DAOs – Decentralized Autonomous Organizations and the future of the organizations

What is a DAO and the future of the organizations

The internet went into a frenzy when Constitution DAO raised $47 million worth of Ethereum. The same figure Gloucester Public Schools proposed for the 2023 fiscal budget. Although the DAO, with its $47 million, lost the bid of the US constitution traditionally auctioned by Sotheby’s, it was enough to direct minds toward what a decentralized autonomous organization (DAO) is. It was in 2021 that DAO came into the limelight with over one million members across different DAOs. As of 2021, the 20 leading DAOs are worth over $14 billion in digital assets, equivalent to the amount the US lawmakers signed off for Ukraine aid in March.

 

A decentralized autonomous organization is a governance model used in decentralized projects, DApps, and crypto-investment funds.

They are known for their decentralization, transparency, and self-executing smart contracts.

Additionally, DAO helps solve technical issues in organizations like voting processes and proposals.

Also, investment, NFTs trading, sustainability, and borrowing have better efficiency with the DAOs structure.

For instance, Jenny DAO is a metaverse organization providing fractional ownership to NFTs. In 2021, the DAO acquired its first NFTs purchase.

 

What is a DAO?

In a traditional organization, there is a hierarchical power distribution, from the chief executive officers to directors, managers, and the like. In most instances, the junior staff aren’t involved in decision-making and barely make suggestions – a top-down approach to management.

This form of governance reduces trust among members. However, decentralized autonomous organization (DAO) utilizes smart contracts to automate processes and agreements.

Smart contracts automate every process of a DAO, allowing all members to trust the process.

Again, most members in a DAO vote for any suggestions and mostly rely on crowdfunding with token issuance.

Therefore, DAO is governed by the community – not directors or trustees.

 

 

How does a DAO work?

A DAO isn’t created for fun; they serve specific functions through highly enthusiastic individuals who deploy their missions via smart contracts. The mission framework deployed on smart contracts is verifiable and auditable by all members of the DAO; after this process comes the development of governance tokens via smart contracts for crowdfunding.

Other steps are receiving funds and organizing the governance structure. Receiving funds via token sales confer rights on investors, categorized according to their investment. An investor with a higher investment has a higher voting right. After this, the DAO goes live; altering or adding any process will require a consensus vote. Thus, the community’s decision governs DAO.

 

The processes are summarized as follows:

  • Establishing the protocol’s goals
  • Obtaining funds through a token launch
  • Protocol launch via smart contract

 

What are the possibilities of a DAO?

DAO proffers significant benefits for crypto projects. The best is a smart contract – an on-chain code that automates human operations. Additionally, DAO is a great tool for community organizations, especially anonymous ones.

DAO is used remotely, and the fears of trusting an unknown identity are eliminated with an automated organization that guarantees integrity.

DAO is also cheaper to create than a traditional organization because of the cost of organizing global teams, which a relatively cheaper amount is enough to create one.

Decentralization of power and accountability also makes DAO juicier.

 

 

Benefits of DAOs

 

Decentralization

Decentralization is the hallmark of a DAO as it relies on collective decisions and output rather than an individual’s.

Traditional publicly-traded companies rely on the CEO and other board members to initiate any moves in the company.

Therefore, employees and consumers have no say.

Imagine if consumers have issues with a product and have no direct channel to voice their opinions.

This is a limitation of traditional companies that the voting process, even by users in a DAO, eliminates.

 

Democratize engagement

Democratize engagement as DAOs involve the community globally to work towards the productive outcome of a project.

Any individual at any location can log into web3 and participate in their desired DAO when they purchase the governance token of a DAO.

This boosts an organization’s engagement and confers a sense of ownership to members.

 

A stake in the project

Decentralization and community involvement are complemented by having a stake in the project as part of the benefits of a DAO.

First, voting rights by governance token to influence a project’s future, engagement, and revenue sharing are stakes in a DAO project.

 

The limitations of DAOs

 

Regulatory implications

Regulatory concerns pose a great challenge to DAOs due to the absence of set rules for taxation and management.

DAOs already carry the burdens of extended transaction and voting periods because everyone needs to have a say.

