Preface:
In life, most organizations and companies will have a centralized management structure. For example, listed companies may make major decisions through board meetings. But in the blockchain world, DAO is a new organizational structure that operates through smart contracts. DAO does not have a centralized management unit, but promotes organizational operations through members holding tokens.
What is DAO
Decentralized Autonomous Organization (DAO, English: Decentralized Autonomous Organization) is a new organizational structure based on blockchain technology, which mainly uses smart contracts to automatically execute decisions.
Ethereum, one of the world's most well-known public blockchain platforms, pointed out that DAO operates differently from traditional enterprises and does not rely on a specific authority to make decisions.
In other words, DAO does not need to trust benevolent managers to manage funds, and there is no chief financial officer who can deliberately manipulate the accounts. The organization is jointly governed by decentralized individuals to ensure that everyone has a voice.
DAO runs on the blockchain through smart contracts. Once the smart contract is deployed on the blockchain and the rules required for the organization's operations are written, the contract will be automatically executed when the conditions are met without human intervention. Therefore, this type of decentralized operation can ensure the transparency of decision-making. and justice.
If you are still unclear about smart contracts, you can refer to the previous article "What is a smart contract?" 》.
In order to give you a clearer understanding of the operational differences between DAO and traditional enterprises, CryptoCity has compiled the following table:
feature
KNIFE
traditional enterprise
governance structure
Determined jointly by members holding tokens
Determined by the board of directors and senior executives
transparency
Transactions and decision-making records are recorded on the blockchain, with relatively high transparency
Mainly depends on company policy, and it is difficult for outsiders to access relevant records
Legal status
Legal supervision is in a gray area
Legal persons have clear legal status
operational efficiency
Because it requires extensive voting and discussion, it may be less efficient.
Decision making is usually faster
technology risk
Relying on smart contracts may involve risks of technical vulnerabilities
Enterprises may face information security system risks, etc.
Picture source: "Crypto City" Chart What is the difference between the operation of DAO and traditional enterprises?
How does DAO work?
DAO is a new type of organization that relies on blockchain technology and smart contracts to operate. To complete the basic operation of DAO, the following three important elements are required.
Smart contract: The well-known financial media Investopedia mentioned that the operation of DAO relies heavily on smart contracts. The relevant rules and processes will be written into the smart contract. When members vote on the proposal and reach a certain number of votes, the smart contract will automatically execute corresponding decisions.
Governance tokens: DAOs usually issue governance tokens. The number of tokens reflects how much voice members have in the organization. In other words, members who hold more tokens have more voting rights.
Proposal and vote: Members of the DAO can propose proposals, which may involve fund allocation within the organization, protocol modifications, etc. All members with voting rights can vote for proposals. When the number of votes exceeds a certain threshold, the smart contract will automatically execute the proposal content.
The operation of DAO includes the process of establishing rules, raising funds, and voting on proposals to implement resolutions. Cryptocurrency media Cryptonews explained that when the DAO organization operates, members will first determine the goals and rules of the DAO and write relevant specifications into smart contracts.
Furthermore, DAOs usually raise funds through initial coin offerings (ICOs) or other methods. Members invest funds to purchase tokens, obtain voting rights, and further participate in the DAO's decision-making process through tokens.
Finally, members can put forward various proposals in the DAO. If the voting reaches the threshold, the smart contract will be automatically executed. Through this decentralized approach, it is ensured that members can participate in the organization's governance and decision-making.
Source: "CryptoCity" Chart DAO Operation Illustration
Advantages of how DAO works
DAO promotes organizational operations through a decentralized approach, and Memeology Tech, a platform that focuses on technological issues, compiles some of the advantages of DAO compared to traditional enterprises.
Transparency: Transactions and decisions within the DAO organization will be recorded on the blockchain, which can increase transparency and allow members to understand the operating status of the organization.
Participation: The operation of DAO is based on blockchain technology. Members who want to participate can participate in the organizational decision-making process through the Internet.
Efficiency: DAO will first write the relevant specifications into the smart contract, so if it needs to handle fund management and proposal content, the smart contract will automatically execute after the voting reaches a certain threshold, which can improve the efficiency of decision-making.
What are the types of DAOs?
With the vigorous development of blockchain technology, various types of DAOs have also been produced to meet different needs and application scenarios. The following is a summary of the types and individual characteristics of DAOs compiled by TokenMinds, a blockchain technology consulting company, and Alchemy, a Web3 development platform.
DAO Types
characteristic
Case
Protocol DAO manages DAOs of decentralized protocols, including lending applications, decentralized exchanges, etc. MakerDAO, Uniswap, and Yearn Finance invest in DAO to raise funds for new projects and provide investment opportunities. MetaCartel Ventures and Krause House Charity DAO promote philanthropy and use To support social welfare projects Big Green DAO and UkraineDAO Social DAO brings together organizations with like-minded people on different issues Friends with Benefits Collection DAO collects and manages digital art and non-fungible tokens (NFT)
Flamingo DAO
Funding DAO provides financial support for new projects in the blockchain ecosystem Aave Grants DAO
Source: TokenMinds, Alchemy
Image source: "CryptoCity" Chart What are the types of DAOs?
Limitations you should know before investing in DAO
Compared with traditional enterprises, DAO is an emerging organizational type, but the technology is still developing, so it will also face some challenges and limitations.
1. Uncertainty of legal supervision
DAOs currently lack legal status and regulatory frameworks in many countries, and this uncertainty may deter potential participants and investors from fear of a lack of protection against legal risks.
2. There are loopholes in the program code that may lead to the risk of hacker attacks.
DAO is based on blockchain technology, but because the execution is automatically executed through smart contracts, once the relevant specifications are deployed to the smart contract, it is very difficult to modify. If the smart contract code has loopholes, it may also be attacked by hackers. .
3. Governance challenges
The decentralized governance model of DAO means that all members can participate in the decision-making process, but it may also be possible at certain times when quick decisions are needed because participating members still need to spend time reaching a consensus, which may delay the implementation of the resolution.
4. Technical threshold
Participating in DAO requires a certain knowledge background and technical ability, which may be a barrier to participation for beginners.
5. Risks of concentration of voting rights
The voting rights of DAO are usually related to the number of tokens owned by members. The more tokens holders have, the more say they have. However, over time, a small number of members holding a large number of tokens may have an excessively high proportion of voting rights. , further affecting the fairness and representativeness of decision-making. This may expose DAOs to the same over-concentration of power problem as traditional organizations.
