What is DAO (Decentralised Autonomous Organization)?

DAO (Decentralised Autonomous Organization) is a member-owned community that doesn’t have a centralized leadership. DAO utilizes transparent rules that encoded as a computer program

What is DAO?

DAO (Decentralized autonomous organization) is designed to be decentralized and automated. It is a member-owned community without centralized leadership, a typical management structure, and a board of directors. 

According to blockchain technology, all rules in DAO are encoded as a transparent computer program. All members control rules in DAO, and no central government influences rules. It was created by its developers to automate decisions and facilitate cryptocurrency transactions.

Eventually, a DAO is governed entirely by its individual members, who collectively make critical decisions about the project's future, such as technical upgrades and treasury allocations. Specifically, community members create proposals about the future operations of the protocol and then come together to vote on each proposal. Proposals that achieve some predefined levels of consensus are then accepted and enforced by the rules instantiated within the smart contract. 

Large corporations' familial hierarchical structures give way to community collaboration under this framework. Each member of the DAO oversees the protocol at some level. Part of the elegance of this framework is the alignment of incentives. It is in the individual's best interest to be forthright in their voting and only to approve proposals that serve the best interest of the protocol itself.

A healthy, robust protocol will garner more usage and increase the value of each DAO member's tokens. So as the protocol succeeds, so do the token holders.

How does DAO work?

DAO’s primary working mechanism is based on a smart contract. The smart contract constructs the DAO’s operational foundational framework. This framework is exceptionally transparent and publicly auditable. Therefore, any potential members can fully understand the functions of the DAO protocol and can participate in making a change.

When these rules written by smart contracts are fully settled onto the blockchain, the next step is funding. The typical funding method is to issue tokens. The protocol issues tokens to raise funds and fill the DAO treasury. In return for token holders’ contributions, the protocol gives each token holder a certain voting right, usually proportional to their holdings. Once the funding is completed, the DAO is ready for deployment.

After deployment, once code is confirmed into production, it cannot be changed by any means other than a consensus reached through member voting. Therefore, no special authority can modify the rules of DAO, and it is entirely up to the community of token holders to decide.

Why is there criticism in DAO?

In May 2016, a decentralized autonomous organization called “The DAO” was hacked. The DAO held a massive amount of ether tokens. At the same time, a paper illustrated several DAO’s potential security vulnerabilities—cautioning all investors from voting on future investment projects until the issue is solved.

Later in June 2016, hackers attacked The DAO based on these vulnerabilities. The hackers gained access to 3.6 million ETH, worth about $50 million at the time. This prompted a massive and contentious argument among DAO investors, with some individuals suggesting various ways of addressing the hack and others calling for the DAO to be permanently disbanded. 

This incident also figured prominently in the hard forking of Ethereum that took place shortly after that. The hard forking aims to restore approximately all funds to the original contract. This split the Ethereum blockchain into two branches, each with its cryptocurrency, where the original unforked blockchain continued as Ethereum Classic.

What happened in DAO after the hack?

The DAO, as initially envisioned, had not returned as of mid-2020. Nonetheless, interest in decentralized autonomous organizations as a broader group grows. In 2021, The Maker Foundation, an icon in the crypto industry as the original champion of DAO, announced that it was officially turning operations over to MakerDAO (creator of the DAI stablecoin) and would dissolve by the end of the year.

While there are many lingering concerns and potential issues regarding legality, security, and structure, some analysts and investors believe that this type of organization will eventually come to prominence, perhaps even replacing traditionally structured businesses.