Chances are you have heard about DAOs, and you have probably mistaken them for crypto tokens or even DeFi projects. However, DAOs are much different from crypto tokens and DeFi projects, although they are also built on smart contracts.
A decentralised autonomous organisation (DAO) operates without the need for hierarchical management and can serve a variety of objectives. DAOs are software models that run on the blockchain and allow its users to collectively manage its code and protocol. It is built on a smart contract that enforces specific rules which are embedded in its code on members, therefore, creating a trustless organisation.
What does Trustless mean in Blockchain?
Trustless simply means that you do not have to place trust in an institution or person to complete negotiations or payments. Participating parties within a blockchain are incentivized to cooperate with the rules defined by their protocol to ensure compliance.
The DAO launched in 2016 was the first model of a decentralised autonomous organisation created as a form of venture capital fund. That is, its members collaborated and provided funds for projects that they considered highly profitable and benefitted by receiving dividends.
Some developers expressed concerns a few days into the token sale that a glitch in The DAO's smart contracts may allow unscrupulous actors to drain its cash. While a governance plan was being developed to address the flaw, an attacker exploited it and stole approximately $60 million in ETH from The DAO's wallet. In response to the hack, there was a hard fork in which the Ethereum Blockchain was returned to its previous state before the introduction of The DAO to allow investors to withdraw their stolen tokens.
DAOs are built on blockchain technology and use smart contracts to enforce laws such that no member of the organisation can bypass the laws or cheat others. Smart contracts are agreements between parties that are automated and executed once certain conditions are met.
The rules guiding the organisations are decided by DAO stakeholders, and once completed, the organisation can begin to raise funds and add more members.
For a DAO to begin its operation, there are certain processes it goes through.
DAOs have different policies concerning their membership which is embedded in the smart contracts. As such, a DAO may have:
When considering joining a DAO, find out what kind of membership policies they have in place, the participation rate of the members and how they respond to proposals to see if they are fully participatory.
Although DAOs are vastly growing, certain limitations have discouraged many from setting up DAOs even though they can revolutionise the existing organisational and business models. Some of the limitations include:
The decision to join a DAO is personal. The main thing to consider is if a DAO represents an idea you believe in and if it is worth your investment. Here are some of the benefits of DAOs to keep in mind when considering it as a potentially profitable venture to invest in:
DAOs have potential, and their broad adoption would aid in the management of financial initiatives by providing transparency and decentralisation. As DAOs become more widely used, they will adapt to overcome their limits and cover the inadequacies within the traditional financial system. Before investing in a DAO, you should undertake thorough research to ensure that you are investing in a viable project.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.
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