What is a DAO (Decentralized Autonomous Organization)?

If you are relatively new to the DeFi or Crypto space, you most likely have heard the term DAO before, or you must have seen it in the names of many DeFi projects. If you are searching for the most accurate definition of the term DAO, you will not find it anywhere. DAO is a relatively new concept, and various sources have a slightly different interpretation of the term and provide a somewhat different definition. This article will define the DAO based on what a DAO is supposed to be, not how the term is misused today in the DeFi space. So, what is a DAO?

What is a DAO?

The term DAO stands for “Decentralized Autonomous Organization”. It describes a group of people, sometimes unknown to each other, that collectively come together, form a team, and work towards a common goal. Unlike traditional organizations, DAOs decisions are taken directly from the community instead of centralized, hierarchical governing bodies. DAOs issue their own token on a blockchain network to enable the community to make decisions. They use Smart Contract technology to facilitate the execution of the decisions. DAOs also hold a treasury fund used for the various DAO developments. Usually, everyone can become a member of the DAO by acquiring the DAO’s native token.

In traditional organizational structures, centralized governing bodies such as the board of directors, executives, and senior management make the decisions. Unless you’ve been living under a rock for the past few decades, you know that these structures are not always the most efficient, transparent, or work favorably for their shareholders. Innovative ideas that sometimes come from employees at the bottom of the hierarchy are lost. In some other cases, managers work to serve their own self-interest instead of the common goals defined by the organizations they serve.

Decentralized Autonomous organizations are eliminating these shortcomings by replacing the governing bodies of centralized organizations with computer code, running with smart contract technology. Any community member (tokenholder, shareholder) can propose changes to the operations, and everyone can participate in the governance. Considering that code is open-source, everyone can go and look up the changes and ensure that the changes are performed as proposed. Once decisions are approved, the smart contracts facilitating the changes are written, reviewed, audited, and deployed.

Certainly, to have a truly decentralized autonomous organization in place, many aspects of the organization have to be decentralized. This is not easy to achieve, especially for huge organizations with complex business processes and operations.

Traditional Organization vs DAO

The most common differences between DAOs and traditional organizations are listed in the table below:

Traditional OrganizationsDAOs
Usually hierarchical.Usually flat and fully democratized.
Depending on the structure, changes can be demanded from a sole party, or voting may be offered.Voting is required by members for any changes to be implemented.
If voting is allowed, votes are tallied internally, and the outcome of voting must be handled manually.Votes are tallied, and outcomes are implemented automatically without a trusted intermediary.
Requires human handling, or centrally controlled automation, prone to manipulation.Services offered are handled automatically in a decentralized manner (for example, distribution of philanthropic funds).
Activity is typically private and limited to the public.All activity is transparent and fully public.
DAOs vs. Traditional Organizations. Source: Ethereum.org

DAO use-cases

As mentioned above, the use-cases of the decentralized autonomous organizations are limitless in theory. However, to help you understand how DAOs are used in practice, consider the following common use-cases below:

  1. Venture Capital: A DAO can create a pool of funds that are then invested or managed by a decentralized governance body. The ones contributing to the fund, receive the native token of the DAO which can use to participate in the governance decisions. Earnings from the fund are then also distributed to the token holders relative to their share in the pool.
  2. Charity and Donations: Similar to the example above, a DAO can collect funds for charity instead of investment purposes. Once the pool of funds is established, the token holders can decide which causes to support.
  3. DeFi dApps: Some DeFi dApps, although initially are fairly centralized projects where the founding team decides the direction of the project, are then shifted to a DAO model. The holders of the protocol token later decide on further improvements or changes to the protocol. Anyone can propose changes to the protocol, any token holder can vote on proposals. Approved proposals are then executed accordingly.

Final Thoughts

A DAO is an exciting alternative to traditional organizational structures. To achieve true decentralization, where all decisions are taken from decentralized governance, is not an easy task to accomplish. Considering that we have seen DAOs only for small projects, only time will tell how effective DAOs can be for large-scale operations/organizations.

Don & Alex Tapscott, authors of the Blockchain Revolution, also have another interesting proposition. They are suggesting that agents can be used for certain decision-making processes. Their book describes the concept of Distributed Autonomous Enterprises (DAE) as an alternative to DAO, where computer programs and algorithms make the decisions instead of humans. Code manages people. That’s another interesting concept, which could potentially find some applicability in the future, where internet-enabled devices will work together to complete tasks or replace humans.

Finally, we frequently see projects coming up with the term DAO in their name. Using the term DAO in a project’s name doesn’t make it automatically a DAO. Using a decentralized environment also doesn’t make a dApp decentralized.

If a project team claims to be a DAO but makes decisions associated with the “DAO” off-chain, they are not a DAO. If a DAO has a decentralized governance in place, but the team members hold 30, 50 percent of the tokens, they are not a DAO. If a team holds a majority vote, then DAO is meaningless. Therefore, for people new in the space, take it with a fine grain of salt when you see the term DAO.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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