What’s a DAO?
With so much attention on price and speculation, it’s easy to forget that cryptography ushers in revolutionary technologies and ideas. The concept of decentralization supports completely new ways of exchanging value – such as internet money, DEFI or NFT – but it also opens up the possibility of completely new ways of making decisions. This can lead to reinventing traditional approaches to corporate and even national management. Meet the DAO – Decentralized Autonomous Organization.
What is DAO?
Cryptocurrencies may have successfully grown into a multibillion-dollar industry in just over a decade, much of this huge success wrapped up in cryptic acronyms and ideas. DAOs are one example.
The DAO is a decentralized independent organization. Translated more simply, a DAO is a way to make decisions without being controlled by anyone, instead using a governance supported by technology and financial contributions.
If you were to rank the problems plaguing society, the necessary evil of centralized power would probably be somewhere near the top. Belief in politics and politicians is the basis, while big companies are seen as unreliable or selfish.
Indeed, the Edelman Trust Barometer shows that none of the four main pillars of society – government, business, NGOs or the media – are trustworthy. The Learn Crypto blog doesn’t have enough bandwidth to fully unveil the reasons, but focuses on the need to delegate power to a minority of decision makers who generally don’t act in the best interests of those they represent.
A decentralized autonomous organization uses technology to automate processes to reach consensus. The rules that govern how decisions are made are called governance.
They are reduced to logical arguments, expressed mathematically as smart contracts running on the blockchain. The use of blockchain ensures that the administration cannot be changed except with the consent of all participants in the agreed administration process, who have a financial interest via tokens.
The origin of the DAO
Modern nation-states as we know them, centered around a single authority – such as a government or a monarchy – are only a few hundred years old. The invention of gunpowder and the subsequent development of military machinery changed the extent of power that wealth confers.
While in the past the dominant empires were those with the most disciplined, loyal or powerful armies, gunpowder only made armies stronger through wealth, Society, incidentally, was governed on a tribal level, with several examples of progressive approaches to decision making that were effective on a small scale. DAOs can be seen as a modern evolution of such self-organizing methods as tribal councils.
Given the connection of cryptocurrencies to mining, it is interesting, for example, to see how the isolated mining communities that have arisen spontaneously around new sources of precious minerals have organized themselves to make decisions.
Gold, silver and diamonds have often been found in remote locations far beyond the reach of recognized authorities, attracting a melting pot of nationalities living in extremely harsh environments, all rushing to seek their fortunes. The fact that so-called mining councils have established codes of conduct workable without hierarchies under these circumstances is testament to what can be achieved. Although this has not always gone without problems.
Cooperatives also provide inspiration for the community principles of DAO, as they are owned and controlled by their members and exist for their common needs. Despite noble intentions, Coops still need a formal hierarchy to make decisions and run the organization.
DAOs can be seen as attempts to create a headless organization modeled on existing examples of self-organization, but with the advantage that blockchain technology brings distributed but coordinated decision-making power.
How does DAO work?
DAOs inevitably start with a single idea or goal of someone or something, and then have to evolve from being those founders centered to a community-driven initiative. How this development occurs and the broader tasks of the community are defined in the rules – governance.
Since DAOs are rooted in cryptocurrencies, most of those created so far focus on the control, management and growth of financial entities, but the principle can be applied in any context.
Management must be able to be expressed mathematically, which reinforces the logical and objective framework. The math is then encoded in a smart contract. Turing complete blockchains like Ethereum can execute smart contracts as long as they are written in a programming language called Solidity.
Due to the decentralized nature of blockchains like Ethereum, once a smart contract is created, no entity can unilaterally modify it except by participating in the governance process. The few operational DAOs – so far – revolve around speculation, so the right to participate in governance is proportional to the financial commitment expressed in the governance tokens, as are the rights granted to the builders of the technology.
DAO communities can propose rule changes, but they must be submitted through an agreed proposal process and voted on by all token holders. DAOs are trying to enable a new form of technocratic democracy, and while this is a great ideal, they are not without their problems.
This may be because founders are allowed to wield a disproportionate amount of voting power or because few token holders bother to participate, reflecting the apathy of traditional voting systems.