Understanding Decentralized Autonomous Organizations (DAOs)

What is a DAO?
Niviya Vas
Niviya Vas
Marketing & Growth

A decentralized autonomous organization (DAO) is a revolutionary application of blockchain technology that allows organizations to function without the need for a central governing authority. Amongst all the innovative applications of Blockchain technology, DAOs stand out as an exceptional concept where blockchain, smart contracts, the Internet of Things, and Artificial Intelligence(AI) are coming together to contribute toward indefinite future possibilities.

What is a DAO?

DAOs are legal structures created using smart contracts to encode financial rules and transactions on the blockchain. Blockchain-powered smart contracts allow invested stakeholders voting rights toward management and administrative decision-making, built on the principle that a community of like-minded diverse individuals is better suited to represent the best interest of an organization’s growth over a biased regulatory authority. DAOs allow prorated voting rights to members based on the number of their token holdings.

How does a DAO work?

Before we understand DAOs, we must first explore what smart contracts are and how they are the lifeblood of any successful DAO. Smart contracts are digital contracts coded to self-execute when meeting a list of preset conditions. Smart contracts form and execute agreements between multiple parties without the need for an intermediary. It is worth noting that not all DAOs are flourishing as their success largely depends on the structural quality of the underlying smart contracts.

DAOs fundamentally use a series of smart contracts for all decision-making where one DAO triggers the next when fulfilled, ensuring that all organizational decisions are contingent on the direction of the majority of members’ votes. Smart contracts thus guarantee that an entire community instead of a small group drives and contributes toward the growth of the DAO. For instance, based on the outcome of voting decisions, smart contracts can implement different codes with multiple potential pathways for the organization’s future. For example, when a majority of members disagree with a selected proposal, a preset alternative directive is automatically executed.

To summarize, DAOs powered by smart contracts are trust-free systems that do not rely on humans to function. Instead, it depends on a consensus of stakeholders driving its decision-making to achieve common goals further.

Benefits of DAO

DAOs have been gaining much traction through every stage of their evolution with countless benefits in the newly rising Web3 world. Here are some of the benefits of DAOs that constitute a significant factor driving web3 migration:

1. Decentralization

The concept of a decentralized organization driven by like-minded stakeholders for decision-making and administration is one of the best-selling points of the DAO blockchain concept. For instance, in most companies, all past, present, and future decisions are driven by CEOs and board members with little power offered to the customer. This form of centralized decision-making is not the case in DAO organizations, where every single token holder has a right to make proposals as well as cast their vote on existing proposals deciding the future of the DAO.

2. Transparency

DAO proposals and votes are publicly available for all stakeholders to view. This transparency encourages stakeholders to refrain from submitting proposals that are detrimental to the DAO or, in some cases, unimportant submissions that are a waste of stakeholder time. The transparency ensures that token holder actions made on the blockchain network contribute to the betterment of the DAO and its community.

3. Valuing members based on merits

DAO token holders can work from anywhere across the globe and are solely merited based on their contribution toward the growth of the organization, with no room for any form of cognitive or location-based discrimination. This system adds a layer of diversity and enriches the decision-making process.

Limitations of DAO

Although DAOs have irrefutable benefits, it is crucial to take a glance at a few of their limitations that have blockchain aficionados rushing for a fix. Here are some of the limitations of DAOs:

1. Distribution of voting power

The distribution of DAO voting rights to token holders, once perceived as its most significant advantage, has also illuminated its greatest flaw. However, voting power to a diverse group of DAO members allows for unbiased decision-making. There lies the possibility of individuals or groups purchasing a large amount of DAO tokens and amassing unbalanced voting rights that can introduce a bias in decision-making. For instance, a group that buys a majority of the voting rights of a DAO can manipulate its decision-making to suit its individual needs due to its higher governance rights.

2. Slower decision making

The decentralized model splits the power to make decisions among the community. This slows down the decision-making process, as now the entire community has to have a say in the direction the community steers itself. This involves aligning the entire community in a certain strategic direction and convincing all the members to vote for the same goals.

Thus, the decision-making process in DAOs tends to be slower and less efficient when compared to an LLC where an individual or a small group makes these decisions themselves.

3. Code vulnerability

DAOs provide their users with a trustless network through smart coding contracts to gather and decide on organizational requirements. The problem with this is that code is often subject to exploitation through vulnerabilities. A DAO created with smart contracts that have loopholes or vulnerabilities can pose a significant setback to its future and growth. Hence, it is essential to audit and identify vulnerabilities in DAOs and their smart contracts before implementation.

How to create a DAO?

