Decentralized Autonomous Organization (DAO): Definition, Purpose, and Example

Since the emergence of cryptocurrency, there have been questions about the existence, of who controls the cryptocurrency market. The cryptocurrency hit the world and started to make ways for itself in the world, and people’s interest has been how to gain from it.

However, there comes a time when people begin to question the existence in charge of controlling and coordinating such volatile currencies. We at block farm have seen the various questions asked by people about these existing bodies. To this notice, we would be presenting to you one of the existing bodies in the cryptocurrency world. This agency is known as the “Decentralized Autonomous Organization (DAO).

decentralized-autonomous-organization-dao-definition-purpose-and-example

There are important details to note while we talk about these organizational institutes.

  • DAO includes an organizational model known as a decentralized autonomous organization that allows stakeholders to engage in the administration and choice of an organization.
  • A DAO lacks centralized power; rather, stakeholders vote on behalf of one another to share power.
  • Since the DAO posts all votes and activities on a blockchain, everyone can see what people do.
  • Among the original DAOs were Developers who established the DAO organization to streamline bitcoin procedures and automated decision-making.
  • A DAO must highlight cybersecurity since breaches can cause it to lose millions of dollars in capital reserves.

What Is Decentralized Autonomous Organization (DAO)?

A decentralized autonomous organization (DAO) is a new type of regulatory framework with no centralized power. It also has representatives who are all committed to acting in the institution’s best interests. DAOs are utilized to reach choices in an underside managerial style and have gained popularity among bitcoin advocates and blockchain networks. The decentralized nature of digital currency is one of its key characteristics.

However, this indicates that they are distributed among numerous computers, connections, and nodes rather than being under the jurisdiction of a single organization like a bank or financial institution. Virtual currencies sometimes take advantage of this decentralized nature to achieve levels of confidentiality thats impossible with traditional currency. Decentralized autonomous organizations, or DAOs, were created in 2016 by a team of programmers as a result of the independence of cryptocurrency. The goal of a DAO is to encourage control and oversight of a body that resembles an enterprise. The lack of a central power, however, is what makes a DAO unique.

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How Does Decentralized Autonomous Organization (DAO) work

Smart contracts play a big part in DAOs. Evaluation is mandated by these rationally coded contracts based on fundamental blockchain operations. For instance, depending on the result of a resolution, a specific code may be written to increase the number of tokens in circulation, burn a predetermined number of exchange tokens, or give predetermined incentives to token holders already in existence. On a blockchain, the voting procedure for DAOs is published.

Choosing between exclusive alternatives is common for users. Users’ legislative power is frequently split among them according to the number of tokens they possess. For instance, a person with 100 DAO tokens will 2X voting power as a user who holds 50 tokens. The idea underlying this technique is that individuals who have a greater financial stake in the DAO are encouraged to act honestly. Consider a user who possesses 25% of the total voting authority. This user is free to engage in wrongdoing, but doing so puts the worth of their 25% share in jeopardy.

Tokens that can be released in the open market for fiat currency are frequently stored in the treasury securities of DAOs. Representatives of the DAO could start voting on how the finances are used. For instance, DAOs that want to buy rare NFTs may choose whether to trade treasury funds for holdings.

Advantages Of Decentralized Autonomous Organization (DAO)

There is quite a merit gained from the existence of DAO in the cryptocurrency blockchain.

#1. Decentralization

Instead of a centralized power that’s overpowered by their colleagues, choices that influence the company are decided by a team of people. A DAO can decentralize power over a far wider spectrum of users than a single person (CEO) or a small group of people (Board of Directors) could.

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#2. Participation

While participants inside an organization possess a clear voice and voting authority on all issues, they may seem highly energized and engaged with the organization. Even though these people may not have much influence, a DAO motivates token owners to vote, burn tokens, or utilize their tokens in manners they believe are best for the company.

#3. Publicity

Votes inside a DAO are conducted via blockchain and rendered available to the public. How each vote and individual judgment will be released publicly, forces people to behave as they believe is best. This encourages behaviors that will enhance the public image of voters and deter misconduct against society.

#4. Community

The idea of a DAO inspires individuals from all around the globe to work together invisibly to realize a common goal. Token holders can communicate with other holders from anywhere in the world simply by having internet access.

Hindrance of the DAO

However, not everything about DAOS is ideal. Incorrectly establishing or managing a DAO has serious repercussions. The DAO model has some of the following drawbacks.

#1. Speed

A singular vote could be required to determine a certain action or mode of conduct for the business to take if a government corporation is led by a CEO. Every user has a chance to cast a vote in a DAO. When taking into account time frames and priorities outside of the DAO, this calls for a significantly extended voting session.

#2. Education

Similarly to the speed concern, a DAO is accountable for raising awareness of delayed entity activities among a larger audience. Although token holders of a DAO could have varying educational qualifications, comprehension of efforts, motivations, or availability of resources, a singular CEO is significantly easier to remain informed of corporate activities. While DAOs unite a broad group of individuals, one of their fundamental challenges is that this diverse group of individuals must understand how to develop, strategize, and negotiate as a unified entity.

#3. Inefficiency

DAOs pose a significant danger of being ineffective, to summarize the first two key points in part. It is simple for a DAO to spend considerably more time contemplating change than putting it into action. This is as a result of the sheer time required to systematically train voters, convey proposals, explain methods. Due to the necessity of managing far more people, a DAO may become mired in pointless managerial activities.

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#4. Security

Security is a problem that affects all online media for blockchain assets. Implementing a DAO needs extensive technical know-how; otherwise, choices for or votes may not be validly cast. If people can’t trust the corporation’s design, the trust could be lost and individuals may depart. DAOs can be abused, treasury holdings can be taken, and vaults can be depleted even with the usage of multi-sig or cold wallets.

Frequently Asked Questions

What kind of DAO is an example of?

Examples of active DAOs are

  • Augur, a futures market network.
  • MakerDAO, a program that manages a stablecoin,
  • DASH, a cryptocurrency run by its members.

Alternate use cases involve rewarding users for running community imaginary worlds like Decentraland or social networking sites like Steemit.

Bitcoin: Is it a DAO?

The well-known crypto Bitcoin could be compared to a DAO, where participants engage in contracts to transact the asset by predetermined conditions, and all transactions are recorded on the blockchain. The Ethereum network, the second-largest blockchain, is used by the majority of DAOs currently in existence.

Conclusion

The existence of these companies was meant to bring a sense of safety and a form of cybersecurity to o the cryptocurrency blockchain. These companies may not be great at what they do but have protected many users up to this date and that effort should be known to the world.

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About Daniel Ogbuciekwe

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