DAOs are the first coded systems designed to perform multiple functions without the involvement of a human manager. Think about it as a service that you can subscribe to for different features such as ordering food, requesting laundry services, bills payment, and so much more. In all of this, you still have the authority to decide on the type of service to be delivered and how often you need to use the service. The entire system functions on specially written codes.
Now that you have an idea about how DAO systems work, let’s talk about the concept. The DAO management concept was developed at the time cryptocurrencies such as Bitcoin were formed. The aim was to decentralize a unique alternative currency system to ensure it works properly without regulatory bodies or intermediaries, creating a seamless and more effective platform for financial transactions.
The project to develop DAO with seamless organizational features suffered a setback due to errors in its code. However, the developers made adjustments, and today, and the cryptocurrency industry thrives on DAO.
DAO functional features
To further understand the idea, it is essential to learn about DAO features. Bitcoin is the most prominent cryptocurrency. It provided the perfect platform to run DAO organizational system. It is a success; today, Bitcoin transactions are autonomously done using a defined protocol based on programmed rules. Further advancement of the idea led to the introduction of smart contracts for Ethereum transactions. Subsequently, the DAO functions became more accessible to the general public.
Essential processes to launch DAO
It is essential to define the rules of operation before all the features of DAO can be fully deployed. These rules are integrated into the smart contract program available on the internet. However, activating a smart contract is not autonomous; it has to be done by a user.
After deploying the DAO, the user can proceed to fund the system. It is essential to fund DAOs because the user is granted voting privileges which can determine how well it works. Also, the funding process cannot be skipped because it provides tokens which enable the user to perform transactions with the system.
Funded DAO systems are fully operational and autonomous. The open source DAO system is transparent which makes its codes open to public view. It functions without the influence of its developers, or other administrators which makes it impossible to externally influence the DAO functions. Also, the protocol that guides its processes and records of all transactions are stored in the Blockchain.
Before financial transactions are initiated through a fully functional DAO, the stakeholders take a unanimous decision. The stakeholders are also responsible for deciding on how the DAO is used for future transactions. To create an order and avoid irregular submission of proposals, stakeholders are usually required to make a financial deposit before proposing ideas about using the DAO.
Actions are only performed when there is a majority vote in favor of the transaction. The code used to develop the DAO also determines the percentages that will be regarded as majority votes. The voting process makes the system quite vulnerable because decision-making is slower. For example, if a loophole is discovered in the DAO, it cannot be rectified until the entire voting system is completed to determine the majority votes. The slow process can be exploited by hackers who take advantage of the loophole in the DAO.
Using DAO systems, people from all over the world can exchange funds. Therefore, it is a perfect platform for receiving donations, investing, borrowing and lending, or special fundraising activities without involving middlemen.
While DAO can be used to perform multiple essential, secure, and convenient tasks, it should be noted that you cannot use DAO to perform tasks such as writing codes, project development, or creating computing hardware. To achieve such tasks, you will need to hire a contractor. As always, a smart contract is created after the decision to hire a contractor is approved via voting. When the job is done, the contractor is paid via the smart contract.
You are eligible to become an investor in a DAO if you already have a cryptocurrency wallet that you use to buy Bitcoin or Ethereum. It is an easy process. After identifying the DAO, you want to invest in, buy its tokens, and become a DAO shareholder.
After securing your tokens for the DAO, the funding process ends. Next, you can now vote, propose ideas, and benefit from the system’s profits. Please note that the voting power of stakeholders in a DAO is determined by the value of tokens you have purchased.
It is best if you study the DAO before investing. It will be easy to get all the information you need before investing because DAO systems are transparent, and the open-source system makes its codes accessible to the public. You can ensure the DAO is free from coding errors before investing.
DAO as Decentralized Applications
Here is a brief description of the Decentralized Applications. The Decentralized Applications, Dapps, are designed for the Ethereum Blockchain network. Dapps are deployed based on smart contracts to perform autonomous tasks. Dapps are not under censorship, and this makes the apps a perfect medium through which users can control shared data while accessing services.
