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What is a DAO? The future of Decentralized Autonomous Organizations.

What is a DAO? What are Decentralized Autonomous Organizations (DAOs)? We will be showcasing the meaning and definition of DAOs along with examples and the potential future of the crypto economy. The following paragraphs in this article will allow users to better understand the definition of a DAO and how decentralized autonomous organizations work.

DAOs can be used for many different applications. For example, they can be used to keep the Ethereum ecosystem safe by making sure that apps are compliant with the set of protocols. They can also be used to come up with and approve changes on any decentralized system.

DAOs also avoid the centralized control seen with other types of development. Furthermore, they have a use case in gaming and can function within the vast world of metaverse gaming. Therefore, it is important for anyone who is into blockchain development to understand what is a DAO.

Definition of a DAO

In short, a DAO, or decentralized autonomous organization, is a system that allows people to govern themselves. Because its governance is decentralized, it operates more efficiently than traditional systems. At present, most DAOs are based and operate on the Ethereum Blockchain, however, there are other examples as well.

Origin

Organization theory has a lot of literature on different types of decentralized organizations. Yet, the first references to actual DAO emerged in the 1990s to describe multi-agent systems in an internet-of-things (IoT) environment or nonviolent decentralized action in the counter-globalization social change movement.

However, the modern meaning of DAOs can be traced back to the earlier concept of a Decentralized Autonomous Corporation (DAC), coined a few years after the appearance of Bitcoin. Early cryptocurrency traders used the term 'DAC' in informal contexts, whether it be online forums or chats. They would also use "decentralized" and "distributed" interchangeably. The first public mentions of "DAOs" on the web date back to 2013, and this term was especially discussed in Vitalik Buterin's publication in Bitcoin Magazine.

In addition to that, Buterin, in the Ethereum white paper (Ethereum, 2013, p. 23), defines a DAO as:

a virtual entity that has a certain set of members or shareholders which ... have the right to spend the entity's funds and modify its code.
That is, the aim to replicate the legal trappings of a traditional company or non-profit but using only cryptographic blockchain technology for enforcement.

Nowadays, there are already many DAOs in existence, and they’re mostly based on Ethereum smart contracts. The rules of smart contracts determine the behaviors and limits within the DAO. For example, the first DAO was built on Ethereum in 2016. It failed due to an exploit, but the developer community has learned a lot from it since then. Hence, Ethereum and blockchains are far more robust than before thanks to that first attempt to create a DAO.

How do DAOs work?

In the DAO, each action or vote is represented by some form of transaction on the blockchain. Typically, members are identified using their Ethereum address. These addresses can either be owned by a person or a robot (or IoT devices). This makes it a perfect fit for a system that is self-sustainable to run the DAO.

Each member is given a token which represents the shares of the DAO; these tokens can also be used to vote in the DAO to take a certain decision. The token is nothing but another kind of contract sitting on top of the blockchain. The more tokens an address has, the more control it will have on the DAO decision-making process.

As such, each DAO participant will have the right to submit a proposal or to take certain decisions. Such decisions can include:

  • Replacing or changing key members of the DAO
  • Hiring external vendors to complete different tasks
  • Hiring lawyers
  • Issuing tokens
  • Voting on the direction of the DAO
  • Voting on changes in general
  • Governing the DAO internally

The DAO is essentially a democracy run on the blockchain, which means that members can vote on issues themselves or someone they trust instead. This is in fact just like voting by proxy in the real organization. DAOs can also crowdsource funding by offering tokens to investors in exchange for money. This process can be done in real-time, unlike the slower traditional methods of funding. Payments and issuing tokens can be done in real-time unlike the longer and daunting processes in real organizations.

