A Decentralized Autonomous Organization (DAO) is a piece of software that runs on the blockchain and provides users with a built-in model for collectively managing their code.DAOs are different from organizations run by boards, committees, and executives. Instead of being run by a limited group of people, DAOs are run by a network of computers running shared software that enforce a set of rules written in code. To become a member of a DAO, a user first needs to join the DAO by purchasing its cryptocurrency. Users who hold the asset then have the power to vote on proposals and updates, usually in proportion to the amount they hold.
The first successful example of a DAO was BitShares, a virtual e-commerce platform that connects merchants and customers without a centralized organization. At the time, Bitshares was labeled a Decentralized Autonomous Company (DAC), a term coined by its founder Dan Larimer.
Notably, the first DAO created on the Ether blockchain, called The DAO, was marred by controversy when hackers discovered a vulnerability in the code.
What are the uses of DAOs?
While DAOs are still in their nascent stages, many exist today. Operational DAOs include DASH (a user-managed cryptocurrency), MakerDAO (a software that maintains stablecoins), and Augur (a prediction market platform). Other use cases include incentivizing users to run social media platforms (e.g., Steemit) or share virtual worlds (e.g., Decentraland).
How do DAOs work?
DAOs are designed to mimic the structure of a company by enforcing the rules and regulations established in their open source code through the use of smart contracts.
When a person or team creates a DAO, they write a smart contract to establish rules and procedures by which the day-to-day operations of the DAO can be managed. A smart contract is a protocol that performs a specific task when certain conditions are met. Unlike traditional institutions, there is no hierarchy in a DAO. Instead, in order to align the interests of the organization with those of its members, the DAO encourages users of the distributed network to achieve their goals.
This smart contract acts like a voting system that fairly records and counts the contributions and decisions of its members, thus realizing the DAO's autonomy and transparency.
One of the main features of a DAO is the internal capital used to encourage participants and ensure the smooth running of the organization. Once the initial set of rules has been finalized and codified in a smart contract, the DAO typically enters a financing phase in which anyone wishing to enter can do so.
At the end of the funding phase, the DAO is considered valid and operational, and all key decisions around the institution are made by users reaching consensus on a proposal. By holding cryptocurrency and pinning it to a voting contract, users gain the ability to vote on the proposal with a voting weight proportional to the amount of cryptocurrency locked up. The proposal is then validated according to predetermined network consensus rules, and voters are rewarded with additional cryptocurrency for their participation.
