The explosion of Decentralized Finance (DeFi) during 2020 and 2021, has brought a rise in renewed interest in DAOs; and a number of DAOs have already grabbed the attention of more conventional venture capitalists, including Mark Cuban, the billionaire who called them “the ultimate combination of capitalism and progressivism.”
As the crypto community predicts that DAOs will be the next big trend in the space and mainstream investors start to take notice, in this article we will explain what is a decentralized autonomous organization, DAO?
What Is DAO?
A decentralized autonomous organization (DAO) as the name suggests is an entity with no central leadership. DAOs are internet-native organizations collectively owned and managed by their members.
The core idea of DAO's started out as organizations that automate business functions and processes using smart contracts and other blockchain fundamentals. Wikipedia defines DAOs as "an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO's financial transaction record and program rules are maintained on a blockchain."
So in simple terms, a DAO is can be understood as an internet community with a shared bank account. Organization’s members directly serve as managers and owners without a need for extra bureaucracy because the organization is run by code on the blockchain rather than a hierarchical leadership system.
DAOs are already being used for many use cases such as investment, fundraising, borrowing, charity, or buying NFTs, all without intermediaries. For example, a DAO can receive donations from anyone around the world and the members can settle on a plan of action on how to spend donations.
How do DAOs work?
The DAO structure and function rely on smart contracts that automatically execute when conditions are fulfilled. These smart contract outlines the organization’s rules, which can only be changed via vote.
The foundational framework of the DAO is established by a core team of community members through the use of smart contracts that lay out how the DAO is to operate. These smart contracts are highly visible, verifiable, and publicly auditable so anyone or a potential member can fully understand how the protocol is to function at every step.
Once these foundational rules are formally written and deployed onto the blockchain, the next step that comes is funding. Funding is typically achieved through token issuance. The DAO sells tokens to raise funds and fill the treasury. Token holders are given certain voting rights, that are generally proportional to their holdings. After the completion of funding the DAO is deployed.
