What Is DAO? A Beginner’s Guide

DAO Introduction

Decentralized Autonomous Organizations (DAO) is one of those popular concepts you might have heard as a newbie in the cryptocurrency industry. However, hearing it is not just enough. You need to be able to answer, “What is DAO?” in full as a blockchain enthusiast.

So, in this article, we will answer the question, “what is DAO?” Also, we will answer other intricate questions about the concept.

What Is DAO?

In full, it means a Decentralized Autonomous Organization. It simply refers to an entity without central leadership. So, members of the community make the decisions in the firm. Its membership is based on obeying some rules in its blockchain.

Furthermore, these communities make changes in the firm through proposals voted by groups within a set time. Different reasons may influence establishing it. It could range from paying for subscriptions via pool funding to funding charity firms from members’ donations.

At this point, let us make something clear. There has been a DAO project. It was the first of such Autonomous organizations created in 2016. It differs from DAO (an internet-native organization concept). The first project failed, leading to the Ethereum blockchain.

How Does a DAO Work?

One major way to be part of a DAO community is to own its native tokens. Also, these organizations work with smart contracts. In addition, Ethereum was the first to use these smart contract codes.

Furthermore, these contracts set the rule on these platforms. The people with tokens with the firm have the right to vote and influence the firm’s operations. However, their voting processes will be based on the rules set by the smart contract.

Components of DAOs

Generally, there are three major components for launching a Decentralized Autonomous Organization.

Smart Contract

Before an internet native firm is established, developers must first write the smart contract code. Again, once the codes are written and the firm launches, changing it cannot be done independently. These developers will need the votes of the community members to change the contracts. Specifically, it is called a governance system.

Funding

The next thing to do after writing the contracts is to create a way to receive funds and implement the governance. Mostly, the firm sells its tokens to raise funds. So, users with the tokens have the right to vote.

Deploy

Immediately after the two stages have passed, the next thing to do is to launch it on a blockchain. From here, the community members decide the future of the firm. It means that the developers and creators of the project will share influence on the firm equally with holders.

Advantages and Disadvantages of DAO

Advantages

• They take away trust issues between parties through smart contracts during transactions.
• They take away a principal-agent dilemma. The conflicting priorities between users (agents) and those deciding for them (principals).
• People have the right to influence the decisions of a firm they have invested in.
• Activities are verifiable and transparent.
• You do not need central control to do things in the firm.
• You will earn passive income from investing in a DAO project.

Disadvantages

• They are imperfect and have legality, structure, and security issues.
• Fixing
• These projects do not have legal backing.
• Token holders can vote against the projects’ developers.

Examples of DAOs (DEFI)

DeFi (Decentralized Finance) is the most prominent example of DAO. DeFi platforms use the Decentralized Autonomous Organization technology to fully decentralize their finance applications.

Some people argue that the earliest form of DAO is Bitcoin. On the contrary, Bitcoin is not, based on today’s standards. The cryptocurrency that we can term the first real DAO is Dash Coin.

Today, there are more advanced DAOs. These projects run on the Ethereum network. For example, Stable Coins.

What Is DAO’s Relationship With Crypto?

Blockchain technology, which powers cryptocurrencies and smart contract codes, is the life wire of DAO.  The smart contract is the governance rules written as codes. In addition, these firms are usually run on the Ethereum blockchain and use Ether for transactions.

What Is DAO Smart Contract?

As mentioned, its rules are written as a smart contract. Also, the project team’s developers write these smart contract codes. The developers can publicly audit, verify, and make the contract transparent. In addition, these developers form the basis for its operation. Through smart contracts, potential investors will know how the firm works.

What Is DAO’s Relationship With Ethereum

The programming language for smart contract coding is Solidity. The Decentralized Autonomous Organization project will go live when the developers on the team launch these contracts on the Ethereum blockchain. However, for the DAO to engage in transactions, it will need Ether. Therefore, the first step after going live is receiving ETH. During the initial creation phase, people can send ETH to the project’s contract address, as mentioned in the code.

How Do You Start a DAO?

Build a Solid Foundation

This step involves discussing with your team. Why is there a need for it, and how will the platform work? To develop a DAO, you must identify opportunities and build your structure around them. Then maybe you may need to collaborate and draw out the plans to make up the smart contract.

The most important thing is to be clear about the goal of your project, especially to the people you are collaborating with. Let your investors know how the project will make money. Then you will need an encrypted wallet to keep the funds for the project that the fund will raise.

Determine Ownership

After carefully discussing the project’s goal, the next thing to do is to determine the ownership. How will the project establish the members’ ownership? Because its ownership is tokenized, you will have to distribute tokens through rewards or airdrops. Also, members can buy the token with their Ether to be part of the community.

Determine the Governance Structure

After you have determined how members will get ownership, you will then decide how these owners will make decisions. The most common governance method is “Token weighted voting.”  Each token is a vote, and the holders are the voters.

Establish Incentives and Rewards

This part is one way to build trust. In this step, the platform will share its tokens with its contributors and members who have used its Defi protocol. These tokens will not have any market value but represent the right to vote. Immediately, the conceptualization phase ends, and the platform can further improvise its reward system.

