According to DAO statistics by Brian Never, there are 4,000 active Decentralized Autonomous Organizations (DAOs) worldwide, which account for $20 billion in market capitalization. Cointelegraph reports state a 660% increase in the DAOs from 2019 to 2020.
Over the years, centralized decision-making has been the de facto organizational structure. Ronald Corse, the nobel-prize winning economist, garnered attention with his work on property rights and transaction costs of labor and managing resources. Centralized decision-making and its benefits to the firms embodied a significant part of his work. On the contrary, many scientists have stated a decentralized approach is beneficial.
DAOs disrupt investments, corporations, politics, education, and social clubs. DAO exists everywhere! We can be a part of this revolutionary process and gain an experience that lasts a lifetime. But let’s learn the basics to carve a future in the world of DAO.
The article helps you to understand the dao meaning, how it works, DAO infrastructure, and what it holds for us in the future.
What is a DAO and how does it work?
A Decentralized Autonomous Organization (DAO) is an entity that facilitates a distributed group of token holders to achieve a specific goal by agreeing on a shared set of rules on the blockchain. The organization integrates the rules with smart contracts through governance frameworks. The decentralized structure of cryptocurrencies inspires the Dao ecosystem.
For beginners, DAO is an organization minus the hierarchical structure. Moreover, here the ecosystem adopts a distributed structure where the participants or actors can interact with each other based on the conditions in the smart code. So, there is no central authority of DAO.
However, the system is not fully automated. However, most of the decentralized applications are not fully automated. Rather they function on the coordination of a group of human participants. Does dao crypto function on centralized control of humans? The answer is – no; the system’s structure depends on the project type and governance framework.
How does DAO work?
- Smart contracts are the heart of DAO. The core community institutes the DAO rules through smart contracts. Smart contracts define the DAO’s operational rules, which are highly transparent, verifiable, and publicly amendable so any member can comprehend the functioning of the protocol.
- The crucial next step is – funding. DAO has to decide on ways to receive funds and bestow governance. DAO acquires funds by token issuance – sell tokens, raise funds. How do the token holders benefit? In exchange, they receive voting rights according to their holdings.
- After funding, the DAO is fit for deployment. However, once the code deploys, it cannot be altered by any authority other than a consensus through member voting.
What is an example of a DAO?
Users have to join DAO after buying the platform’s native cryptocurrency. Examples of DAO are Augur, DASH, and MakerDAO. A virtual e-commerce network, BitShares was the first functional DAO.
Dao maker is a technology provider that renders SAAS solutions for nascent crypto startups. Their signature product is DAO Pad, a multi-investment platform that helps DAO token-holders participate in early-stage token sales for vetted projects.Some other DAO examples are:
- Doggy DAO
- Moon DAO
- Shapeshift DAO
- Bankless DAO
- Klima DAO
Key DAO metrics
There are different players in the DAO market. How do you compare them? You need a standard scoring model to compare and evaluate the different DAOs. A mix of quantitative and qualitative metrics makes a scoring model.
Here are the different types of DAO metrics and the core elements it includes to assess DAO:
1. Strategic Metrics
- Resistance to competition
- Legal Structure
2. Financial Metrics
- Treasury Size
- Revenue Streams
- Burn Rate
3. Technical Metrics
- Core Structure
- Voting to execution
- Supplementary tooling
4. Governance Metrics
- Number of proposals
- Vote distribution
- Token distribution
- Proposal threshold
5. Community Metrics
- Team Commitment
- Social Media Influence
What was the purpose of the DAO?
Regulations are an integral part of traditional organizational structures. These regulations define what is permissible and what is not for the organizational entities. And the rules exist in private agreements like shareholder’s contracts between business owners.
That said, the two critical questions to ponder are:
- Do the parties follow the rules?
- Is mutual consent given before the execution of the rules?
So, whom does it affect the most? Stakeholders with minimal power and influence are impacted the most by these discrepancies and; ultimately lose money. Moreover, it falls under the umbrella of the principal-agent problem. Is there a solution? DAO is the remedy for financial mismanagement.
