Discovering Decentralized Autonomous Organization (DAO) | Web3 Investment
Dissecting fancy wording behind the potential future of organizational structures; Decentralized Autonomous Organization (DAO)
A Decentralized Autonomous Organization (DAO) describes an organization run by software rules on a blockchain.
A DAO has no central authority, so any member can propose to modify the organization’s direction, and all members are free to vote on those proposals.
Generally DAO coordinates itself through the use of NFTs or tokens, and in the case of OpenPad both with dual-token governance. These structures ultimately provide holders with voting power.
We know, we know, there are a lot of abbreviations in the crypto space but trust us, this one (DAO) we will be examining today is an essential one. We keep saying that blockchain technology is more than just hyper-financialized assets gaining or, in this 2022 crypto winter case losing value. It’s more than just crypto bros religiously trying to talk you into buying some NFTs or some altcoins. It’s a paradigm-shifting innovation, and a part of that innovation comes with DAOs as they challenge the status quo much like democracy did in Athens 5th century BCE. Maybe we are getting ahead of ourselves, but maybe not. So, before we take a deep dive into why DAOs matter and what they bring on to the table, let’s start out with its definition, shall we?
A Decentralized Autonomous Organization (DAO) defines an organization run by software rules on a blockchain.
DAOs have no central authority, so any member can propose to modify the organization’s direction, and all members are free to vote on those proposals.
A DAO is, in its most basic form, a collection of smart contracts that allow people to exchange money, services, or property without the involvement of a third party. A DAO operates without the need for hierarchical management and can serve a variety of objectives. These groups can create freelancer networks where contracts pool their funds to pay for software subscriptions, philanthropic organizations where members approve payments, and venture capital businesses run by a group.
Internal capital is used to incentivize organization members to maintain the organization and guarantee that procedures function smoothly, which is a distinguishing feature of DAOs.
MakerDAO, an Ethereum-based protocol, is a well-known example of a DAO.
How Does a DAO Function?
DAOs are member-owned and governed internet-native organizations. They have built-in repositories that only their members may access—the group votes on proposals affecting the organization over a set duration of time to make decisions.
Smart contracts, which are simply bits of code that run automatically when a set of conditions is satisfied, are used by DAOs. These smart contracts establish the DAO’s regulations.
By foregoing some value for a duration, individuals having a stake in a DAO get voting rights and the opportunity to influence how the organization operates. Because of their investments, they have the right to decide on or create new governance proposals.
Yea, that’s cool, but why does it matter?
Starting a business that includes money and capital necessitates a high level of trust in the individuals you’re dealing with. Trusting someone with whom you’ve never communicated on the internet is difficult. You don’t have to trust anybody else in the group with DAOs; all you have to trust is the DAO’s code, which is visible and verifiable. This brings new possibilities for international collaboration and coordination.
So let’s put the essence of it all with a quote from Alexandre Dumas; the writer of Count of Monte Cristo and Three Musketeers, to further establish the core idea behind it all. Obviously, there has to be some scenery behind the quote cause you know how the internet works; you have seen those before.
We got the general idea behind it and how it works; now, let’s get into steps to realize this.
How are DAOs Created?
There are three essential steps in creating a DAO. Once these steps are completed, the DAO can continue to exist and be fully operational.
Create the Smart Contract - The first step involves creating the code/smart contract which will power the DAO. To design the DAO’s smart contract, developers must collaborate. After their debut, they may only amend the rules these contracts specify through the governance system. As a result, they must thoroughly test the contracts to ensure that essential aspects are not overlooked.
Financing the Project - Following the creation of the smart contracts, the DAO must select a method for raising funding for the project as well as governance criteria. Tokens are frequently sold to generate capital, and these tokens grant holders rights to make proposals and participate in the DAO decision-making process.
Implementing the DAO - The DAO must be launched on the blockchain once the first two phases have been completed. From this point on, the stakeholders are in charge of choosing the organization’s direction. The project’s founders/developers have no more influence than other stakeholders.
Subscribe for undistorted and unspoken facts about Web3 investment.
DAO Governance and OpenPad DAO
Tokens or NFTs that offer voting rights are used to govern the DAO. That’s a classical approach anyway; here at OpenPad, we are proposing dual-token governance where either owning a Citizen NFT or $OPN token can both enable governance. People who have confirmed possession of these governance tokens in a cryptocurrency wallet can join a DAO, and membership may be traded.
The DAO governance is carried out through a series of proposals voted on by members using the blockchain. Having more governance tokens commonly correlates to having more voting power. Members’ contributions to a DAO’s organizational goals can occasionally be recorded and internally rewarded.
Loopholes in the Design | How are DAOs Secured?
Once the system is up and running, it is tough to change the code of a DAO, including bug fixes that would be straightforward in centralized systems. Corrections to a DAO need a new code and an agreement to relocate all assets.
Even if a security flaw was discovered in the initial code, it couldn’t be fixed unless the majority agreed. Hackers can take advantage of a flaw in the code while the voting process is in progress. Because of this danger, the smart contract that powers a DAO is often rigorously tested before going live.
Much like other forms of governance, DAO voting models are also susceptible to coups or hostile takeovers, especially if voting power is dependent on the number of tokens one holds. In 2022, Build Finance DAO was the victim of a coup in which one individual accumulated enough tokens to get a vote approved. The culprit then voted to grant themselves complete control of the DAO and then used that authority to drain all of the DAO’s funds.
How are DAOs Utilized?
DAOs have a more democratic structure than regular corporations. Any modifications to a DAO must be voted on by all members rather than enacted by a single party (depending on the company’s structure).
DAOs have been utilized for a variety of reasons thus far, including investing, running a project, charity, fundraising, borrowing, and buying NFTs, all without the involvement of intermediaries. A DAO, for example, may receive donations from anybody on the globe, and its members can select how the money is spent.
Decentralized Autonomous Organizations (DAOs) aren’t without flaws. They are a relatively new technology that has drawn much criticism due to lingering legal, security, and structural problems.
What’s all this Hype about DAOs?
DAOs offer one of the most viable solutions to the principal-agent dilemma — a conflict in priorities between the principals and those making decisions for them, acting on their behalf, etc., which often leads to miscommunication.
Other times, conflicts develop when one or both parties act in their own self-interest rather than what is best for the interests of the other.
DAOs tackle this problem by establishing community governance in which no one is required to participate. Instead, stakeholders are motivated to enhance an organization structured to serve their best interests by holding tokens.
A New Digital Frontier
Power tends to corrupt, and absolute power corrupts absolutely.
Throughout the history of humankind, many forms of governance have been tested, failed or succeeded. To keep man’s worst impulses in check and to overcome systemic corruption that rewards only the powerful, blockchain technology and DAOs possess all the tools for becoming a solution to this age-old problem. The foundations of this new governance form have been built; the question now is how we better advance it to make it the new status quo.
Resources to Learn & Invest with OpenPad
🕸 Home: openpad.app
📖 Docs: docs.openpad.app
🧢 Twitter: twitter.com/OpenPadCitizens
📒 Web3 Newsletter: openpad.substack.com
🔊 Announcement Channel: t.me/openpad
🗣 Community Channel: t.me/OpenPadTG
🔗 Official Links: linktr.ee/openpad
Thanks for reading OpenPad! Subscribe for undistorted and unspoken facts for Web3 investment, DAOs and DeFi.