Understanding a Decentralized Autonomous Organization (DAO)

Blockchain and smart contracts are governance innovations that can offer relatively high transparency while lowering bureaucracy.

They can mitigate existing organizational dilemmas and the need to outsource resources. Smart contracts within the organization have clear benefits without third parties' need to automatically align the company's interests.

A DAO enforces rules using Smart Contracts.
A DAO enforces rules using Smart Contracts (Photo by Shawn @shawnanggg on Unsplash)

A Centralized Autonomous Organization (CAO) lacks full accountability. It is run by human managers prone to errors. In contrast, a Decentralized Autonomous Organization (DAO) is inherently scalable, self-organized, Blockchain managed. DAO basic operations are managed following the rules and principles laid down in an immutable Smart Contract code without human interference.

Decentralized autonomous systems are characterized by using blockchain technology to provide a highly secure ledger for tracking financial interactions over the internet, strengthened against frauds by trusted time stamping and a distributed ledger database.

This method removes the need to include a mutually agreed actor in financial transactions, thereby simplifying the transfer of funds, information, or communications. The costs of a blockchain-enabled transaction and the related data reporting may also be significantly offset by removing both the trusted intermediary and the need for the repeated recording of contract exchanges in previous datasets.

Understanding that a DAO is just the digital version of the system, as mentioned above, is an important thing. All rules and regulations are written in a Smart Contract source code instead of a piece of paper. Thousands of people/machines execute them together via some consensus-based algorithm. Blockchain is the platform where the DAO's going. Ethereum Blockchain is the most common case where the DAO is writable. In the form of Smart Contracts, rules are written in Solidity, or Vyper languages in Ethereum.

How does DAO work?

In the Decentralized Autonomous Organization, every act or voting is represented in the Blockchain by some transaction. The address (in Ethereum, It's Ethereum address) represents the organization members. A person, a computer, an IoT device, or maybe another DAO may own those addresses. Members are given a token representing the DAO's shares; these tokens may also be used to vote in the DAO for a specific decision. The more an address a token has, the more influence he'll have on the DAO.

The Creation of the DAO

The most notorious DAO project was the DAO that Slock created and officially launched on April 30, 2016. That was a virtual venture capital fund ruled by DAO investors. The concept was: Funds raised from shareholders are pooled, the token holders.

Token holders could become contractors by using the DAO funds to submit proposals to fund their projects. The process included a curator examination, which was just a verification of identity conducted by one of the curators selected from among the respected members of the Ethereum community.

When the proposal was carried out and checked by the curator, the investors would vote on it. So when a proposal is accepted by a supermajority of 20 percent of all tokens, the DAO passes Ether immediately to the smart contract representing the proposal. All Ether generated out of the DAO-funded proposals would've been returned as rewards to participating investors.

Bitcoin represents the first real-world application of a "decentralized autonomous organization" (DAO) and introduces a modern organizational architecture model. Imagine dealing with a multinational business corporation, whose regular activities are guided by a software system rather than managers and staff.

The algorithm randomizes job assignments and incentives. Information is not channeled via a hierarchy but registered transparently and safely on an immutable public ledger called "blockchain." The company also agrees on improvements in design and strategy through a democratic voting mechanism involving a previously unknown class of stakeholders called "miners."

DAOs are essentially online, digital entities that operate by applying pre-coded rules. Sometimes these organizations require minimal to zero input into their service. They are used to execute smart contracts and monitor blockchain activity.

Modern legal structures are structured to allow the participation of associations, as well as particular individuals. Most legal systems do this by granting organizations the right to enter into legal contracts, sue, and appeal, also known as the 'separate legal entity' principle.


A decentralized autonomous organization (DAO) automatizes decision-making. This is just because of the lack of having any central governing body. Token holders take the time to make decisions on problems that frequently hamper work progress in a DAO. A decentralized autonomous organization (DAO) offers decision-making power to all of the token holders.

Token holders can withdraw their uninvested payments at any time. An uninvested investment reflects a sum not invested in any current programs. But a massive withdrawal of donations acts as a loss to an autonomous decentralized organization. The development and programming of a DAO contract is a critical aspect. It is of paramount importance to fully test and audit the software. Sometimes it's challenging to patch code bugs in a DAO.

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