Decentralized Autonomous Organizations (DAOs): An Easy Guide of 2021

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Let us get learn something about Decentralized Autonomous Organizations (DAOs). If you have already a better understanding of cryptocurrency, blockchain technology, and smart contracts, you will better understand DAOs now, which are also called Decentralized Autonomous Organizations.

DAOs stand for Decentralized Autonomous Organizations, which can be said as one of the most complicated forms of smart contracts.

What are Decentralized Autonomous Organizations (DAOs)?

To get a good idea of what decentralized autonomous organizations are, it is ideal, to begin with, a crisp explanation.

If you take a deeper look, although it is very clear, you can have a sense that the phrase basically points at a decentralized organization, just like cryptocurrency and blockchain.

The plan to launch the idea of DAOs had been around the market ever since the first cryptocurrency, Bitcoin, was launched back in 2009.

With a good amount of research and development on looking for the best solution to expel intermediaries from financial transactions, DAOs finally emerged as the best solution possible.

In the end, it all falls to one thing, decentralized autonomous organizations are organizations or firms that function without hierarchical management. These organizations are usually community-managed and changes and rules are taken effect based on the response received via polling and voting.

They are much similar to smart contracts as they too operate based on pre-defined conditions.

If explained more technically,

“DAO is a form of contract in which the processes and laws of a decentralized organization are inserted as a permanent code of the smart contract, and operates through a distributed consensus protocol.” – 101Blockchains

What’s the Difference between a Usual Organization & DAO?

To define Decentralized Autonomous Organizations aka DAOs in an improved way, let us begin by finding out the difference between a DAO and a traditional organization.

  • A traditional or usual organization follows a top-down hierarchical model of leadership with a centralized authority on top, for example a CEO. Generally, financial decisions are made by a CFO. This is not the scenario at a DAO. Here the leadership and decision making are transferred to a distributed network of autonomous participants.
  • A regular organization is a legal entity, centrally approved. On the other hand, a DAO is not centralized.
  • A traditional organization uses legal contracts to work with its employees, whereas, a DAO simply makes use of decentralized smart contracts.
  • The former is centralized however, the latter is decentralized.

What does a DAO do & how does it Work?

Most newcomers have this question – “What does a DAO actually do?”. Well, here’s an answer to it. In layman’s terms, DAOs basically allow the exchange of funds, investors or stakeholders, with anyone without the presence of an intermediary like governments or financial institutions like banks.

This allows people to invest, borrow, or raise money for any purpose with help of a DAO.

So, how does a DAO work?

To understand this aspect of DAOs better, I am listing out the steps involved in the working of a DAO.

Laying Down the Rules and Guidelines

It all begins with stating the rules and guidelines. These are basically the instructions or warnings you outline and you want a particular organization’s work under. You are required to formulate these rules to later add all of them to a smart contract.

Smart Contract

All the rules are now penned down in code, into a smart contract i.e., a computer application/program. It resides autonomously on the web and needs people to do tasks that the smart contract cannot do on its own.

Funding

Next comes the funding phase which is one of the most crucial steps in the process for mainly two reasons.

First, all DAOs require tokens. These tokens are basically an internal property of DAO in specific. The organization uses these and uses them to reward for activities within it.

Secondly, when a user funds into the DAO via this process, they are actually buying their voting rights. This means, the person who spent on the DAO, can exercise more influence on the way it operates. Think of it like stakeholders’ investment in a regular firm.

Deployment

The final step is deployment. Once a DAO is deployed, it becomes completely independent of its creator and becomes fully autonomous. Every DAO is open-source, which means anyone can view its code.

All transactions or exchanges and guidelines are stored using blockchain technology for record making them fully transparent and incorruptible.

It is important to note DAOs also have quite a few limitations.

For instance, it is not smart enough to write to code independently or on its own, develop hardware or create a product. This is the point where contractors play their crucial role.

To get these tasks done, DAOs hire contractors based on voting. 

Conclusion

Let us get learn something about Decentralized Autonomous Organizations (DAOs). To get a good idea of what decentralized autonomous organizations are, it is ideal, to begin with, a crisp explanation. Read this post to learn more about DAOs.

Noteworthy References

101Blockchains