The increasing popularity and fast development of decentralized finance, also known as DeFi, has opened a conversation about DAOs. This is a term frequently used in the blockchain and crypto world and something you must learn and be familiarized with in order to step into the decentralized future.

This is why in this article you will learn about what DAO is, how it works and some real examples running nowadays. 

What is DAO?

A Decentralized autonomous organization (DAO) is a software integrated into the blockchain technology that allows DAO members to have collective management of the code through a built-in model. 

It is also an entity that is fully autonomous and transparent as there is no central authority and it is based on the foundational rules of smart contracts. These smart contracts are visible, verifiable, and publicly auditable. So, every member can have full knowledge of the protocol and how it functions. 

Types of DAO

It also must be emphasized that DAO encompasses a wide range of different types of groups and businesses. Therefore, it could be two different collectives that are both DAOS but extremely different. This is why you must know some examples of the most known DAOs.

  • HerStory: This DAO collects and funds projects that are run by Black women and non-binary artists.  
  • PleasrDAO: This one collects various Non-Fungible Tokens (NFTs) and invests in other assets. 
  • MetaCartel Venture: The DAOs of this category serve profit businesses that invest in early-stage decentralized applications. 
  • Friends with Benefits: People who want to use this type of DAO need to pay to enter because it is a highly exclusive social club. 
  • Komorebi Collective: This DAO is focused on funding crypto founders who are women and non-binary.

 

DAO Management model

Unlike traditional organizations that are managed by a specific number of executive boards or committees, the authority of DAOs is based on the users who have their cryptocurrency. 

Therefore, it could be said that holding an asset provides the community members the power to vote on different proposals, updates, and even changes. For instance, providing proposals for future operations or changing the code itself. The amount of power they hold will depend on the number of assets they have. However, all the proposals do need a predefined level of consensus to be accepted and enforced based on the terms of the smart contract.

Also, DAOs do not have a hierarchy. Therefore, in order to have common interests and achieve common goals, DAOs are focused on incentivizing a distributed network of users to achieve their goals. This is done using internal capital given to these actors to ensure the overall organization runs effectively. 

 

How does DAO work?

The DAO management model follows a set of rules using an open-source code and it is enforced using smart contracts. It is also enforced by the network of computers running shared software. 

In order to provide a more clear idea of how DAO works, we have divided the process into four different mechanisms that are responsible for its operation. 

  •  Autonomous actions

The first mechanism is related to the ability to program actions and have them executed according to certain parameters. Thanks to that, the DAO gains the ability to execute actions autonomously. These executed actions follow a set of rules that govern the DAO and that are programmed through smart contracts.

  • Consensus protocol

The second mechanism is based on the consensus protocol. This protocol is responsible for guaranteeing that the decisions made within the DAO are made by consensus of all the parts involved. This ensures that no external factors alter the network, so it runs smoothly.

  • Token

Thirdly, there is a mechanism that depends on the issuance of DAO tokens or means of exchange. The purpose of this mechanism is to guarantee an environment that economically sustains the DAO. In addition to allowing users to earn the power to vote and at the same time be a mechanism for exchange and economic rewards.

  • Blockchain

Next, DAOs have a fourth mechanism that is in charge of recording everything that happens in the DAO. This task falls to the blockchain, where all the information is stored to be accessed publicly and guarantee its security. 

The union of these four elements is what allows the operation of a DAO at all times.

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