DAOs are designed to accomodate Dapps, though DAOs have a unique process because of features such as the governance protocols and voting system. The other kinds of Dapps require assets such as property or insurance cover before they can be used to manage finances.
How DAO was invented
A German startup operating with the brand name and website- slock.it – created the name ‘DAO’ as the identity of its application designed to allow users to advertise their rentals on a decentralized version of the popular Airbnb platform. In May 2016, the DAO concept was funded via a massive token public offer, which raised more than $150 million. It was recorded as one of the most successful crowdfunding campaigns for a digital project.
Startup Challenges experienced by the DAO team
During the first weeks of its launch, the DAO development team experienced setbacks. Online users studied its open-source data and detected loopholes in the system, which they exploited. One particular incidence, on June 17th, hackers working together accessed and transferred money from DAO into a cloned platform created with similar features. Up to $50 million worth of Ethereum was lost in that attack. The system was patched to stop the theft. The team needed to review its code.
Ethereum’s growing reputation at that time suffered a huge blow. The public learned about the theft and became skeptical about using Ethereum as a hosting platform or investing in DAO. This caused a split in the Ethereum network. The theft could have been avoided by going the extra mile to retest the code. However, if the incident had not happened, the developers won’t have realized the need for troubleshooting their network to detect potential loopholes.
Advantages of DAOs
The DAO concept introduces a new and secure way to perform and manage transactions in the modern business world. It has shown outstanding potentials. For example, investors who buy tokens of a properly designed DAO have the leverage to organize their businesses better. Also, the elimination of a hierarchical system has given all shareholders equal power to propose ideas and decide on how the system should be used. Every stakeholder in the DAO system follows the same rules that guide actions and the voting process, which significantly eliminates disputes.
Furthermore, it is mandatory for stakeholders to invest a particular amount of money before voting or sending in proposals. This requirement compels stakeholders to think carefully before acting, eliminating time-wasting. All members of a DAO can review rules, financial transaction history, and other relevant data on the Blockchain, where the information is stored. Also, the transparent system makes it easy for all members to participate in deciding how to spend funds and monitor expenses on funded projects.
What Critics are saying
The DAO concept is new, and it promises a revolutionary change in the cryptocurrency industry. It is not surprising to find criticisms because it is a new concept. One review by the folks at MIT Technology indicates they are not comfortable that every stakeholder participates in making financial decisions. And another critic claims the system could not possibly yield financial gains. It has also been speculated that for DAO funding systems for projects to succeed, there needs to be a massive shift in the way things work in the world.
There are also worries about the security in place to protect investors after considering the hacking incident. DAO works with an ‘unstoppable code’ principle, which made it difficult to stop the theft of funds, leaving observers to watch helplessly while money was stolen from the system. However, attacks can be prevented in the future by ensuring the system is checked and rechecked to eliminate bugs in the code.
There is also mention of the difficulties securing legal documentation that permits startups to function as DAOs and perform transactions outside the Blockchain. Observers are also concerned about the protection of intellectual property and financial tools involved with the system. While a legal framework is yet to be defined for the new cryptocurrency-based system, it is certain that a solution will be developed in due time.
What platforms qualify as a DAO
from a general perspective, any organization under decentralized governance, autonomy, and a defined budgeting framework is DAO. This means all cryptocurrency networks with decentralized systems eligible for pre-launch crowdfunding are DAOs.
Some of the existing DAOs which have gained popularity today are as follows;
Dash — Dash is an open-source, peer-to-peer cryptocurrency platform. Dash has become very popular because of its services, such as processing instant payments via discreet transactions.
Digix Global — This DAO has maintained an impressive standard in facilitating the transfer of digital assets among individuals. For every Digix Gold token, you get 1 gram of LMBA standard gold. All assets are secured in secure vaults.
BitShares — This is one of the quickest and seamless decentralized cryptocurrency exchange platforms. It leverages the autonomy of cryptocurrency and the stability of the USD to offer its users better crypto exchange services.