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DAO: What Is It and How Does It Work? | Notum

By Notum

Sep 22, 20224 min read


What Is DAO?

DAO (Decentralized Autonomous Organizations) is a new way of doing business that uses blockchain technology and smart contracts to manage the company automatically.

The traditional business management system has a management structure and hierarchy. As we remember from the theory of blockchain, this leads to centralization and, as a consequence, corruption, mistakes in management, and unstable communication between senior management and the entire staff of managers and directors.

With a centralized management system, there is no guarantee that one of the managers does not put his interests above the company's when making important decisions.

A DAO is a set of smart contracts and blockchain-based programs that run a company according to to set rules. Like Bitcoin, there is no single control center — it happens with the help of democracy and voting, as a result of which the rules for achieving consensus in the organization are adopted.

In fact, instead of crypto wallets — employees, and instead of the coins themselves — the right to vote in the company’s management.

DAO Is Decentralized and Autonomous

The DAO structure establishes its own set of rules governing its entire ecosystem. These rules, stored in smart contracts, are usually public and accessible to anyone. Moreover, they are entirely transparent, as anyone can view the smart contracts of DAO directly in the blockchain.

Smart contracts of each DAO are immutable and irreversible, which makes them more secure under certain conditions.

The most straightforward and most understandable example of autonomy in the blockchain is a scooter rental business. The scooter itself is autonomous and contacts directly with the client without intermediaries. But, it is centralized since it has an owner.

Now let’s add decentralization to this example — the owner of scooters is not a company but all citizens of the country. If you have a passport, you can take a ride by confirming your identity data directly to the scooter. And the money in the right amount, bypassing the state, will fall into the account of the counterparty who repairs and maintains them. The rest will be transferred to the healthcare fund.

And all this without the participation of deputies, kickback schemes, and theft. And most importantly, only passport holders can decide on purchasing new models or upgrading old ones. And so it is with any organization. Any process can be written in code and entered into a public and open database, i.e., into the blockchain.

The advantages of decentralized autonomous organizations are:

  • Equality and democracy;
  • Independence and autonomy;
  • Automation of management and exclusion of intermediaries.

DAO Is Democratic

DAO allows you to use the system’s tokens for voting and making executive decisions. For decisions to be made, smart contracts prescribe the conditions for making decisions and voting stages, similar to the election of the president of the country.

Votes cannot be stolen or forged. In any case, the management system of decentralized autonomous organizations will come to a common decision: consensus. DAO is the purest manifestation of democracy in organizations and management structures.

Where Can DAO Be Used?

Decentralized autonomous organizations are so customizable that they can be used almost anywhere we want to bypass the hierarchy.

Take, for example, social networks. It is becoming increasingly difficult to discuss specific topics because the central authority (the organization that runs the application) completely blocks or censors messages and entire communities.

A DAO-type social network removes an organization that is subject to regulators in the person of the government, and a fair vote will have to be held for banning certain topics. A similar scheme is used in decentralized applications, but the term has a slightly different meaning.

One of the significant examples of DAO is Aave. Aave is a kind of pioneer of the concept of P2P lending (direct exchange between participants without intermediaries). Aave is a DeFi protocol of the DAO model that allows you to borrow or lend cryptocurrency without having to deal with the bureaucracy of central banks. The AAVE token is the basis for managing the Aave protocol. The owners of the AAVE cryptocurrency can participate in the voting together with all other members to decide on the AAVE Improvement Proposals (AIP) results. Such proposals exist in many other blockchains but are not the basis for decentralized autonomous organizations. Most decentralized applications have exactly this control structure, but not all.

DAO Is the Future

DAO can set a new standard for the structure and principles of the work of organizations, thanks to decentralized voting, which does not require leadership or supervisory authority, which may also have selfish motives.

Most often, DAO smart contracts have an open source code so that everyone can verify their honesty. But, it’s worth considering that hackers can also check the quality of the written code in search of vulnerabilities.

Decentralized autonomous organizations have just begun their existence, so they will have to pass tests on live projects before they enter our everyday life.

Closing Thoughts

The capitalization of the global cryptocurrency market continues to grow, and if you think about it, the entire market is based on the very principles of the DAO.

Imagine that your phone’s current apps are being replaced by apps that don’t track your every move, don’t sell your personal data, and, most importantly, aren’t controlled by conglomerates and corporations.

Traditional platforms can either adapt to today’s changing worldview or stay on the sidelines alone with their projects.

Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.