DAO Technical Structure

As the technical definition of the DAO indicates, the rules of organizational logic and operation of DAO are encoded in the form of smart contract. As a set of promises, specified in a digital form, including protocols within which the parties perform on these promises. The smart contract itself is in the form of a program code and the results of calculations are recorded in a distributed ledger. Consequently, the recording of computations and the execution of a smart contract are done in a decentralized or open manner while maintaining the anonymity of participants. Where a smart contract is an automated computer program that enables the terms of a contract to execute upon the occurrence of some event, without external intervention.

In the case of DAO, the usual charter of a company turns into a set of rules written in programming language in the form of a smart contract, where all rules are automatically executed if all the conditions for data collection are met. A smart contract is executed as a program in a given blockchain, executed by distributed nodes of the network and recorded in the blockchain. That eliminates the need for intermediaries or a trusted third party. Influence on the operation or modification of the smart contract requires the consensus of an essential part of the network.

DAO Participation

As discussed already, most DAOs require a token in order for users to participate. Social tokens and Socios.com in particular are showing a lot of potential and are a good example of a future decentralized organization. In Socios, users buy tokens of their favorite sports club. After that, the token is used by users to make decisions associated with their team. For example, such decisions can include the new design of the team's kit, the new design of the club's stadium or general social media giveaways.

However, tokens are a must whenever we look at DAOs and they are used to encourage users to support their favorite projects both on the blockchain and financially with full transparency. Tokens follow different standards, but the ERC-20 Token and the ERC-721 Token remain a widely popular choice for users. Therefore, they can vote on a poll or by signing a transaction on a Web3 wallet like MetaMask.

As of Q4 in 2021 and the rising popularity of NFTs, DAOs are starting to form within non-fungible tokens as well. Bored Ape Yacht Club and many others are attempting to create DAOs evolving around the popular ERC-721 tokens. For example, NFT DAOs will allow token holders to vote on decisions related to a particular NFT project and to project their ideas regarding the future of the token.

Examples of DAO Tokens

DAO tokens are an important part of DAO design and as such, they are an essential part whenever a DAO ecosystem is created. Below are some of the biggest DAO tokens in the blockchain space today:

  1. Aave – Aave ($AAVE) tokens are used in the world’s third-largest dApp and Ethereum’s second-largest lending protocol. It facilitates lending and borrowing on the Aave platform, which already boasts having a TVL of $13 billion.
  2. Maker – Maker ($MKR) is used in MakerDAO, DeFi’s largest lending platform. It allows users to vote on MakerDAO’s parameters, including business logic and risk management systems.
  3. Uniswap – The Uniswap ($UNI) token and decentralized exchange are very popular. The platform has more than $10 billion in TVL currently and is the second-largest DEX on Ethereum. Users holding the UNI token can vote on new proposals and participate in LPs. Although, the developing team still has a large say on Uniswap decisions, making it less decentralized than others.
  4. Olympus - $OHM is a decentralized reserve currency protocol that is running on the OHM token. OHMs tokens are backed by a multiple digital assets stored in the Olympus treasury This in turn creates a ground price for OHM that the actual price shouldn’t fall below.

Metaverse DAOs

The concept of a metaverse and NFT metaverse games such as Decentraland have been sparkling the ideas of creating metaverse DAOs around them. In fact, However, Decentraland, a full 3D ecosystem, has already established its DAO. Through the Decentraland DAO, its members can vote on proposed game updates. For any user who is interested in such ventures, then it is safe to say that DAOs are possible and will be persistent in the metaverse. The Sandbox is another good example which is set to implement a DAO according to its roadmap.

Summary of DAOs

Blockchain technology with smart contracts and decentralized autonomous organizations constitute an opportunity for global and regional economies to take into account the incredibly dynamic technological progress of web 3.0 over the last few years. We are currently at an early stage of technology development and the next stage may be the leadership of technology-developed countries in blockchain-based innovations. As a result, we will be seeing a lot more of DAOs either taking place at our favorite team or whenever we become the holders of non-fungible tokens. It is a fact that DAOs will be having a lot of implementation in the next few years especially with the excitement of the metaverse concept.

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