The vision of DAO is to work together with people who don't know each other but share the same ideals. DAO allows the community to make its own rules and make decisions in a collaborative environment, all thanks to blockchain technology. So what is DAO? How does it work? What are the current and future new trends in the market? In addition, what are the real-life applications of DAO? You will find all the answers in this article.

What is a DAO ?

DAO has no centralized leadership, but is operated jointly by community members through rules established by open and transparent computer programs and coding, and is not influenced by any central agency.

A DAO is a group of people who share a common purpose and agree to follow rules to achieve a common goal. The rules of the organization are written into the code of a smart contract, and algorithms are automatically run to enforce these rules if certain conditions are met. Blockchain technology ensures that every community member follows the rules, can track financial transactions, and enforce the software rules of the DAO.

Anyone can join, and it doesn't matter what the group does. The term "decentralized" means there is no central governing body. Unlike a traditional CEO, no single person owns or controls the DAO; instead, everyone holds a stake. The DAO operates entirely on the network, relying on blockchain technology as a ledger that records all of the group's activities, including financial transactions and executive decisions.

How do DAOs work?

Smart Contracts

The DAO’s functional architecture is based on the provisions of smart contracts. Smart contracts utilize blockchain technology to automatically execute code when certain conditions are met. Although Ethereum was the first blockchain to use smart contracts, many other blockchains are now using smart contracts.

Since the content and records on the blockchain are open and transparent and can be easily verified, any member interested in joining can see the exact working status of the protocol at each stage. The rules set by the DAO community are all executed by smart contracts.

Once the code is officially enabled, it can only be changed by members of the group by voting, and the rules can only be changed by the community of token holders. No one else has the right to propose changes. In a DAO, token holding rights are the most common way to participate. Members of a DAO can vote or propose new governance proposals if they hold shares in the organization.

Finance and governance

Once these rules are formally recorded on the blockchain, the DAO needs to determine how to obtain financing and grant governance. A typical DAO will raise funds by selling tokens and storing them in the DAO's treasury.

Token holders gain certain voting rights when they exchange fiat currency for tokens. Once funding is secured, the DAO can be deployed and launched.

A DAO that operates in this model will not be flooded with too many ideas at once. A majority of stakeholders must support a proposal for it to become law. The method for determining a DAO majority varies from DAO to DAO and is outlined in each DAO’s smart contract.

DAOs are community-managed but open to the public. Open source blockchains allow everyone to view their code, making the relevant information accessible to anyone. In addition, since the blockchain records every transaction of funds, anyone can view their treasury records.

The different stages of establishing a DAO

In most cases, establishing a DAO is divided into three stages.

The three stages of establishing a DAO : smart contracts, funding, and deployment

  • Smart Contracts : A DAO’s smart contracts must first be written by a team of developers. Afterwards, only the governance system can change the terms of the contract after it goes live. This means they must thoroughly test the contract to ensure that no important information is missed.
  • Fundraising : The DAO must figure out how to get funding and put governance in place after developing smart contracts. In most cases, the community will sell tokens to raise funds, and holding tokens will give voting rights.
  • Deployment : Once everything is ready, the DAO must be launched on the blockchain. After that, the future of the organization is decided by its stakeholders and the developers can no longer influence the proposal, including the founder of the organization.

History of DAOs

DAO was defined as a self-sufficient autonomous system in a paper published by Werner Dilger, a German computer science professor in 1997. After the birth of Bitcoin, the term "Decentralized Autonomous Corporation" (DAC) appeared frequently. It is defined as an autonomous company that uses tokenized tradable shares for dividends. By purchasing DAC shares or receiving compensation in DAC shares, anyone can become a shareholder of the company. Therefore, shareholders of DAC will have the right to share profits, participate in the development of the company, and have a say in the operation of the company.

Some consider Bitcoin to be the first decentralized autonomous organization (DAO). However, the basic governance mechanisms present in DAOs were not present in Bitcoin’s design. As a result, today the name “DAO” refers to a decentralized autonomous organization built using smart contracts on top of an existing blockchain, rather than to the blockchain itself.

Genesis DAO or "The DAO" was launched in 2016 by German company Slock.IT. It was the first DAO of a venture capital enterprise that was jointly run by investors. The DAO was built on the Ethereum blockchain, and its code framework was structured as a smart contract. Investors could purchase its DAO tokens through Ether (ETH) in the project's token sale. The DAO's token holders were then eligible to vote in the DAO's governance process. With their voting rights on various projects, members of the DAO could share in the project's profits and benefit from it. However, due to a coding flaw, The DAO was attacked, resulting in the theft of $50 million in Ether. The community then hard forked the DAO, allowing token holders to remove tokens from the Ethereum network, enabling community members to recover their funds more quickly.

After this attack, DAO became a controversial topic and prompted the public to think about the advantages and disadvantages of DAO.

If DAOs are to work effectively, they must be based on the principles of autonomy and decentralization. Due to the coded rules of smart contracts, DAOs can operate autonomously without human involvement, and members can democratically decide on regulations. In this way, open source software ensures a high degree of openness and accountability. In addition, the decentralized nature helps to eliminate geographical restrictions, providing unprecedented services for DAOs around the world.

Therefore, developing DAOs and automating processes is a very time-consuming process. Even a single line of wrong code can cause the entire program to crash, resulting in huge financial losses; the legality of its activities is also a problem. Due to the lack of legal status of DAOs, global business is hampered.

New Trends in DAOs

As blockchain technology matures and becomes more popular, DAOs are becoming more and more popular. The prevalence of non-fungible tokens (NFTs) plays a key role when it comes to DAO governance and who can participate.

In September 2021, Andreessen Horowitz funded $5 million to Friends with Benefits, a Discord community composed of different cryptocurrency fans, artists, and NFT enthusiasts. Subsequently, they decided to operate as a decentralized autonomous organization (DAO) on platforms such as Facebook and Telegram and raised $1 million, which shows that even without economic incentives, online communities still have unexpected fundraising power.

DAO investing is another important new trend that allows Web3 native network residents to pool and deploy funds, allowing niche players to compete with established financial institutions.

DAO still has great appeal and topicality, and is likely to be as unstoppable as the development of NFT in 2021. Of course, there are still some concerns about DAO, but these issues need to be truly answered in the future through continuous development.

The Future of DAOs

DAOs are a new form of organizational structure that could revolutionize the way we run our businesses. As more and more DAOs flourish in different industries, it will be interesting to believe that some of them will stick around and become an integral part of our society. After all, DAOs have leveraged the revolutionary resources of the cryptocurrency market to unlock a creative future.