What Is A DAO?
Cryptocurrency and blockchain projects dominated the finance economy in 2021. Blockchain innovations like DeFi, NFTs, and DAOs have seen significant growth and applications in cryptocurrency. More people are beginning to understand how these innovations work and stand a better chance of profiting from them.
One of the innovations that got many consumers’ attention is DAOs, short for Decentralized Autonomous Applications. A DAO is an internet-based venture capital fund governed by its members and encoded on the blockchain. They want to establish a decentralized business framework for all future operations. Mark Cuban called them “the ultimate combination of capitalism and progressivism.”
All of the code is open-source, which is a significant feature. An automated crowdsourced decision-making process will remove human error, manipulation, and third-party involvement. DAOs, unlike corporations, have democratized organizations by enabling all members to vote on any changes made. The D Autonomous Organization, DAO is represented by open computational rules protected on the internet’s digital ledger, toughened against forgery via timestamping and disseminated as a distributed database. The DAO is under the control of the members. A central manager isn’t required. A DAO can be created for any purpose as long as members of the DAO community have to decide. The DAO ecosystem has been expanding extensively over the past few months.
Today, there are hundreds of DAO, each with its purpose. For instance, Protocol DAOs like Uniswap and Compound have the objective of providing liquidity in the crypto market. Venture DAOs like the LAO fund emerging projects in crypto. Some collector DAOs collectively buy expensive NFTs or other crypto collectables. Even a social DAO called “Friends with Benefit” is a community of creators, collectors, and everyone in between. When creating a DAO, it is important to make your idea unique so that it can attract a unique set of investors as a dedicated community is important for the success of a DAO.
How can I join a DAO?
Invest in their token, and voila, you’re a member. The DAO rules were set by the smart contract token you just purchased. To obtain voting rights and influence activities in the DAO, you’ll almost certainly need to stake a token or two. Typically, this is accomplished by agreeing on and developing governance plans. The requirement of staking to propose suggestions eliminates spam and ensures that the majority approves suggestions of stakeholders.
What are the incentives for joining a DAO?
The objective of a DAO matters to the underlying community; many retail investors and venture capitalists join a DAO solely to profit from its native token. Joining a DAO only for financial profit is not sustainable over the long term. Before joining a DAO, make sure you connect with their interest and what you are passionate about.
They have and establish a higher level of trust than the classical corporate hierarchy. The open-source code must be trusted, transparent, and thus auditable and verifiable. It solves the economic principal-agent-dilemma where there may be a conflict of interest of priorities between a group and those making the decisions for the group. The answer is community governance, where incentives are aligned. Every member of the DAO gets to decide on where their interest lies, and the decision is made based on the majority.
There are charity DAO, ones for NFTs investments, for funding projects by BAME and non-binary artists, for funding women and binary crypto founders. Some are exclusive social clubs, and others are for-profit business applications.
Downsides of DAOs
There is no such thing as a flawless organization, whether decentralized, autonomous or not. DAOs are an extremely new technology that attracts criticisms over legality, security, and structural issues.
A DAO can be distributed across multiple jurisdictions, and as such the federal government in different jurisdictions tends to interfere with its structure. You can read further on the implications of the laws on the formation and development of a DAO at mondaq.com
Since a DAO is programmable by humans and open source, the code used in its formation can be studied by bad actors and discover its vulnerabilities. In June 2016, the DAO, which held a good percentage of all Ethereum, got hacked, and the hacker made away with over 3.6 million worth of ether tokens. According to Investopedia, this led to creating the first Ethereum fork called Ethereum Classic, $ETC.
Future Potentials of DAOs
Imagine a DAO created for a football team where members of the DAO are responsible for deciding what the team manager will carry out. Such a DAO will draw the attention of football fans worldwide, which may be a key driving factor to the success of the DAO. People like to be in control, and the fact that DAOs offer them such luxury is one of the reasons for the continuous growth of the DAO ecosystem
Despite the potential for DAOs to revolutionize the industry and be a disruptive force to corporate structuring, they face security and legality issues. As we all know, the SEC claims some blockchain-based companies might have made illegal offers of unregistered securities. There is also a lack of understanding about cryptocurrencies from new investors, not to mention the technical competence one needs to understand the computational infrastructure and consensus mechanism within the smart contract to feel good about investing in it. It’s not bad though, Wyoming became the first state to recognize DAOs as legal entities. DeepDAO says about 181 DAOs, with an ecosystem’s total assets under management (AUM) of $13.4 billion.