Since 2016, when the Original DAO raised $150mil in Etherium, crypto experts and futurists all o
Sver the globe have been paying close attention to DAOs. What are DAOs, and can they be something that real-world future companies might look like? Let’s find out.
What are DAOs?
DAO stands for Decentralized Autonomous Organization. As the name suggests, a DAO has a flat hierarchy, and there is no central governing authority. In layman’s terms, this simply means that in a DAO, people with similar ideas group together, and they all play by the same rules. The rules are written into the code of the organization via smart contracts.
Simplify it further, please!
Well, for starters, a DAO can be created for any purpose whatsoever. The creators of the DAO need to write and test a code extensively. They need to establish what the purpose of the DAO is and write the rules of engagement within the smart contract of the DAO. Since it is an open-source code, anyone can read what’s written into the smart contract.
Once the purpose and the rules of engagement of the DAO are established, people who believe in the said purpose group together and start buying stakes in the DAO in exchange for tokens.
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Till now, this seems not that different from a traditional organization. A traditional organization has a vision and a mission statement and a group of people who believe in a said purpose. But what makes a DAO revolutionary is the fact that DAOs operate online and there is a flat hierarchy.
How are decisions made without a hierarchy in a DAO?
Since a DAO does not have a traditional hierarchy, this type of organization is as decentralised as it gets. Though the original creators have written the smart contract of the DAO, after funding, the smart contract itself is the one that can be said to be in charge.
DAO has a flattened hierarchy hence everyone in the group has a stake in the organization. Decisions are made through voting on every issue. Since everyone has a stake and voting rights, this eliminates the self-interested decision-making by top-level management. There is no top-level management.
Let’s take an example of a real-world business, and see how it would run if it were a DAO. Imagine that your nearest cloud kitchen was a DAO. There wouldn’t be one individual running this business and making every decision. Rather, everyone in the group will have a say in decision-making. When to replenish inventory? What should be the delivery charges? What should be the cost of each meal? Which items should be a part of the menu? These are all the questions that will be handled automatically by smart contracts.
Why would stakeholders trust each other?
The beauty of a DAO is that stakeholders don’t need to trust each other. As long as they trust the smart contract, it doesn’t matter if they trust each other or not. It doesn’t even matter if they know each other or not. It is the system that guarantees trust.
What if a stakeholder breaks the rules of the smart contract?
When a DAO is first created by its original creators, it has its purpose and rules inbuilt into the algorithm as smart contracts. When the stakeholders fund this DAO by buying stakes in exchange for tokens, they all agree to play by the rules of the smart contracts. These smart contracts are programmed to run when certain actions take place.
If a situation arises when one or more stakeholders carry out actions that aren’t coherent with what’s written in the smart contract they are essentially violating the rules of the contract. If and when this happens, the funds of the DAO are locked. Now nobody can use the DAO. This is what guarantees that everyone will follow the rules of the DAO.
Every DAO stores its cache of digital currency in its built-in treasury. Members of the DAO can only access these funds after they have received the approval for the same from the group. All the decisions that may affect the group are made collectively and in a set time. This guarantees transparency and trust in the system.
How can we create and launch a DAO?
A Decentralized Autonomous Organization can be created and launched in three steps. These are the following:
- Smart Contract: This is the first phase of DAO creation. The original developers of the DAO write the algorithm or the smart contract of the DAO. This smart contract contains the rules of the DAO and its purpose. This code needs to be tested extensively before moving on to the second stage because once a DAO is launched, these rules can only be changed through group voting.
- Raising Funds: DAOs run on the shared cache of money that’s seeded to them by their stakeholders. After the smart contracts are created, and the rules and purpose of the DAOs are decided, people who believe in the said purpose buy the stakes of a DAO in exchange for tokens. The Governance rules of the DAO are also established in this phase.
- Launch: This is the last and final stage of creating a DAO and here the DAO’s code is deployed onto the blockchain. From this point on, it can only be changed by stakeholders who vote on each issue collectively. The original developers are now no longer in control of the DAO, and the organization’s hierarchy becomes flattened.
Can DAOs work as real-world organizations?
Theoretically, DAOs are the most decentralized forms of organizations ever created. But theories can sometimes be tricky to implement in the real world.
DAOs work very well in their niche world i.e. the world of cryptocurrencies, but this model is still not ready to be deployed in a traditional corporation.
Artificial Intelligence is becoming more and more sophisticated with every passing minute. But, as of now, algorithms still can’t tackle real-world problems such as worker strikes or factories shut down from a hurricane.
DAOs also need to contend with fraud and security issues such as cyber-attacks and hacking of the funds before they find themselves as a mainstream model for future organizations. But there is no denying that DAOs are very exciting as a concept. All they need is a bit of rejigging before they become the norm in the future.
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