In this article, we learn what DAOs are, their memberships, and challenges they face. We also compared DAOs to traditional organizations.
Table of Contents.
- What is a DAO?
- DAO Membership.
- A Compasiron Between DAOs and Traditional Organizations.
- Challenges Faced by DAOs.
A DAO (Decentralized Autonomous Organization) is an organization built upon a foundation of rules that are encoded in software that is distributed among all participants. This makes sure rules are immutable and decisions are made by everyone. The software of course is in the control of all members and free for use by all - open-sourced. These communities are owned and controlled by their members.
As discussed in previous articles, the central purpose of a blockchain is transactions, DAOs rely on the blockchain which is open-source software for all its activities, the blockchain enables DAOs to keep public immutable records, all transactions are public and all members can access them. This means that funds have been allocated for an asset or are meant to fund a cause in the case of grant applications, we can be sure the code will act as instructed when the specified condition is met.
All this is good however DAOs also have their issues and how they are resolved. In this article, we learn about DAOs, types, and examples of DAOs. We also compare DAOs to traditional organizations and finally explain the challenges associated with DAOs.
What is a DAO?
A DAO is a community, a group of people who come together for a common goal in this case without not central leadership hence the name Decentralized Autonomous Organization. DAOs bring like-minded individuals together in order to fund or work on common ideas. It can be compared to a business whereby each member has a voice in the activities of the DAO.
There are many different types of DAOs, the following list summarizes the common types of DAOs;
- Collector DAOs -> NFT artists rely on these types of DAOs to establish ownership of digital art such as music, images, gifs, etc.
- Investment DAOs -> These allow the pooling of capital from investors for a common purpose such as funding Decentralized Finance operations.
- Protocol DAOs -> Here tokens are used as voting metrics whereby collectors gain rights to the governance of the network.
- Grant DAOs -> A group of people contributes coins towards a common purpose, distribution is also managed by the whole community.
- Media DAOs -> Creators can share their content without third parties such as advertisers.
- Entertainment DAOs -> A form of decentralized fun where creators can create without governance. Participants can vote on creative decisions.
Examples of operational DAOs include;
- Dash -> used in governance and funds allocation
- Uniswap -> Exchange and market-making
- Augur -> market prediction, sports betting, insurance
In order to join or participate in DAO activities, one needs to be a member. The following are various forms of membership to a DAO;
Token-based: In this type of membership, participants hold membership tokens, the more the tokens a member has the higher the governance power on the network. Tokens can be traded permissionless on a decentralized exchange.
Share-based: In this case, members hold shares that represent voting power on the network. Member buy shares in form of work or value exchange. This is used in charity applications or other human-centric organizations.
Reputation-based membership: Just customer loyalty is important in traditional business, blockchains use this as a way of membership, in this case, a higher reputation proves membership. This translates into voting power in the DAOs activities.
A Compasiron Between DAOs and Traditional Organizations.
- First the most important difference involves how decisions are made. In traditional organizations, decisions are made hierarchically, in that they come from a single point or perspective. In DAOs, every participant gets a voice in all DAO operations.
- In DAOs all operations are public and can be monitored by everyone, in traditional organizations... you know.
- All DAO services are handled by all participants in a decentralized manner, this aid to improve security and immutability, services are created, distributed, and controlled by a central authority prone to bias.
- Changes to a traditional organization are passed from higher up downwards, in DAOs, changes are verified by all participants.
- Most importantly, the issues of voting, In DAOs, voting happens without any intermediaries, in traditional organizations voting is managed using centralized software or even worse manually.
Challenges Faced by DAOs.
DAOs although very revolutionary present issues which we discuss below;
Governance: this involves the distribution of information to all participants. It is difficult because of the size of the organization consisting of even up to millions of people, unlike traditional organizations where a group met in a board room somewhere and discussed means forward.
Shadow Voting: This is whereby a participant who owns a token can cast a vote toward governance which is borrowed and later returned.
Centralization, the purpose of a decentralized autonomous system is to ensure decentralization, in DAOs, master nodes are those nodes with a large number of tokens, this means their opinions are highly considered in governance.
No legal recognition, DAOs are not recognized legally, this exposes members to liabilities, it also means that members are responsible for themselves. Any issues have to be resolved without an intermediary.
A DAO is a self-managed group of people who form an organization that abides by a transparently defined set of rules agreed upon by participants and encoded in the software.
DAOs take advantage of decentralized finance in many ways such as crowdfunding endeavors, charity initiatives, value exchange, etc.
DAO members may not ever meet in person or even trust each other, trust is in the open-source software and protocols. The number of participants is also an important factor as it ensures power is decentralized and well distributed.
Blockchain-based governance is something we expect in the future as traditional organizations.