What is a DAO?

Region: Europe
Jan 19, 2022, 11:00:00 AM Published By Wirex Team

What is a DAO and how does it work?

DAO stands for “decentralised autonomous organisation” and is designed to operate using smart contracts, rather than being influenced by a central authority. Instead, they are governed by a community around a specific set of rules on the blockchain. This means that they are collectively owned and managed by members and have built-in treasuries that can only be accessed with member approval.

The idea behind decentralised organisations dates back to April 2016, when a group of developers was inspired by the decentralisation of cryptocurrencies and wanted to create an organisation that would automate decisions and facilitate crypto transactions. Named simply as “The DAO” at the time, it acted as a form of venture capital that was based on open-source code and without a typical management structure or board of directors. The ultimate goal of The DAO was to place the power of decision-making into an automated system in order to terminate human error and manipulation of investor funds. It also allowed users to send money from anywhere in the world without any third-party involvement.

During its launch, The DAO raised $150 million in funds and was known as the largest crowdfunding campaign at the time. Unfortunately, as quickly as it was built up, the organisation came tumbling down - but we’ll get to that later.

DAO vs traditional organisations

Let’s have a look at DAOs compared to traditional organisations. The difference between the two is simple – one is centralised and the other isn’t.

Traditional organisations are governed by a central authority, such as a board of directors, executives or upper management. They also follow a ladder-like model with a certain body on top, such as the CEO of the organisation. In terms of financial decision-making, this is typically given to the chief financial officer (CFO).

As mentioned earlier, DAOs are owned and managed by a community, meaning there’s no “higher power” to control or operate things. This includes decision-making, as these are made through proposals that are voted on during a specific period.

The only similarity between a DAO and a traditional organisation is how they are formed. A traditional organisation may be started by an entrepreneur with the aim of filling a gap in the market with a new product or service. A DAO is launched by a group of developers with the same goal, that also wants to bring value to a certain community.

Real life examples – MakerDAO and the infamous DAO hack

Now that we’ve discussed the difference between a DAO and a typical organisation, let’s look at some real-life examples.

Remember The DAO, that we touched on earlier?

In June 2016, 3.6 million Ether (ETH) tokens were stolen from The DAO network. This was due to vulnerabilities in its code base, which several users expressed concerns about. Computer scientists were also concerned, as they discovered a bug in The DAO wallet's smart contracts that would make them easily accessible. While programmers attempted to fix this, the problem wasn’t solved quickly enough, and the attacker managed to drain the funds completely.

Fortunately, Ethereum developers were able to restore the stolen money by executing a hard fork. However, not all parties agreed with this decision, and so the network split into two separate blockchains – Ethereum and Ethereum Classic.

While the funds were recovered to investors in the end, the incident left The DAO with a damaged reputation. By September 2016, its native DAO token was delisted from major cryptocurrency exchanges and ultimately became defunct.

Now let’s look at a more positive example: MakerDAO. The MakerDAO software runs on the Ethereum blockchain and its purpose is to make and maintain DAI, a stablecoin designed to track the value of the US Dollar. DAI is created when a user locks up another cryptocurrency (e.g. ETH) on the Maker protocol to take out a loan in the stablecoin. Users can also purchase the platform’s native MKR token to vote on proposals that influence how DAI can be used, such as choosing which cryptocurrencies can be locked into the protocol or the amount of these assets that will be sold in liquidation.

Founded by Rune Christensen and his team of developers in 2015, MakerDAO has become one of the most popular decentralised applications on Ethereum. The MKR token has also seen its value rise to approximately $2k.

Are DAOs the future of work?

Like most decentralised projects, whether DAOs will replace traditional organisations when it comes to the world of work has been a topic of much speculation. An article by Future commented that a person won’t simply work for a company. Rather, people will earn an income through playing games, learning new skills, creating art or curating content. DAOs will make work more flexible than the regular 9-5 that many are familiar with, as well as present people with greater job opportunities.

However, as exciting as that sounds (imagine making a living from playing video games!), mainstream adoption isn’t likely to happen just yet. Much like with any new technology or concept, DAOs come with their challenges.

Income is a primary example of this, as the amount someone can earn through a DAO is uncertain, and “play-to-earn" or “learn-to-earn" models don’t necessarily mean every single person will be able to play games or create art as a living. While DAOs will make this type of work more available, the market won’t reward all of them and people can only earn a decent income by providing value, such as gaining a significant audience or achieving certain outcomes.

Even so, DAOs are growing immensely and are already providing people with opportunities to earn through certain activities. However, whether they will fully replace the traditional 9-5 remains a grey area – perhaps in the distant future when we’re all living through funky avatars in the Metaverse.