What Is the Foundation of a Decentralized Organization
The impact of blockchain technologies on the minds of people is inevitable. In fact, blockchain technology has taught us surprisingly useful financial skills. We began to learn how to independently build economic models, share information and experience, make economic transactions and everything without intermediaries. There are more and more of us, and now we are ready to unite on the basis of the same idea of blockchain technologies to build the next level of relationship. Decentralized Autonomous Organizations (DAOs) are a logical step for this.
DAO Minimum Requirements
Let’s take a look at this definition first.
Organization — means any association of people;
Autonomous — in this context, independent, working on the principle of making an informed, uncoerced decisions;
Decentralized — refers to the blockchain technology on which these autonomous organizations are build. The principle of decentralization is achieved by some functions (rules) that are added into the blockchain and known as a smart contracts. In this article we will refer to smart contracts on the Ethereum and Ethereum compatible networks. The opposite can be organizations built on legal documents ratified by a central authority, also known as government.
From the definition above, we conclude that DAO is an association of people whose relationships are built on top of blockchain technologies with the principle of making informed, uncoerced decisions in accordance with pre-established rules written in a smart contract.
These rules enter into force as soon as a group of 2 or more people is formed. To make decisions, people will need to vote. This means it is also necessary to establish a quorum. Upon reaching this quorum, the proposal will be either accepted or rejected. Participants and quorum are the determining factors in a DAO. These minimum requirements are enough to set up decentralized organization on the blockchain immediately. But there is something more.
Proposal Types In a DAO
DAO can be run with the variety of rules and presets. DAO can be made for media, for social club, venture capital fund or just for a simple mutual assets management, run by NFT or by project’s native token. But the main significant difference lies in the proposal types:
- Voting with execution;
- Voting without execution.
Voting with immediate execution in case of positive decision will be instantly executed by the DAO’s smart contract and will be written in the blockchain. This way, a DAO can execute any transaction via voting, for example, sending part of the funds from DAO’s treasury to the DeFi protocol, or to a wallet.
The screenshot shows this process in XDAO followed by the execution of voting. We see that the token holders of this ComplexDAO have the right to manage and make decisions. Voting with status “Ready to activate” were signed with a quorum (here is 51%) but have not been executed yet, Voting with status “Activated”— were signed and written into the blockchain.
Companies and venture capital funds can jointly manage their treasury without the fear that one of the members will disappear with the whole money one day. If they wish to perform any actions with the DAO wallet, they will be forced to create a voting, where according to the established quorum the decision will be either accepted or rejected.
DeFi Protocols can safely store their funds in the DAO. Use them for marketing, bug bounties, rewarding users, team salaries. They can do this publicly, showing the community that their business is absolutely transparent, and non-publicly, just to solve the problem of trust in the team.
They ALSO can use a DAO model to actually change the state of the protocol via upgradable proxy. However, to do this they should proceed to vote token holders first. In the screenshot below taken from Tally dashboard anyone can go and see what decisions are made on the protocol.
Voting without execution akin to a SnapShot are used to involve the community into governance. These votes doesn’t need to be executed, added into the blockchain afterwards. Further implementation of these usually lies within the team. DeFi projects prefer such governance model because it is cheap (via off-chain voting). The community also have a voice and rights to take part on it. And again, anyone can publicly go to user-friendly dashboards and see what is going on with the project.
Is DAO model successful?
Although the first DAOs were invented back in 2016, a wave of public interest was catalysed only now.
DAOs act as an alternative to corporations. In one interview with Dapper Labs “…Gharegozlou (Dapper Labs CEO) and McFedries (founder of Friends With Benefits DAO and Brud) suggested this could also be a way for legacy projects to effectively “exit” to the community — to transform from a traditional (or Web2) way of corporate thinking to a decentralized, collectively owned approach.” Refusal of third parties, transparency of communications and actions in the DAO attracts more and more people around crypto space.
On the one hand, DAOs simply copied the governance principles from traditional institutions, as they have already done with finance, but made the process simpler, more open and sincere.
On the other hand, DAOs have many tools that bring business and technology closer together. Let’s recall what was said at the very beginning of this article — Decentralized technologies for DAOs are smart contracts. Until now, writing these smart contracts and adding them to the blockchain so that the DAO can work has been a difficult task that only highly qualified developers could do.
After the DAO boom, we see tools emerging on almost every modern blockchain to create and manage DAOs. By tools, we mean protocols that, through the interface, will help you configure DAO for certain tasks, like on the WordPress website builder. This is a huge step for the development of blockchain technology, because with the emergence of such manageable DAOs, an influx of money into decentralized finance begins.
If you are already managing other people’s finances, you can make this process transparent to investors. You love NFTs, but it is too expensive to buy them yourself — let your DAO with 20 like-minded people be theirs holder!
As mentioned above, even 2 people on board can manage a DAO. Person can join any DAO as well.
As we can see from the statistics provided by Deep DAO, the total AUM of the all largest DAOs increased by $ 6.9 billion in the last month. People are actively buying governance tokens to participate in any kind of a DAO. Decentralized organizations generally possess significant funds and thus contribute to the blockchain economy.
Look towards the DAO.