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What is a DAO? About Decentralized Autonomous Organizations.

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This blog post is part of our TokenSmarty Intro Series, where we explain basic crypto concepts in layman’s terms for beginners.

DAO, or Decentralized Autonomous Organization, is one of the most interesting concepts to come out of web3 to date. This concept has become popular in the world of cryptocurrency and blockchain due to how they operate without traditional management structures. In this article we will explore what a DAO is, how it works, and why it has become such an important concept in web3.

What is a DAO?

You can think of a DAO as a group of humans joined together under a common, agreed upon mission. Their primary goal is to move that mission forward, as a collective. But, unlike a more traditional corporate structure, a DAO makes progress toward their mission without any centralized authority or leader. There is no government entity or corporate enterprise leading the DAO.

This complete decentralization is a key feature of a DAO. In a proper structure, there is very little hierarchy within the organization itself. No C-Suite, no directors, no middle management. Voting members make decisions through a process of consensus. This ensures that all members have a say in the decision-making process. It also means that the organization operates in a transparent and democratic manner.

How does a DAO work?

Do you think voting by consensus seems a little too utopian, a little too idealistic? Well, it's not quite that simple. The first indicator of a well run DAO is that it is able to establish clear and transparent rules of engagement. Certain processes must be established, for example: how decisions are made, how funds are allocated, and how members are added or removed. This requires those leading the creation of a DAO to be very thoughtful and forward-thinking.

These decisions are written into code and stored on a blockchain. This type of code is called a "smart contract". A smart contract is a self-executing computer program designed to automatically enforce the organization's rules as written. Smart contracts are generally tamper-proof (though not all smart contracts are, which is a topic for another day) and they eliminate the need for third party intermediaries in transactions. The proper execution of a smart contract leads to quicker, more efficient, and more accurate decisions. It's the smart contract that provides the infrastructure to support consensus-based voting.

How do you join and participate in a DAO?

A DAO will usually go through some type of process to gain liquidity or funding once established. DAOs generally do this by creating their own cryptocurrency, or token, and place it on the open market for sale. Ownership of the token denotes membership. Dropping a DAO-centered NFT (such as Proof Pass from Proof Collective) onto the market for purchase is another method of gaining membership. This latter method is growing in popularity as of late.

Through the members' respective ownership of tokens or NFTs, power has essentially become distributed across the entity. Your token denotes membership, and your membership means a vote. Voting authority is commonly granted based on the volume of tokens a person holds. This is why one person may be able to gain more decision-making power - by owning more tokens.

Why is the DAO concept important?

The concept of a DAO is intriguing because it represents a new way of organizing and governing human activity. Humans have been bound by corporate, government, and nonprofit structures for years. These traditional organizations are hierarchical, with power and decision-making authority concentrated at the top. This can lead to a number of conflicts -  inefficiencies, corruption, and a lack of transparency, to name just a few. The design of a DAO, on the other hand, is transparent, democratic, and efficient.

In addition, DAOs have the potential to revolutionize the way we raise and manage funds. Most often in traditional markets, only those who have access to capital and connections are able to participate in investment rounds. This is very restricting and selective. DAOs, on the other hand, generally allow anyone to invest in the organization, regardless of their wealth or connections. This makes it possible for small investors to participate in the funding and governance of the organization, which can lead to more equitable and democratic outcomes.

Where will DAOs go from here?

Simply named "the DAO", one of the first DAO structures launched in 2016. The DAO’s code base is open-source, meaning accessible to anyone, and at its height it raised over $150 million from over 11,000 members. The DAO was eventually taken down by an exploit in its code base, leading to the first and only hard fork in the Ether blockchain. This history provides a unique window into security risks of a DAO and, in hindsight, ways to prevent such exploits. Since this time, the web3 space has seen the creation of a number of successful DAOs. Those DAOs are fully functioning entities today, for example MakerDAO, Flamingo DAO, and our personal favorite SquiggleDAO.

As with any new organizational concept, there are pros and cons to the DAO model. At TokenSmart, we love DAO's because of their decentralization, participation, and transparency. However, to work well, we believe strongly that a DAO must prioritize the education of its members about both its mission and processes. They also need to have strong security measures in place. Both of these challenges may result in execution of a DAO being more slow-moving than is ideal, at least to start.

The DAO concept is certain to evolve over the next few years. But one constant we hope remains is the emphasis on more equitable and democratic ways of organizing human activity. DAOs have the potential to transform the way we create, fund, and manage organizations, which could have far-reaching implications for the future of both business and technology, as well as society at large.