Jun 20, 20223 min read

Decentralized Autonomous Organization (DAO) explained

Updated: Jun 30, 2022

At some point in your crypto investing journey, you will have come across the phrase “Decentralized Autonomous Organization”, also known as DAO. As the name suggests, a DAO is a fully autonomous, decentralized, and community-led entity that exists to raise funds to reach a coordinated goal.

Whether you’re interested in becoming a member of a DAO or are a beginner crypto investor, it pays to know how DAO works and its purpose.

What is a DAO?

A DAO is an internet-native organization that seeks to decentralize and automate how projects in the crypto sphere are run. It has no central authority and is fully transparent, as every agreed upon decision on the protocol, and even the code itself, can be publicly audited. Its main purpose is to raise money for a purpose, which could be anything from predicting stock market moves to collecting rare NFTs. The first DAO, also dubbed as the Genesis DAO, was created by the Ethereum community on April 30, 2016.

What makes a DAO different from other organizations is that it has no hierarchical structure. Instead, it’s built on community collaboration where each individual member oversees the protocol to some degree. Members possess tokens that give them voting rights.

But of course, not all DAOs are created equal. Ultimately, it is the DAOs responsibility to create and maintain a healthy, robust protocol and vote on projects that serve the best interest of the protocol.

How does a DAO work?

In a DAO, community members create proposals on the future operations of the group. The members will then come together to vote on each proposal. If the proposal reaches a predefined level of consensus, it is then accepted and deployed by the rules within the smart contract.

Create smart contract

DAOs operate within a foundational framework laid out through smart contracts. DAO members would elect a core team, who would then establish the rules of the group using these smart contracts. These smart contracts are visible to all members and are verifiable to make sure that each member understands how the protocol will function.

The core team will then code the smart contract and decide on the group’s purpose. At this stage, rigorous testing of the code will be done to make sure everything is ironed out before launch, after which future changes can only be done through group voting.

Raise funds

Once the rules of the DAO have been formally coded onto the blockchain, members will begin raising funds. The group will first establish how it’s going to receive funding and delegate governance of the DAO.

The common method is token issuance. In this process, the protocol sells tokens to raise funds, which will then fill the DAO treasury. In other words, members who support the project will buy their way into the group and earn voting rights, similar to buying shares or assets in exchange for a stake in a company. Voting rights are typically proportional to the member’s holdings, as well. At this stage, members will then lay down governance rules.

Launch

Once the fund raising is completed, the DAO is ready for launch. The code will then be deployed to production and can no longer be changed, unless members reach a consensus through voting. This means there is no special authority that will retain control of the DAO. Not even the core team and original developers can modify the DAO’s rules. Only the community of token holders can decide to make changes to the protocol.

Decentralized autonomous organizations (DAOs) may not be the future of corporations, but they have their merits. If the community succeeds at its governance, a DAO’s members can benefit from its upside.

About AlgoBlocks