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Decentralized Autonomous Organization [Comparison, Examples & Drawbacks]

A decentralized autonomous organization (DAO) is also known as a decentralized autonomous corporation (DAC). A decentralized autonomous organization (DAO) does not have a central governing body. Rules, transactions, and other information are encrypted as a code in a decentralized autonomous organization (DAO).

All transactions and necessary data are stored as code in a DAO blockchain. This blockchain is accessible to all token holders, making it easy to share all the information with every token holder.

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Blockchain

A block is the digital depiction of many transactions. A chain is a public database. A blockchain consists of several blocks that store transactions. Once a transaction is completed and verified, it is stored in a block. A single block has the storage capacity for many transactions. First, all the transactions of the block are verified.

It is then added to the blockchain. Once a block is added to the blockchain, it is accessible to token holders. Each block has a unique identifying code called a hash. This code distinguishes one block from the other.

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Read: Blockchain Project Ideas

How does a DAO work?

DAO meaning crypto is a self-governing and decentralized entity built on blockchain technology. DAO is a collective member organization where decisions are made from the bottom up. If you want to participate in a decentralized autonomous organization, you need the ownership of a token.

DAOs function through the use of smart contracts. These contracts are sections of code that activate automatically when specific conditions are met. These smart contracts establish DAO’s rules. Those who have a stake in DAO get voting rights. They can then influence the organization’s operations and take part in creating new governance proposals. 

Since DAO decentralized autonomous organization is built on open-source blockchains, they are completely transparent and autonomous. Anyone can view the code, and since the blockchain records all financial transactions, anyone can audit their built-in treasuries.

Steps to Launch a DAO 

To launch a DAO, you need to follow these three steps.

  • Create a Smart Contract

A group of developers first build a smart contract for the DAO and are responsible for changing the rules of the contracts, after launch, through the governance process. They ensure the contract does not skip crucial details and conduct extensive tests to safeguard the contract.

  • Funding

Once the smart contracts are built, the decentralized autonomous organization must find a way to receive funding and determine the enactment of governance. Usually, tokens are sold, which gives holders voting rights and DAO funding.

  • Deployment

After the set-up, the final task is to deploy the decentralized autonomous organization on the blockchain, after which the stakeholders determine the organization’s future. The developers who originally wrote the smart contract now have equal influence over the project as other stakeholders.

DAO membership

The DAO membership has different models. The way voting works and other important aspects of the DAO can be influenced by membership. 

  • Token-based membership

When it comes to governance tokens, the level of permission varies depending on the specific token. Some are fully permissionless, meaning they can freely be traded on a decentralized exchange. Users have to earn the others by completing some form of ‘proof-of-work’ or offering liquidity. Regardless of the acquisition method, simply holding the token allows users to vote. Governance tokens are often used to govern decentralized protocols and tokens.

  • Share-based membership

Members must submit a proposal and offer a tribute through tokens or work to join a share-based DAO. Members have direct ownership and voting power represented by their shares. Exiting the DAO is possible anytime with a share of the treasury. 

This type of decentralized autonomous organization can also govern protocols and tokens and is suitable for investment clubs, charities, and worker collectives. The process is open to prospective members but still requires permission.

  • Reputation-based membership

Members can get voting power if they have a strong reputation representing participation proof. Reputation-based DAOs differ from a token or share-based memberships since they don’t transfer ownership to contributors. Decentralized autonomous organization members can only earn reputation through active participation since it cannot be transferred, bought or delegated. The on-chain voting process is permissionless, allowing prospective members to submit proposals to join the decentralized autonomous organization. In return for their contributions, they can request to receive tokens and reputation as a reward.

Centralized organization vs decentralized organization

A principal-agent dilemma occurs when a member is entitled to make others’ decisions. It is quickly sorted out in a decentralized autonomous organization (DAO). This is because no one is anyone’s boss in a decentralized autonomous organization (DAO). So, every token holder is entitled to make their own decisions.

In a centralized organization, the relationship between the employees is defined by employment contracts. These contracts also describe the relationship between the employee and the organization. These employment contracts are legally enforced by the legal system of the respective country. These contracts determine which employee can be sued based on any breach of clause.

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In a decentralized autonomous organization (DAO), people interact based on a self-imposed contract. There is no legal contract binding between the employees. The investors supporting DAO get tokens in return for their support. They can use these tokens to decide on a path for the organization. They take decisions on various issues faced by the organization. Weightage of opinions depends on the number of tokens possessed. More weightage in decision making is given to a token holder having more tokens.

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In a centralized organization, there is a hierarchy of people working in the organization. It is shown in the above diagram. Every level has to work under the instructions of the preceding higher level and proper communication needs to be maintained between all the levels. In a decentralized autonomous organization (DAO), there is no single owner. All token holders are owners. Everyone works independently, and all transactions and other records are held in a blockchain. The DAO blockchain provides a platform for sharing information about various transactions.

