What Is Decentralized Autonomous Organization? DAO In A Nutshell

A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Understanding a decentralized autonomous organization

The blockchain-centric model of a decentralized autonomous organization seeks to address a problem present in almost every business – regardless of industry or size.

This is sometimes referred to as the principal-agent dilemma and occurs when an individual or entity (the “agent”) can make decisions on behalf of another individual or entity (the “principal”). Under this system, the needs and priorities of the agent often differ from those of the principal. This causes the agent to make self-interested decisions, even if they had been originally tasked with looking after the principal.

DAOs are one way to bypass or at least reduce the need for centralized, hierarchical decision-making in organizations. Using blockchain, a DAO ensures that information flow and incentive structures are properly aligned in a codified format. Indeed, organizations of the future will have their systems, management, charters, and performance bonuses written into smart contracts. 

One of the primary goals of the DAO is the automation of all essential and non-essential processes, which has obvious benefits to the organization in terms of efficiency and cost. Blockchain also mitigates the potential for fraud and as noted earlier, directors acting according to their own self-interest.

How does a decentralized autonomous organization work?

While each organization will have specific needs, establishing a DAO using blockchain requires some important groundwork:

  • Smart contract set up – initially, the underlying rules of each smart contract must be defined and encoded. The organization must reach a consensus on governance, operations, and incentivization before proceeding with smart contracts. This enables the DAO to become truly autonomous and sustainable and avoids potentially destabilizing changes from having to be made in the future.
  • Funding – in other words, what will power the DAO? Smart contracts must create and distribute some form of internal property that allows the organization to establish a voting mechanism and incentivize activities. Native tokens are one such form of property, giving interested individuals the right to vote among other things.
  • Deployment – a decentralized autonomous organization reaches critical mass when it has secured enough funding for deployment. Moving forward, strategic decisions are made by token holders who automatically become stakeholders in the organization. Provided that the token distribution policy and consensus mechanisms are robust, these stakeholders will make decisions that result in beneficial outcomes for the business.

DAO builders and infrastructure platforms

Several service providers exist to provide the tools and platforms necessary to create a decentralized organization.

Following is a look at some of the best-known platforms:

  • DAOstack – providing a large coordination platform for DAOs with a focus on solving the problems associated with large-scale decentralized decision making. Decision-makers can use the native token GEN to promote proposals they deem important.
  • Aragon – a dApp on the Ethereum blockchain allowing the creation and management of a range of organization types. These include companies, NGOs, hedge funds, and open source projects. Members who hold ANT native tokens have the right to be involved in decision-making proposals regarding smart contract upgrades and fiscal and token policy.
  • Colony – ideal for the community-led organization that wants to utilize “plug-in style” payment and collaboration tools. Colony is web-based and as a consequence is more open than organization-based platforms like Aragon.

Key takeaways:

A decentralized autonomous organization is any organization run autonomously using smart contracts on a blockchain network. Instead of the centralized, hierarchical decision-making model, power resides with those who own native tokens.

Moving to decentralized and autonomous management requires important groundwork. Robust smart contracts and a native token system must be created before the management model can be deployed.

Depending on the needs of a business, there are several DAO service and platform providers. These include DAOstack, Aragon, and Colony.

Connected Business Concepts

According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum). However, according to blockchain investor Paivinen due to ease of forking, incentives to compete and improved interoperability and interchangeability also in a blockchain-based economy, protocols might get thinner. Although the marginal value of scale might be lower compared to a web-based economy, where massive scale created an economic advantage. The success of the Blockchain will depend on its commercial viability!
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
The Graph is an ERC20 Utility Token (built on top of Ethereum) to enable consumers to freely query the blockchain through a fully decentralized database kept by indexers, incentivized by the payment of tokens (called GRT). The network is also ministered by curators and delegators that help maintain a high-quality index.
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.
In 2012, co-founders Christian Larsen and Jed McCaleb created Ripple, a technology acting as both a pre-mined cryptocurrency called XRP and a digital payment platform enabling monetary transactions. Where Ripple is the tech company, XRP is the decentralized ledger.
In 2014, Jed McCaleb – which also played a key role in the development of Ripple – created a cryptocurrency to provide fast, reliable, and affordable money transactions. The same cryptocurrency has considerably grown seven years later. It is now one of the most stellar cryptocurrencies to provide a real-time platform that links banks, payment systems, and people. Meet, Stellar!
In early 2019, a joint project between TRON and BitTorrent Foundation called BitTorrent Token came to fruition. BitTorrent Token launched to tokenize in-demand file-sharing protocol and enhance content delivery and bandwidth accessibility with blockchain technology.
Chainlink is considered the most established decentralized oracle network. As an ecosystem housing several decentralized oracle networks running simultaneously. As a decentralized oracle service built on Ethereum, Chainlink has the power to support the development of blockchain solutions for both traditional businesses and enterprises.
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.
Designed and created as an alternative to Ethereum, Cardano claims to be the first decentralized blockchain protocol to use a scientific approach and undergo a peer evaluation.
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

Read Next: Proof-of-stakeProof-of-workBitcoinEthereumBlockchain.

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