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What is DAO?


Two of the most popular blockchains, bitcoin and Ethereum, are not companies in our usual sense. These cryptocurrencies need executives who single-handedly run them or even board members who oversee their operations.

Instead, blockchains are run by consensus (mutual agreement). Miners, validators, and owners of nodes (network nodes) keep blockchains running. So they are the ones who vote on internal changes to the operation of that network by agreeing among themselves to update the software.

This concept of decentralized network management became the prototype for creating DAOs (decentralized autonomous organizations).

In simple terms, a DAO is a self-governing community.

The ideology of this concept is based on flexibility, transparency and rejection of classical hierarchy. Members of such an autonomous structure are equally responsible for its success because all critical development decisions are made by voting.

DAO is an organization that allows building a self-governing community with common interests, in which everyone contributes to the common cause.

The very idea of a DAO resembles the principle of a joint stock company but dramatically simplifies the idea by eliminating bureaucratic issues. All its members (token holders) manage decentralized organizations using mathematical algorithms (smart contracts) and voting.

How did DAOs come into being?

The very first decentralized organization was created in 2016 by the Ethereum blockchain community.

The name of the organization was The DAO.

The idea of this organization was to act as a venture fund investing in promising crypto startups. At the same time, investors were supposed to vote for the choice of projects.

The idea was so responsive to the community's needs that The DAO quickly raised the equivalent of $150 million.

But just two months after the launch of the first decentralized organization, a skilled hacker exploited a loophole in the code of its smart contract and stole about half of the entire budget, more than 3.6 million ether. Today, this amount would be equivalent to 623 billion rubles.

Interesting fact: Ethereum and Ethereum Classic split precisely because of The DAO hacking scandal or the community's controversial decision to deal with its aftermath.

As mentioned, reaching a consensus in decentralized networks can take a long time, and sometimes the community can get an impasse in their disputes. It is at these moments that the network splits (in cryptocurrency terms, this is called a "fork" from "fork"). One group continues to use the old version of the software and registry, while the others continue to use the updated version.

This is how the Ethereum community split into two camps. The first, led by the project's founder Vitalik Buterin, decided to "roll back" the state of the blockchain before the hack, that is, to erase all transactions that were carried out after the hack and before the decision was made, not only fraudulent ones but also other candid ones.

Most developers and investors agreed to take such an unpopular step to recover the stolen $70 million. Still, some of the community decided that such a principle of decentralization as "immutability of information" is fundamental and should not be departed from it even for the good of the community - the followers of the original blockchain began to call their blockchain Ethereum Classic.

By the way, bitcoin has also "split" more than a dozen times in its history; the most famous of its offshoots are Bitcoin Cash and Bitcoin SV, which is already a branch of a branch.

But this failure did not stop the spread of the DAO concept, and today there are many successfully operating organizations. Moreover, the original idea has become much broader and new ideas have emerged:

  • Managing DAOs. When a community manages a specific network on a blockchain. Examples: MakerDAO, Compound.
  • Investment DAOs. These are decentralized investment funds. Examples: The Lao, Yearn.
  • Grantmaking DAOs. Exist to fund public infrastructure, where the community votes to award a grant to a project. Examples: MolochDAO, MetaCartel DAO.
  • Collectors' DAOs. Created to release and manage NFT collections. Example: PleasrDAO.
  • Infrastructure DAOs. Created to develop tools for creating more advanced DAOs. Example: Aragon.
  • Content DAOs. Organize management of media content release and distribution. Example: BanklessDAO.

Is it legal?

Unfortunately, lawmakers in most countries have not yet defined what DAOs are and how to work with them. However, in some US states, such organizations are already recognized as a legal form of legal entity. The same policy is followed in the Marshall Islands.

Several countries recognize DAO mechanisms and include them in their legal practice - Switzerland, Liechtenstein, Malta, Singapore, Cayman Islands, British Virgin Islands, Bahamas and Panama.

How to earn in DAO?

The easiest way is to buy a DAO management token and wait for its price to rise. We will tell you how to calculate promising projects below.

But to earn in DAO, you can also participate in the organization's development. Young projects are in great need of competent professionals from various fields. Therefore, you can offer the project your services, for which the community will issue a grant for your work.

In some DAOs, the reward system is based on reputation. Participants vote to decide who should receive "reputation points", which are used to distribute the reward among the participants.

Is there a future for the DAO?

Many crypto-enthusiasts expect that people will mostly not work for one particular company in the future. Instead, professionals will earn a living in non-traditional ways, such as playing games, creating, learning new skills, or curating content. This includes participating in decentralized autonomous organizations.

It still needs to be determined where the development of this concept will come from, but modern DAOs have both advantages and disadvantages.

The main advantage is bringing together many people who can contribute to overall success, avoiding the possible vices of traditional company leadership.

Also, DAOs allow to eliminate the risk of error due to human error or misunderstanding on the part of management.

But there are disadvantages, the main of which can be considered that, like any information system, a DAO can also break down or be hacked.

Also, the necessity of decentralized coordination of the work of employees worldwide and working part-time causes difficulties.

In addition, a disadvantage is that most existing DAOs are startups with pre-formed teams of developers who may have too much power or without the project's viability.

How to choose a project?

The most successful projects in this sphere:

  • DAO Maker
  • Compound
  • UNI
  • AAVE
  • Yearn
  • Synthetics
  • Lido DAO

When choosing a DAO, the main rule of the crypto market - DYOR - remains relevant. It stands for "do your research" - do your research.

That is, do not unthinkingly rely only on experts and review articles, be sure to study all the nuances of the organization before investing your time and money in it.

Of the most general rules, there is only one: if the project's main idea is just "creating a DAO", you should not invest in it. Over time, the participants of such a community will lose their interest, and their tokens will lose their value.

A DAO should have a clear, attractive idea behind it beyond just bringing people together.

© – , updated 01/30/2024
Reprints are allowed only with permission of BestChange

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