And since DAOs do not have a single unit accountable for all decisions, the accountability it provides through blockchain is jeopardized.

Therefore, setting rules and regulations for DAOs is difficult to implement.

 

Code vulnerability

DAOs depend on smart contracts to cater to every process. However, every code is vulnerable, and DAOs can be victims.

Hence, the major advantage of a DAO can be a setback for the project’s future if the codes are hacked.

 

Management

How DAOs are managed is another interesting twist in the future of a DAO.

The governance model considers the opinion of the majority, which could make the project align with the public view.

But collusion with the community may still occur.

On this topic about the management of DAOs we are working on a proposal to some DAOs implement to improve the management, the grow and sustainability of the organization.

Stay tuned and subscribe our newsletter to be aware of web3 impact on our future.

 

Time wastage on trivial decisions 

Since many people are part of a DAO and everyone needs to vote, the voting process is slow and delays decisions.

Additionally, this leads to Parkinson’s law, where we devote much time to less important tasks.

This greatly hampers the time set out for important tasks.

Imagine if a community needs to decide what color palette they should use for a project while leaving decisions like whether to adopt green hydrogen or solar power.

 

Human interest

DAO relies on smart contracts as an automated system to take care of almost all decisions.

This automated system lacks critical thinking – a factor where human edges out. Therefore, automated systems can’t perform efficiently during non-formal situations to manage projects.

 

Requirements of a DAO

Most successful DAOs have the following requirements to make a list short.

    • A purpose: A DAO has an underlying project they seek funds for and execute. Without a purpose, there is no DAO.

 

    • A voting mechanism: a voting mechanism ensures decisions are executed after everyone suggests ideas. A DAO may create a voting mechanism or use a third party.

 

    • A governance token and share system: A governance token may also serve as a utility token. This system proves the rights of members in the DAO. As a utility token, it makes people lay a claim to the DAO investment.

 

    • A community: DAO functions on the backbone of people willing to join and participate in the DAO governance – power democratization.

 

    • Fund management: A DAO must have access to the treasury or crowdfunded, which is saved in a multi-signature wallet and will be ratified by members before usage.

 

 

 

  • Types of DAOs

      • Protocol DAO: these are DAOs mainly for decentralized protocol governance.  An example is Automated Market Maker (AMM), DAO, which utilizes smart contracts protocols to offer DeFi services. These services include DEX and borrowing/lending.

     

      • Philanthropy DAOs: they are not common as the protocol DAOs. They are mainly for supporting philanthropy programs and social responsibility initiatives. Examples of such DAOs are Big Green DAO, an organization that focuses on improving food production and food impact on climates.

     

      • Collector DAOs: these DAOs are purposely created to collect funds from the community to purchase NFTs and collectibles. They are also known as NFT DAOs because the members collect high-value NFTs. Examples are Flamingo DAO.

     

      • Investment DAOs: as the name implies, are DAOs with numerous use cases for raising investments for the organization. These DAOs work like traditional investment funds without central control. They are venture DAOs because the money realized funds crypto and web3 projects.

     

      • Grants DAOs: these DAOs help fund and create new projects in the DeFi space. Aave Grants DAO is the first of this type – a community-driven DAO for generating funds for new ideas that will fuel the Aave Protocol. Likewise, Uniswap Grants DAO offers funds for protocol development tasks such as DeFi hackathons.

     

    Other types of DAOs are Entertainment, Media, and Social DAOs.

     

     

    The future of DAOs

    DAOs are still in their nascent stage, and many events will unfold. But it is sure to say that they are here to stay. Some aspects of business are best automated for faster response. On this, decentralized organizations will help to clarify which aspects of brands and projects should be encoded. Some opine that DAO should work like the US constitution, which is above human agents, including the president. But it is left to see if human activities will serve as pros or cons to DAO.

     

    Conclusion

    DAOs offer decentralization, the democratization of power, transparency, and automated services via smart contracts. DAOs types are Grants, Protocols, Social, Collector, Philanthropy, Media, and Entertainment DAOs. Creating DAO and smart contracts for your projects might be difficult, especially the tokenomics of the token and other technical details.

     

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