In a nutshell, what are DAOs?
DAOs are a new type of legal structure with no central authority and members who share the same purpose of acting in the best interests of the business. DAOs, popularized by cryptocurrency enthusiasts and blockchain technology, are utilized for bottom-up management decisions.
Usage of DAOs
Digital currencies, being decentralized, offer anonymity and security due to their dispersion over multiple computers, networks, and nodes, unlike traditional currencies that are managed by a single entity. In 2016, developers developed the concept of a decentralized autonomous organization (DAO), which enables monitoring and control of a corporate-like body. The lack of central authority is the key to a DAO, with a team of members and leaders serving as the governing body.
How DAOs Function
DAOs make choices based on blockchain activity, like raising circulating supply, destroying reserve tokens, or issuing awards using smart contracts. The voting process is recorded on a blockchain, and users choose between mutually incompatible options. The distribution of voting power is based on token ownership; with greater involvement, users incentive to behave in good faith. DAOs frequently include treasuries that house tokens that can be created in return for currency, and members can vote on how that money is used. Some DAOs, for example, may acquire uncommon NFTs by voting on whether to surrender treasury c/ash in return for assets.
The Advantages of DAOs
1. Decentralization
Decentralization is the practice of making decisions within an organization by a group of individuals rather than a central authority, providing more control over a broader range of users.
2. Participation
Individuals inside an entity might feel greater autonomy and connected to it if they have direct input and voting ability on all issues. Although these individuals do not have significant voting power, a DAO encourages token holders to vote, burn tokens, or employ their tokens in ways that they believe are best for the company.
3. Hype
Votes are decided via blockchain within a DAO and are publicly available. This forces people to act in ways they believe are best, as their votes and decisions are going to be made public. This encourages behaviors that boost voters’ reputations while discouraging those that harm the community.
4. The community as a whole
A DAO concept enables people from every corner of the world to work together to develop a single vision. With an internet connection, token holders can communicate with token owners from across the globe.
Drawbacks of DAO
1. Performance
If a public corporation is led by a CEO, a single vote could be required to decide on a specific action or course of action for the company. Every user can vote in a DAO. This requires a considerably longer voting period, particularly when time zones and responsibilities outside of the DAO are considered.
2. Education
Due to the issue of speed, a DAO is responsible for teaching a much larger number of people about pending entity activity. A single CEO makes it considerably easier to maintain track of corporate advances, but token holders in a DAO may have varying educational backgrounds, awareness of objectives, incentives, or access to resources. DAOs have the common difficulty of bringing together a varied group of people who must learn how to advance, strategize, and interact as a single unit.
3. Inefficiency
DAOs, as a summary of the first two points, run a high chance of becoming inefficient. Because of the time required to educate voters, promote objectives, explain the strategy, and onboard new members, a DAO can easily spend far more time analyzing change than establishing it. Due to the requirement to manage many more people, a DAO may become stuck with insignificant administrative activities.
4. Security
Security is a concern for all digital platforms for blockchain resources. A DAO takes extensive technical knowledge to create; without it, how votes are cast or decisions taken may be illegitimate. If users cannot rely on the entity’s structure, trust may be shattered, and users may quit the entity. DAOs can be abused, treasury reserves taken away, and vaults depleted even when using multi-sig or cold wallets.
Conclusion
The DAO’s future was uncertain, including whether it would sell assets and how it would work in the real world. The conversion of ETH into fiat currency may have affected its value. Following a hacking event, large digital currency exchanges, such as Kraken, delisted the DAO token in 2016, thereby ending its existence as a token.
