What is a DAO in Crypto : A Free Course For Beginners

In the world of crypto, understanding the concept of DAO or Decentralized Autonomous Organization is quite important. A DAO is an organization managed by a decentralized program run on a blockchain. It is basically a member-owned community without a centralized leadership. It is a space way to collaborate with other like-minded people on the internet. A DAO is often used to commit funds to a specific cause.

Anyone who wishes to work in the crypto industry should know how decentralized autonomous organizations work. If you are hoping to build a career in the crypto industry, here is a complete explanation of DAO and how it works by using the vending machine analogy.

What is a DAO?

A Decentralized Autonomous Organization (DAO) is run by code. It is fully automated, but the initial members must automate it based on certain rules and regulations that they agree upon. These rules are enforced through smart contracts, which are fully coded and executed via blockchain. This helps the organization automate tasks and be fully self-sustainable. With these smart contracts, the DAO becomes autonomous, and no one gets to monopolize or control the organization.

How Do DAOs Function?

DAOs function based on smart contracts and programmable codes. Smart contracts are used for automating processes and tasks that are used for running the organization. This eventually contributes to the sustainability of the organizations and makes them autonomous. It is an excellent way to avoid risky decisions, manipulation by partners, or the creation of a monopoly. Within DAO, decision-making is fully autonomous and it is made via code. In case the situation gets out of hand, contracts are updated according to previously agreed-upon changes.

Using the vending machine analogy, consider the organization as a vending machine. A vending machine has a few codes at the back that make the process fully automated. These include simple tasks like stock analysis, payment processing, and dispensing snacks based on the customer's selection. Similarly, within DAO, organizational tasks are automated, and decision-making is done based on predefined parameters.

What are the Advantages of Using DAOs?

In such a competitive world where every industry is always at risk of monopoly, DAO helps in automating decision-making. There are many advantages of DAO, such as creating trustless processes, minimizing the risk of opposition, safeguarding the company's future, and offering power to every stakeholder. Using DAO ensures that as more people join, there is no chance of mutiny within the organization, or no single entity gets to take the whole system hostage. To become a stakeholder, you just need a significant number of tokens, which grants you voting rights. Moreover, DAOs are open source, which helps with transparency. This allows all the collaborators to contribute and improve the community.

Is There a Risk of Manipulation in DAOs?

The chance of DAO manipulation is slim, but there is still a chance. The code is openly available to everyone for the sake of transparency. If attackers can understand the code and find a way to exploit the vulnerabilities, they can change the DAO. However, even with this vulnerability, DAO is still safe because developers run detailed scrutiny from time to time just to mitigate this risk.

How do Tokens Work in DAOs?

Tokens are used as a representation of voting rights. If you own a certain amount of tokens, you get to participate in the voting and are considered part of the ownership. For each proposal or change on DAO, token holders come together and vote on the decision-making. Tokens are given high value in the process as they represent the share in profit and reward generation within the organization.

What are the Downsides of DAOs?

Just like benefits, there are some downsides to using DAOs as well. Since the code is openly available, there is no sense of business secrets, and hackers with a good understanding of the code could exploit contract vulnerabilities. Furthermore, securing DAOs is challenging because it necessitates robust security measures.

Example of DAOs

Some of the most notable examples of DAO are The DAO, Aragon, MetaCartel, Gitcoin, and Dash. In 2016, DAO gained a lot of attention, which provoked many hackers and led to major manipulation. This helped the developers resolve manipulation issues, leaving to the Ethereum Classic that we use today.

How to Learn More about DAOs as a Beginner?

There are so many beginner-friendly education resources that you can explore. Open-source platforms like YouTube have many video tutorials by blockchain professionals. These resources are free and offer valuable insight into the functions, possibilities, and risks of using DAOs.

DAOs Taking over Traditional Organizations

In traditional companies like Apple or Google, there is a board that makes decisions, and for each decision, shareholders are asked to vote. Within DAO, there is no CEO to veto things, and the decision-making process is fully automated using code. After each voting session by the token holders, the code is updated, and the change is executed right away. This eliminates the need for human interaction, keeping everyone anonymous.

What is the Purpose of Tokens in DAOs?

Tokens in DAOs represent voting rights and ownership in any organization. Anyone holding a significant number of tokens gets to contribute to the voting and can propose change or improvement. The larger the number of tokens, the more power the token holder will have. Each token holds a specific value and represents a share of the profit and reward generated by DAOs.

Pros of Using DAOs

Trustless

: Using DAOs is a great way to establish trust in an organization. With DAO, the process is automated, so shareholders do not have to be dependent on a single leader or manager. The decision is made and executed, so there is no discrepancy.

No Risk of Resistant Shutdown

: Since the decision-making process is fully automated, there is no way to shut down DAOs because of situational crises or external entities. Even the authorities need to have a significant number of tokens and then contribute to the voting process to execute any change.

Open Source

: The code of DAO is kept on an open-source platform. This is available for everyone to view so anyone can easily review it. This strategy ensures there is no vulnerability left in the code and the process remains reliable.

Cons of DAOs

Vulnerable to Attacks

: DAO’s code is available openly for audits, so hackers can exploit it as well.

No Business Secrets

: Within traditional organizations, business secrets like vendors’ availability, analytics, and research efforts are kept secret. However, in DAOs, there are no business secrets because everything is available openly.

The Evolution of DAO

In 2016, DAO was pitched as a venture capital that received more than $150 million in investment from approximately 20,000 investors. However, the same year, it experienced a hack, leading to a significant loss of $50 million. To fortify the security, Ethereum Classic was introduced to preserve the stolen funds.

This further led the developers to create a new blockchain called Ethereum. To make sure both blockchain work simultaneously, the developer used a hard fork, dividing the Ethereum blockchain into Ethereum and Ethereum Classic. This helped in returning all the stolen funds to their rightful owners.

Cons of DAOs

With so many advantages of DAO, it is important to not overlook the disadvantages. One of the major downsides of DAO is its vulnerability to attacks. Since data is openly available, it is prone to attacks as well. Moreover, DAOs do not have business secrets because everything is available online for the sake of transparency. This takes out any competitive edge that the DAOs might leverage later.

Learn More About DAOs

If you want to learn more about DAOs or other topics in the crypto world, there are so many free online resources that you can explore. Free video-sharing platforms like YouTube have many tutorials and lectures that can help you learn more.

Conclusion

DAOs are a modern form of traditional organizations. These organizations are run via code and smart contracts. These contracts contain all the essential terms and conditions that can turn any organization into full-automated originations. There is no hierarchy in DAOs, no CEO or management; instead, anyone with a significant number of tokens gets to vote for the change. The fully coded system ensures that no single entity can manipulate the system. While there are so many pros, there are some downsides to the DOAs as well. The two major downsides are that DAOs are prone to attacks and there are no business secrets.