A decentralized autonomous organization (DAO) is founded upon and governed by a set of computer-defined rules and blockchain-based smart contracts.
With the mass adoption of blockchain technology, a new form of company or organization has become increasingly popular. A decentralized autonomous organization, or DAO, is a company governed in a decentralized manner through blockchain-based smart contracts. The main idea behind DAOs is to give a large community of contributors the ability to participate in its governance and future development.
DAOs operate thanks to a combination of various smart contracts, which allow participants to take an equal part in the decision-making processes inside the organization. Decisions made by the community of stakeholders include how the company will use funding and resources. In order for the plans and rules of the organization to be accepted, a percentage of the community needs to be in a consensus. This consensus is achieved through a decentralized, distributed blockchain, and each DAO determines the percentage required for a decision to pass.
Initially, Bitcoin was perceived as the first project to get close to being a DAO. However, with the introduction of the Ethereum blockchain and its smart contract capabilities, DAOs have started evolving and getting closer to the ultimate goal of complete transparency and community governance.
The idea behind decentralized autonomous organizations is still undergoing heavy development, as this is a relatively new phenomenon in the business world. An important distinction that has to be pointed out is that DAOs cannot make products or develop code or hardware. However, DAOs can easily hire contractors to perform all these services once the community consensus has approved a hiring contract.
Decentralized autonomous organizations are designed to be completely transparent so that all financial operations performed by the company are visible to all shareholders and the DAO community. The smart contract and underlying code of the DAO are also publicly available. This high level of transparency is essential to the concept of a DAO. Just like the underlying motif behind cryptocurrencies, the idea of a DAO is to surpass the traditional centralized management of a company and create an absolutely transparent organization whose actions and finance are completely public.
Decentralized applications (DApps) play an important role in the activities surrounding a DAO. DApps are software products developed with the help of smart contracts, and DAOs are essentially a variety of decentralized apps. While some DApps are created to perform money management functions, DAOs are designed to serve as a decentralized platform for communal decision-making.
One important distinction that has to be made is that as open-source software, DAOs can be targeted by hackers and exploited. One famous case of such a bug exploit happened with the organization called “The DAO,” which was targeted by a group of hackers, and a big portion of its funds was siphoned to a copycat DAO.