Cryptocurrency space is filled with a large number of projects and sprawling ecosystems. Some of these systems have legal entities that are registered in their respective jurisdictions. Others exist purely as digital entities that have no centralized form of government. When decentralization becomes the centerpiece of an entity’s management, the only way to reach decisions is through consensus among its participants. This is where the concept of the DAO – the decentralized autonomous organization comes into play.
What Is a DAO?
At its most basic, a decentralized autonomous organization is an approach to management that revolves around the use of blockchain technology for automating some aspects of voting and transaction processing within a system.
Numerous blockchain applications, projects and even entire ecosystems operate based on the DAO principle, leveraging the combined decision-making potential of its users for deciding on key aspects of development and other processes.
If some of the most prominent adepts and proponents of blockchain and decentralization were to be questioned on the prospects of decentralized autonomous organizations, they would say that the DAO is a perfect means of eliminating the human factor that hampers the development and functioning of most centralized systems. In essence, DAOs can automate many processes in financial systems and transmit full control over them to the stakeholders – essentially making DAOs a near-perfect democratic environment.
The same proponents of DAOs single out the lack of personal relationships and corruption under such mechanisms. Given the fact that all transactions and decisions within decentralized autonomous organizations are prescribed in smart contracts, they are rendered immutable and immune to tampering. DAOs also eliminate much of the bureaucracy involved in centralized systems, relying solely on the blockchain and consensus among stakeholders to sign smart contracts.
How DAOs Work
The underlying blockchain is the main supporting pillar of the decentralized autonomous organization. The entire system works by leveraging smart contracts, each of which is tailored to a specific process. Each decision that is put up for voting by stakeholders is assigned to a smart contract, rendering it immutable, transparent and tamper-proof.
Though the DAO may seem like a perfect escape from bureaucracy and centralized governance, they are still bound by regulation and legal norms. The Securities and Exchange Commission has ruled that any sales of tokens within a DAO will require them to be registered as securities, underscoring the need for decentralized autonomous organizations to have a legal entity.
Such a real-world binding places some limitations on DAOs, meaning that participants can contribute to it via investments or through work performed in the role of validators or oracles. Either way, the decentralized autonomous organization is free from corruption at the protocol level, since the participants do not know each other and there is no paperwork involved that could be tampered with, or any connections that could be leveraged to achieve an unfair advantage during voting on a certain decision.
Advantages of DAOs
Decentralized autonomous organizations offer a number of benefits to projects and entities willing to operate within both traditional and blockchain space, namely:
- Automation of most financial and routine management processes;
- Considerably higher speeds of information processing and decision making;
- Complete fairness of participation in the organization on the part of all stakeholders;
- Complete transparency of all organization processes;
- Elimination of corruption and bureaucracy in organization management.