How do Decentralized Autonomous Organizations (DAO) Work

This article will cover how Decentralized Autonomous Organizations work, what they are, and how useful they can be.

Cryptocurrencies are taking over the world as they have been seeing a rise in popularity and performance due to the current situation of the world. One of the good things about these cryptocurrencies is that so many new terms and applications have been developed for the usage of millions of people around the world. Things such as Smart Contracts, the Blockchain, and DAOs will be extremely useful for the future of finances and privacy. But before even thinking about their benefits, it is important to understand what they represent and how they work.

How do Decentralized Autonomous Organizations (DAOs) work?

1. What are DAOs?

Decentralized Autonomous Organizations (also known as DAOs) are simply entities that do not have any kind of central leadership. But then how do decisions get made? Because the complete organization is led from the bottom-up, it will be governed by the community which works under a specific set of rules that are built in the blockchain.

In simple words, DAOs are internet-native organizations that work exclusively under the decision of a community. Thanks to this unique composition, DAOs can serve multiple purposes, such as being freelance networks where contracts decide to pool their funds to pay for subscriptions, or maybe to work as a charitable organization where members decide and approve donations to NGOs or other charitable organizations.

2. How do Decentralized Autonomous Organizations work?

DAOs are completely autonomous (as their name indicates) since they are built on open-source blockchains. This means that there will always be transparency in the functionality of the organization. Things like the built-in treasuries, blockchain records of transactions, and the code of the organization will be fully auditable to anyone who is interested.

The way these organizations work is by the usage and development of Smart Contracts (which are like a bunch of code that is executed when certain conditions are met) which are nowadays extremely common to the point that numerous blockchains work under them.

The Smart Contracts will establish the DAO’s rules, and those who get access to the community will have voting rights and can influence how the organization will operate and the creation of new proposals. There are various ways to participate in a DAO, but normally it is through the ownership of a token that represents the organization.

Thanks to the usage of Smart Contracts, there will never be spam of proposals in the organizations as a proposal will only be approved if the great majority of the holders approve it. However, some things that do vary are the criteria and how much of a majority is required in order to approve proposals. Keep in mind that every single DAO has a different set of rules that vary from each other.

3. How are DAOs launched?

A DAO’s launch consists of 3 main steps that must be accomplished to obtain both stability and security. Due to being internet-based, DAOs do not require almost any physical interaction with any third party, meaning that everything will be focused on the digital world. Also keep in mind that not everyone can develop a DAO as certain knowledge is required, but after studying and practicing for a little bit, the process becomes much simpler. Here are the 3 main steps to launching a DAO:

3.1. Creation of the Smart Contract:

A group of developers (although it can be a single individual) must create a Smart Contract that will operate behind the DAO. It is extremely important to think through all the rules, as they can only be changed later through the governance system that is chosen by the community. Overlooking details is one of the worst things that could happen during the development of a Smart Contract. That is why testing before launching is important.

3.2. Funding the DAO:

Once the rules are all set, then comes the funding. It is important to determine the way in which the DAO can receive funds and how the installed governance can operate and handle the treasuries. The most common way in which DAOs get funding is by the sale of their respective tokens, which will later give voting rights to holders.

3.3. Deployment of the DAO:

Finally, it is time to deploy the DAO on the blockchain. From this point on there will not be any way of discarding the previously made decisions, meaning that the holders will be the ones who will take control after this step. The creator or creators of the Smart Contract no longer have any right or influence in the project, as they will act just like any other holder in the community.

4. Are DAOs really needed?

Just the simple fact that DAOs are internet-native promotes multiple benefits that traditional organizations do not have. Also, security issues can easily be properly addressed. And there is always transparency thanks to being an open-source project where anybody can watch the whole code and foundations of the organization whenever they want.

DAOs are extremely needed, especially in this time when everything is being digitalized and many traditional companies can not be trusted anymore. Also, in many organizations, decisions are made by an exclusive group of individuals who might not speak on behalf of everyone involved– on the other hand, with DAOs the community always has the power to decide the future of the organization and to provide proposals that could benefit everyone in the long run.

DAOs are suited for accomplishing many tasks as traditional organizations do nowadays. And thanks to allowing investors to pool funds, it is possible to invest in startups and other decentralized projects to increase the scope of the whole project and to improve the profits for holders in the future.

Internal disputes and fights can easily be resolved via the governance system of votes, and everything can be resolved without damaging the holders or the value of the organization. DAOs could be a synonym for innovation, and many traditional organizations should follow the examples of the decentralized world to promote happiness and accountability in the community without compromising the values of the whole organization.