The fundamental purpose of DAO is transparency. It is the perfect solution to untangle the principal-agent problem. DAOs are an integral part of blockchain technology. Smart contracts are the heart of the DAO ecosystem. Furthermore, smart contracts are where the organization writes the governance rules, automates, and implements them without involving a third party.
Can you profit from a DAO?
Earning from a DAO is an alternative to working at an organization. Moreover, a DAO’s structure is horizontal – without a central authority, different from the traditional hierarchical structure. DAO is a revolutionary form of employment – a hybrid ownership model, a conventional form of employment, freelancing, and volunteering.
Every person is a boss and a worker. And they are free to decide how they will work for the DAO. Besides, one can participate in more than one DAOs and accordingly divide their time and resources.
How does one work for a DAO?
- Join a DAO by purchasing tokens.
- Contribute to the DAO through discussion forums(Discord) and voting(Snapshot)
- Earn rewards from DAO as one grows the reputation
- Get a full-time or part-time position in the DAO.
Furthermore, one sets up a DAO; one can yield money from the funds that the organization receives as investments. Moreover, you can receive funds for DAO by convincing others to invest in your venture.
DAOs are common in Decentralized Finance(Defi sector). Defi includes several peer-to-peer applications running on the top of the blockchain eliminating intermediaries.
What is a DAO structure?
“You cannot build a strong building on a weak foundation.” Likewise, the DAO’s infrastructure is essential for experimenting with different governance mechanisms. The DAO ecosystem comprises the following building blocks:
1. Governance Frameworks
Governance Frameworks are the core of DAO functioning. Smart contracts lay the foundation of governance frameworks. Moreover, smart contracts define code that distributes power in DAO.
Another essential element of DAO infrastructure is the controller. A controller facilitates the direct interaction of users with governance contracts via user interfaces. Moreover, they include data and API that help more accessible indexing information, amongst other functions.
A DAO treasury is a pool of funds for the welfare and development of the organization. DAO members must decide on a governance mechanism to allocate treasury funds properly. Diversification of funds and enabling liquidity are plausible solutions for treasury management.
Defining work ethics is also essential for the smooth functioning of the DAO ecosystem. Nowadays, every other person is ‘DAOing.’ How do they function? Levels of DAO participation vary. You can contribute to governance tokens, juggle a bit of Snapshot votes, a voice at DAO’s Discord, or even pitch in another project where you earn your contribution. You choose how to work!
Aggregators are a bridge between governance frameworks and different tools. The responsibility of aggregators is to reduce the complexity of infrastructure and middleware. For example, the pass is a DAO aggregator that helps to build a reputation by aggregating the social graph from chains, tracking, analyzing, and evaluating treasury assets.
What is DAO in Web3?
Web3 lays the foundation for peer-to-peer networks. What is Web3? Web3 creates a decentralized, democratic, and user-owned internet. Moreover, blockchain, protocols, and smart contracts forge the decentralized world. DAO’s nature blends perfectly with Web3.
Moreover, DAOs are an essential element of Web3, and blockchains achieve decentralization with DAOs, thus, moving a step closer to a creator economy. How does DAO fuel Web3? Defi uses DAO to attain complete decentralization.
For example, Uniswap and Sushiswap are DAOs running Web3. NFTs, DAOs, and metaverse render the user’s self-sovereignty and custody of assets.
The Bottom Line
DAO is a revolutionary idea in the crypto world and even in the corporate world. It questions the conventional norms of corporate management. In 2021, 21 million Americans quit their 9 to 5 jobs heralding the “Great resignation” era. Simultaneously, there was an increase in the number of DAOs.
People even wondered if the two events shared a connection in any way. So, is the paradigm shift from a steady corporate job to a digital nomad setting such as DAO worthwhile? The numbers hold an answer.
Launching a DAO implies you give considerable control over your company. No one is the central authority; it is a group initiative, and you make decisions collectively, disrupting the conventional tenets of the corporate world.
As the blockchain industry reaches remarkable heights, DAO has to sail through the ebbs and flows and still create ripples in Web3 with its ineludible spell.