In a centralized organization, trust and proper communication between teammates and teams are needed. This ensures the proper functioning of the organization. In a decentralized autonomous organization, people from different locations speaking different dialects work together. Hence, DAO provides a platform where unknown people can work through smart contracts. In a decentralized autonomous organization, all the shareholders are governed by a smart contract.

In a centralized organization, people are hired based on skills at different hierarchical levels.  A complicated technology, driven by consensus agreements, builds up a decentralized organization. Being a token holder and abiding by the smart contract, people can enter DAO. 

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Token facility

Tokens are given as incentives to promote the work efficiency of the token holders. Token incentives work as an encouragement for all the token holders. Ownership of DAO depends on the number of tokens possessed by the token holder. Ownership gained by a token holder is proportional to the number of tokens possessed.

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Decentralization and Centralization of DAO

A decentralized autonomous organization provides decentralization in terms of token holders from different locations. It provides centralization through the smart contract and a DAO blockchain. So, a DAO, in this sense, is not entirely decentralized.

The code of a decentralized autonomous organization (DAO) needs debugging. There might be other issues to the code too. This is done by token holders who have sound technical knowledge about the code. This aspect again pertains to centralization.

Drawbacks of DAO

There are delays in decision making in a decentralized autonomous organization (DAO). This happens due to a lack of a central governing body. Token holders take time to make decisions on issues that often hampers work progress in a DAO.

A decentralized autonomous organization (DAO) gives freedom to all token holders in making decisions. Token holders can withdraw their uninvested contribution whenever needed. An uninvested contribution is an amount that is not invested in any current projects. However, a massive withdrawal of contributions works as a setback to a decentralized autonomous organization.

Bug fixing of the code in a DAO is complicated. Once the code is uploaded, it is difficult to alter it. So, to fix a bug, the code needs to be rewritten. Though the code is accessible to all, correcting it is tough. This makes it another drawback of a decentralized autonomous organization (DAO).

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Examples of DAO projects

DAOStack is a blockchain leader that provides crypto-economic incentives to token holders. They aim to recreate each work, related to business, as a smart contract. This ensures proper work output despite tension between token holders. It also provides full-stack storage for DApp development. Access to these DApps is provided to customers through simple dashboards.

Jelurida is another example of a project of a decentralized autonomous organization (DAO). Initially, it started with the Nxt blockchain. Later on, it changed to a JAVA based platform named Ardor. Ardor is capable of creating custom blockchains. It provides a marketplace for connecting multiple blockchains and tokenization and voting facilities as well. In short, it has all the facilities needed for decentralization. The tokens are separated from the transactional coins; so, it provides a gap between authority and agreement.

The open-source community has another blockchain platform that is bringing DAO projects in the market. Aragon is one such project. It is working to build a “plug and play” company set-up. This can automatically create many starting steps for a new business. 

The Colony is another project of the open-source community. It removes the corporate hierarchy focus on the work done and the quality of the work done. It decides on the awarding of tokens based on these two aspects.

A decentralized autonomous organization (DAO) still has a long way to go to be fully autonomous. The advancement of artificial intelligence will boost the advancement of DAO. Many companies use the DAO platforms to get a headstart on their business.

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Also Read: Blockchain Developer Salary

Wrapping up

These points about the decentralized autonomous organization (DAO) and blockchain might answer some questions. Still, they raise new ones for you – What are the resources for an aspiring Blockchain developer? What is the scope in this field? And most importantly, how to build a career in blockchain?

Here’s a simple solution to your question: upGrad provides a Advanced certificate program in blockchain technology and an Executive Program in Blockchain Technology Management that may guide you on the right path in building a career. These courses will explain the need for Blockchain Technology and further steps to gather knowledge in this domain.

What do I have to learn in order to be able to make a decentralized application?

There is a lot of learning required in order to be able to make a decentralized application. Before learning decentralization, you need to have good knowledge of programming. After that, one needs to understand the basics of blockchain technology and how it works. Then, they need to learn about smart contracts and how they function. After that, one needs to know how to create and deploy decentralized applications. Finally, it is essential to understand the various challenges and issues associated with developing decentralized applications. Finally, you need to be able to compile and apply all the knowledge you have gained in a disciplined manner.

How does decentralization work?

In a decentralized system, there is no one central authority that makes decisions for the entire network. Instead, each individual participant in the network makes their own decisions about how to operate. This allows for a much more democratic system where everyone has a say in how the network functions. It also makes the network more resilient to attacks or failures, as there is no single point of failure. It is managed by various network providers around the world and controlled by solution providers. The data is owned and operated by the customers.

Should I master blockchain first or directly learn decentralization?

It depends on your goals and what you hope to achieve by learning about blockchain and decentralization. If you want to be able to build decentralized applications, then you should know about blockchain first. Suppose you are more interested in understanding the philosophy behind decentralization and how it can be used to create new models for governance. In that case, you should focus on learning about decentralization. Also, it is essential to note that there is a lot of overlap between blockchain and decentralization, so it is possible to learn about both topics simultaneously.

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