How does a DAO work?
DAOs have become one of the most disruptive technological innovations of recent times.
As the name indicates, Decentralized Autonomous Organizations are entities that seek to disrupt the current forms of collaboration and add self-management and transparency.
If you have arrived at this article, you have probably already heard about them. But, do you know how they work?
In this piece, we explain what DAOs are, the origin of the concept, how they work and we give you some examples of real DAOs.
What is a DAO?
The acronym DAO comes from “Decentralized Autonomous Organization”.
Therefore, a DAO is a type of organization that is managed and controlled by smart contracts. These contracts are computational algorithms in the blockchain network that determine the protocols or rules of collaboration of each party involved.
The use of blockchain allows these organizations to be autonomous, transparent and secure.
The origin of DAOs
In 1997, Professor Werner Dilger, presented his work “Decentralized autonomous organization of the intelligent home according to the principle of the immune system”. This is considered the first time that the concept of DAOs was exposed.
In the project, although blockchain technology did not yet exist, Dilger defined the bases of the DAO as a self-sustaining and autonomous system.
It wasn’t until 2013 that someone talked about this concept. It was Daniel Larimer, founder of BitShares and Steem, who spoke about Decentralized Autonomous Companies (DAC) in the Let’s Talk Bitcoin!
In 2015, Vitalik Buterin relaunched the concept with the launch of Ethereum. The Ethereum network allowed for the first time to create advanced transparent and immutable codes. This was the first big step in creating real DAOs.
How does a DAO work?
As we have mentioned before, DAOs are based on protocols (smart contracts) stored in blockchain technology. Consequently, these organizations are autonomous, transparent and secure.
Below we see the steps to follow for the creation and maintenance of a decentralized autonomous organization:
1. Creation of smart contracts.
The organization developers, first of all, must define and code the smart contracts that will serve as the basis of the DAO.
2. Define the governance of the organization
Secondly, developers need to define governance tokens. These will allow determine the rules of monetization, rewards or penalties.
3. Launch of the DAO
Once the smart contracts are implemented, the DAO is launched with the same stakes so that there is no imbalance of power. The amount of tokens that a user has will determine the weight in the voting.
4. Possible changes in the rules of the DAO
In the event that the community wants to change the DAO rules, it can only be done through a community vote. That is, in a decentralized way.
Also, potential money raised by the DAO cannot be spent unless it is approved by the community. Since the smart contracts are on the blockchain network, any member will have access to these contracts.
Each Decentralized Autonomous Organization operates in a unique way since the developers themselves are who define the rules in the smart contracts.
Below we list some of the best known examples of real cases of DAO:
PleasrDAO is a group of artists, entrepreneurs, and investors from the crypto world who invest through bidding on art pieces by high-profile digital artists. Once purchased, DAO members own the goods. They can then vote to include them in an exhibition, split them into NFTs, sell or hold them or just keep them in a physical or virtual vault.
DeveloperDAO is a community that seeks to generate and disseminate content related to web3 focused on technicians and developers.
Uniswap is one of the most popular DAOs. It works as a cryptocurrency exchange based on Ethereum. Anyone can become a member by purchasing their tokens. The community then has a vote on how the organization is run and managed.
And while the examples above are all success stories, this was a highly controversial case of no success.
The DAO was one of the first attempts to build a decentralized finance (de-fi) network for crowdfunding venture capital. Unfortunately, the network was hacked, resulting in the theft of $60 million worth of Ether token from Ethereum. You can find more information about this case here.