DAOs are a new form of incorporating a business in the crypto world.
If you’re a crypto enthusiast, you may have heard about PleasrDAO. This group of crypto investors came into the spotlight sometime last year for purchasing the only existing copy of Wu-Tang Clan’s “Once Upon a Time in Shaolin” for a whopping $4 million. They also bought the original “Doge” meme NFT for $4 million.
PleasrDAO became popular at the time because it is a decentralized autonomous organization (DAO.) This DAO’s big purchases brought a lot of interest and curiosity around what a DAO is and if it is the next big thing in the crypto community.
So, what is a DAO? Should you start one? Should you join one? Read on to find out.
What Is a DAO?
A decentralized autonomous organization, popularly known as a DAO (pronounced “dow”), is an organization governed by rules encoded as an open and transparent computer program controlled by the organization’s members and not a central government. Since the organizations are embedded into the code, the need for a governing body is eliminated.
Typically, DAOs are internet-based groups of crypto enthusiasts who pull their funds together and then decide how to finance their missions or investments. Keep in mind that DAOs work entirely online and use blockchain technology as a ledger to keep a record of what goes on in the organization. Let’s take a look at how a DAO works.
How Does a DAO work?
As we mentioned earlier, decentralized autonomous organizations don’t have a central governing body, meaning the members have an equal say in the group. So, how does this work?
Usually, a DAO utilizes a smart contract to run the group. So, when a DAO is first formed, its rules and regulations are written into its code as a smart contract.
Anyone buying into a particular DAO has to agree to follow these rules included in the smart contract. And if a member goes against the rules, the group’s funds are automatically locked, preventing everyone from accessing them.
Normally, every DAO has an in-built treasury where the group’s digital funds are stored. These digital currencies can only be accessed with the collective approval of the members.
How Is a DAO Created?
Here is a detailed step-by-step guide on how a DAO is created.
Step One: Creation of a Smart Contract
First, the developers of the DAO have to create a smart contract with the group’s rules, regulations, and mission. Typically, the developers extensively test their contracts to ensure they don’t overlook any vital details. This is because once the DAO is launched, the rules in the contract(s) can only be changed through group voting.
Step Two: Raising Funds
Typically, DAOs run on a shared cache of currency from the group’s members. So, people can buy into the organization if they agree with and support its purpose/mission during this stage. Usually, the individuals buying into the group purchase a particular amount of tokens in exchange for a percentage stake in the group.
During this stage, the governance rules are established, that is, how many voting rights each member will have based on the number of tokens they’ve bought.
Step Three: Launching the DAO
Once the above two procedures are complete, the DAO’s smart contract(s) is posted on a blockchain. Once it is posted, rules in the contract can only be changed through collective voting by the members. At this point, the original developers of the DAO cannot retain complete control of the organization.
As we mentioned earlier, the voting power in a particular DAO is usually distributed among the members based on the number of tokens they purchased. So, a member who purchased 150 tokens will have more voting power than a member who bought 50 tokens.
Advantages of DAOs
It’s no surprise that DAOs have become a huge sensation in the crypto community because they have many advantages. Here are a few benefits of DAOs.
The main advantage of decentralized autonomous organizations is that they are decentralized. Many DAOs are designed to be as decentralized as possible, meaning they are aimed to be run collectively by the group rather than a single individual.
So, unlike a regular company where the CEO or a specific governing body calls the shots in the organization, DAOs allow every member to have a say in the group. Of course, the voting power among the members may vary, but at least each person plays a part in the organization’s endeavors.
Thoughtful decision making
Usually, each DAO member’s vote on anything concerning the organization is deployed on a public blockchain. This means that each time a member votes, it is displayed for all the other members to see.
For instance, if the group votes on whether to purchase a particular NFT, each member’s vote is posted on the blockchain for others to see. So, everyone will see who voted in favor of or against buying that NFT.
This encourages members to make more thoughtful decisions to avoid ruining their reputations.
Another significant advantage of DAOs is that they are transparent. A particular DAO’s rules and regulations encoded in a smart contract are posted on a safe, open-source blockchain record. Therefore, everyone in the group can see everything they need to know about the organization.
Secondly, since a blockchain record is tamper-proof, no one can change anything in the smart contract unless all the members vote.
Disadvantages of DAOs
While DAOs have many benefits, they still have their fair share of disadvantages.
Developers of DAOs can make mistakes while creating smart contracts, leading to considerable losses in the organization. That is why DAO creators need to conduct intensive testing on the contracts.
While DAOs allow members to vote on anything concerning the group, members have to agree with the majority’s decision. And sometimes, it may not favor everyone.
So, what does the future hold for DAOs? Should you join one? Should you start one? Well, it’s pretty evident that DAOs are becoming more and more prominent. Many people are embracing the concept of an organization where everyone has a voice.
However, remember that a DAO requires you to invest. So, you must be keen and consider all possible factors before starting or joining one.