Decentralized Autonomous Organizations (DAO) are organizations that work independently, without any staff. The entire operation is written out in programming code by means of smart contracts. Smart contracts can be compared with a computer program that provides a computer with the correct work instructions.
The idea of DAOs arose closely after the launch of Bitcoin. The hypothesis was: “if money can be decentralized, it can be done for organizations too”. The launch of Ethereum and its smart contracts made this idea reality.
The following prerequisites are needed for a DAO:
- A list of programmed rules through which the organization knows how it should work. These codes are included in smart contracts.
- Tokens that the organization can issue and with which it can be rewarded for certain activities.
- Investors who buy the tokens, resulting in gaining voting power for determining the course of the organization. Token holder can influence how the organization operates and steer the organization in such a way that it will operate successfully.
Compared to traditional organizations, DAOs bring a number of notable advantages:
- The processes are organized more efficiently and as a result people can focus on tasks that really matter instead of completing everyday routine tasks.
- There is no hierarchical structure in the organization. Anyone can come up with innovative ideas that help the business grow and stay innovative. To prevent spam, it is often set that you have to pay a small amount in fees in order to propose an idea.
- DAOs are completely transparent. All transactions are made transparent for everyone via the blockchain.
However, there are also points that make a DAO less interesting:
- The programming code cannot be changed easily. The community has to agree to its change. If they don’t, no adjustment can take place. This means that an error in the code could cause the entire organization to go bankrupt if not acted quickly.
This issue has been experienced by Ethereum’s project, ‘The DAO’. This project was supposed to make it possible to run a decentralized investment organization. At first it looked like it was going to succeed. However, a hacker found a leak in the programming code and saw the opportunity to cash out his investment several times. By doing so, he managed to channel away millions of dollars. Ultimately, this incident was the impetus for the hard fork of Ethereum: Ethereum Classic.
- Every organization must adhere to certain legal rules and since in most countries the laws are not yet up-to-date regarding blockchain and cryptocurrencies, DAOs can expect many obstacles. It is expected that this issue will decrease over time as society becomes more accustomed to DAOs.