What is a DAO?

DAO - Decentralized Autonomous Organization

An organization, run by code and operate on the basis that "code is law." The rules written in the code that effectively run the day-to-day processes and decision making of the organization are known as smart contracts.

DAOs can improve grow and change with time as the token holders of a DAO submit, and then vote on the changes submitted. DAO tokens are typically purchased using Ether and the voting power of any individual is tied to the amount of tokens they hold. 

Profits made by DAOs are redistributed to shareholders through the increase in value of the native tokens.


What are the benefits of DAOs?

Benefits of a DAO

 

  1. Trustless - DAOs do not run based upon a transparent set of rules, not the decisions of any given individual (e.g. a CEO).
  2. Open-source - DAOs are built on open-source blockchains meaning anyone can view the code, audit it and make suggestions on improvements if a token holder.
  3. Frictionless and efficient - Owners of tokens can enact change by voting. Votes are based on the number of tokens held meaning investors can acquire more tokens if they want increase the control they have of a DAO.
  4. Can not easily be shut down - No government or entity can shut a DAO unless they have enormous tokens and submit them to voting.

What are the downsides / cons to DAOs?


    1.  No business secrets - By their very nature, DAOs are open-source. Whilst this has some clear advantages it also means all of the code and therefore the functionality of the business is visible to all.
    2. Accountability risk - Because no single individual entity can be held responsible for a DAO's decisions, the behaviour of others can in theory put other investors at legal risk.
    3. Lack of fit within the existing legal framework - It is also not yet currently clear how DAOs are considered with our existing legal framework. This issue, again largely caused by the lack of specific person to reference legally, ofter prevents DAOs from owning property or transacting with other parties in some jurisdictions (although this is likely to become much easier with time as standards are established). 
    4. Vulnerabilities - Smart contracts may contain vulnerabilities and leave the DAO's susceptible to attack. 

Which blockchains do DAOs operate on?

In theory DAOs can operate on any blockchain but in reality, most run on the Ethereum blockchain.

This is because:

  • Ethereum’s is well established meaning organizations can trust the network.
  • Smart contract code can’t be modified once live, even by its owners.
  • Smart contracts can send/receive funds (without this you'd need a trusted intermediary to manage group fund).
  • The Ethereum community has proven to be collaborative, allowing for best practices and support systems to emerge rapidly.

DAOs vs. Traditional Organizations

 DAOs offer a number of advantages over traditional organizations. These primarily occur due to the voting structure which ensures the wishes of token holders are enacted in a democratic way. The transparent nature of DAOs is also seen by many as a strength.

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