Types of DAO

Based on how the DAO functions, we can categorize it into the various categories below.

Protocols DAO

This type requires tokens for voting and changing the protocols. For example, MarkerDAO and Uniswap.

Collectors DAO

This type is  NFT-based. Collectors establish ownership of the DAO through an NFT art. For example, Flamingo.

Operating Systems DAO

This type is for platforms that are standing alone.

Service DAO

This type is for supporting models and talent hunts.

Investments DAO

These are called Ventures for Defi operation and democracy through capital pooling. For example, Krause House.

Grant DAO

In this type, the community gathers money to grant fund allocation pools and votes. For example, the Aave protocol.

Entertainment DAO

This type is for decentralizing fun. It is about bringing innovation to life. For example, NFT Fluffs and BAYC (Bored Ape Yacht Club).

Media DAO

This DAO type allows readers to directly contribute to content without the involvement of advertisers for token rewards.

Social DAO

These ones allow crypto space networking. For example, Blockster.

What Is DAO Technology Layer?

The first layer is the blockchain layer. On this layer, developers can run various protocols. The companies that do these are called DAO SaaS models. For example, Aragon and DAOstack. They build with Solidity Language.

DAOs as Part of the Layer2 Ecosystem

People can transfer digital assets and cryptocurrencies within a DAO through composability (money legos). Composability is a characteristic that allows picking applications and protocols and constructing them in more than one combination.

What Is DAO’s Cost?

The price depends on the network’s gas fee on which you want to run your platform. For example, on the Ethereum network, you will pay around 0.2Eth as gas fees. Also, you will pay $60 to file an annual report based on your business methods.

Creating a DAO on Aragon Network

Here are the following steps to follow if you want to create a DAO on Aragon

• First, you will need to have at least 0.2 Eth in your digital wallet.
• Then, go to the Aragon website and click Connect Account.
• Select your wallet type from the menu.
• Click correctly through the process to connect your wallet.
• Then, click “Create an Organization” and follow the steps the system prompts.

What is DAO Tension Triangle?

The tension triangle is a careful balance between the major parts of DAO. These parts are;

• Governance (Voice): the governance rules that determine the creation and destruction of the organization.
• Individuals (Exit): this refers to people who trust in self-governance and want to do things for themselves. These are people and firms in the project who wants their rights respected.
• Decentralization (Loyalty): This refers to the equal rights of the individuals in the organization.

Why Does a Firm Need Governance?

Traditional firms face the issue of the Principal-Agent Dilemma. This issue arises because one part (principal) makes plans and carries them out without involving the other (Agent). However, when agents behave the way they want, it looks odd and causes moral hazards.

For example, a traditional bank can decide to change its operation method without seeking its customers’ opinions. The decision may not all be supported by the customers who have accounts in the bank, but these customers cannot do anything about it. However, if customers revolt, it will be odd because they almost have no business in making decisions for the bank’s governing body.

Decentralized Autonomous Organization, through governance, takes care of this problem by allowing its Principals to share the decision-making process with Agents. Moreover, they allow the Agents the right to be part of the company’s improvement through voting.

DAOs vs. Traditional Firms at a Glance

The table below shows the differences between DAO and traditional organizations.

Challenges With DAO

This system is not flawless. It has some issues. Some of its major issues are;

Governance System

This issue refers to the difficulty in managing what the various project members want. If the project’s core developers want a change and the other community members do not, managing the conflicting opinions will be very difficult. Sometimes, these core developers can even be voted out.

Master Nodes

Master nodes refer to the individuals with more tokens in a project. These people have more voting weight. As much as the “more nodes, more voting power” solves the loyalty issue, it will not represent the interest of many people with fewer nodes in the system. The master node problems make the system centralized because the powerful minority will always win in decision-making.

Shadow Voting

This problem makes a Decentralized Autonomous Organization less resilient. It is caused by a scenario where a platform member who does not have an economic stake joins in voting. Typically, the person borrows tokens to vote and returns them to the lender later.

Future of DAOs

In the future, it is most unlikely that individuals will work for a firm. Rather, people will make money using other methods legally. For example, making art, content creation, playing games, and learning skills.

Also, firms that run on the blockchain will absorb the people with the above money-making skills. These companies will reward inputs in their networks and systems.

Today, we already see huge passive income openings for people in the crypto ecosystem. We are seeing firms pay people to contribute to crypto networks like DAOs. This new system of governance will eventually replace what we have today in the future.

Conclusion

In conclusion, this system is not popular, so people still ask questions like “what is DAO?” However, in this article, we have answered the “what is DAO?” question. Also, we have looked at other aspects that a person asking, “what is DAO?” needs to know. For example, how it works, its relationship with crypto, its examples, its future, and its pros and cons.

The Decentralized Autonomous Organization ecosystem may be at its beginning stages, but it will be the future of work. As crypto, passive income, and Web3 keep growing, we will see it reflected in how people work and earn. One of those ways is DAO. So, people who want to earn money in the future passively are already investing in these platforms by buying governance tokens.