There are only two ways in which members can get involved in DAOs. One is to either create your own or become a member of an existing one. Whichever way, it may be beneficial to know how to make a DAO and what value it may bring to you. When considering building your own, the essential requirement is to have a system in place that can effectively handle votes and proposals made by its members and enough cryptocurrency to cover the DAO transaction fees during deployment onto the blockchain network.

A DAO is only as strong as the like-minded community driving its growth. Its members can be valued only by taking every proposal and vote into consideration before executing its preset outcomes. Kreaterverse is one such platform that specializes in designing effective smart contracts that can help you create an interoperable DAO that works on multiple blockchains. We can help identify your business or personal requirements and provide on-chain and off-chain polling solutions based on your needs.

How can I invest in a DAO?

Fundamentally DAOs raise money from users that trade fiat currency in exchange for its native token. Investing in a DAO is purely based on the confidence the investor has in the DAO thesis. Depending on the amount that’s invested, governance rights are offered based on the quantity of DAO token holdings. Cryptocurrency exchanges such as Binance, Uniswap, and Coinbase are excellent places for anyone to purchase investment DAOs. Most of these platforms require users to create a cryptocurrency wallet and log on to exchange fiat currency to purchase DAO tokens. However, exchanges such as Uniswap require their users to first purchase their native token UNI before making DAO purchases.

Successful real-world implementations of DAO

DAOs are an excellent way for communities to come together and leverage cryptocurrency to achieve common goals and drive innovation in the process. Here are some of the ways communities across the world are harnessing DAOs to streamline organizational growth and performance:

1. Ukraine DAO

In recent conflicts between Russia and Ukraine, a concerned group created Ukraine DAO to help raise money for humanitarian aid in current war-torn Ukraine. Ukraine DAO successfully secured around $6.5 million by simply leveraging the DAO to sell a Non-Fungible Token (NFT) of the Ukraine flag, proving to be an excellent case of harnessing DAOs for legitimate causes that can benefit humanity.

2. Decentraland

Decentraland, a market leader in web3 play-to-earn metaverse games, has its decision-making governed by a DAO by providing its user community a democratic voting system for all administrative and governance decisions. Through the ownership of their in-game token known as Mana, appropriate voting rights are offered to individuals to provide inclusivity in the decision-making process and future of the game.

3. Uniswap

As one of the world’s most popular cryptocurrency exchanges, Uniswap is yet another real case example of the practical uses of DAOs. Uniswap, built on the Ethereum blockchain, is governed by a DAO, which allows its users holding their native UNI token to have voting rights towards the administration decision-making, handing its users control over how the organization is to progress toward its future.

In conclusion, apart from a few minor setbacks, the overall future potential of DAOs as a rising star in decentralized finance is undeniable. It is worth reaching out to industry experts on how implementing your own or investing in existing DAOs can be beneficial to you. Kreaterverse is one such web3 industry expert that can help answer all your DAO queries.

Kreatorverse: Web3 Digital Transformation Studio

We at Kreatorverse are constantly exploring the infinite possibilities that smart contracts can offer our clients. Our dedicated web3 product studio specializes in everything on the decentralized web. Our team of experts can help you create your DAO through a conflict-free system powered by our innovative smart contracts. Some exciting projects we’re working on include a crypto payment solution and an NFT marketplace that reimagines fandom, bringing fans closer to their favorite celebrities in the metaverse. Want to know more? Contact us today.

FAQs

What is a DAO?

Decentralized Autonomous Organization is an organizational structure that operates on a blockchain, and is governed by smart contracts. A DAO eliminates the need for traditional hierarchical management. It allows stakeholders to collectively make decisions and govern the organization’s activities.

How much does it cost to start a DAO?

This answer depends on the developer you use to set up a DAO. On average, you can start a DAO with 0.2ETH. However, there are also other costs involved – for example, if you’re setting up a DAO in Wyoming, state regulations state that forming a DAO as an LLC costs $100 in initial filing fees. Please refer to the guidelines for DAO set up in your local jurisdiction to know more.

How do I start a DAO?

A minimum viable DAO can be set up in 7 steps:

  1. Name the DAO
  2. Create a mission statement
  3. Set up a Discord server and a Twitter account
  4. Invite people to join
  5. Create and launch a governance token
  6. Build a funding mechanism
  7. Set up tools for voting and logging member contributions. At Kreatorverse, we help organizations of all sizes build cost-efficient DAOs on a minimal budget. Find out more about our Web3 solutions today.

Is Ethereum a DAO?

The short answer is no. Ethereum by itself is a decentralized, open-source blockchain with smart contract functionality. The vast majority of DAOs today are built on the Ethereum blockchain. However, you can also build blockchains on other networks.

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