What is DAO?
The DAO is an organization designed for automation and decentralization. It operates as a form of venture capital fund, is based on open source code and does not have a typical management structure or board of directors. To be fully decentralized, the DAO was not tied to any particular country, even though it used the ethereum network.
Imagine a vending machine that not only takes your money and gives you a snack, but uses that money to automatically re-enter sold items. The machine also orders cleaning services and pays for itself. Also, when you put money into that machine, you and other users also get to decide what kind of snacks it will re-enter, and how often it needs to be cleaned. It has no manager, all the above processes are already written into code.
In a nutshell, that’s how a DAO, or decentralized autonomous organization, works. The idea of such a regulatory model has been circulating in the crypto community ever since Bitcoin managed to get rid of middlemen in financial transactions. Similarly, the main idea behind a DAO is to form a company or an organization that can fully function without the hierarchical levels of management.
It is important to draw the distinction between the DAO as a type of organization, and The DAO – which is merely the name of one of them. This project was one of the first attempts at creating a DAO and it failed spectacularly due to a bug in its original code.
How DAO works
Initially, Bitcoin was considered the first fully functional DAO, as it had a pre-programmed set of rules that worked automatically and was coordinated through a distributed consensus protocol. Since then, the use of smart contracts has been enabled on the Ethereum platform, which has brought the creation of DAOs closer to the masses and shaped their current appearance.
But what does a DAO need to function to its fullest? First of all, it needs a set of rules to operate on. Those rules are encoded in the form of a smart contract, essentially a computer program, that exists automatically on the Internet, but at the same time it requires people to perform tasks that it cannot do on its own. .
Once the rules are established, the DAO will enter the funding phase. This is a very important part for two reasons. First, a DAO must have an internal asset class, tokens that can be used by the organization or used to reward certain activities within it. Second, by investing in a DAO, users gain voting power and subsequently the ability to influence how it is run.
Once the funding period is over and a DAO is deployed, it becomes fully automated and completely independent of its creators and anyone else for that matter. They are open source, which means their code can be viewed by anyone. Furthermore, all financial rules and transactions are recorded in the Blockchain. This makes the DAO completely transparent, immutable, and indestructible.
Once the DAO is up and running, all decisions about where and how to spend it are made through consensus. People who have purchased shares in the DAO can make recommendations regarding its future. To prevent the network from being spammed by proposals, a deposit may be required for implementation
The stakeholders then vote on the proposal. To take any action, a majority needs to agree with it. The percentage required to reach the majority can vary depending on the DAO, as it can be specified in its code.
Basically, the DAO allows anyone to exchange money with anyone in the world. This can be done in the form of investments, charitable donations, fundraising, borrowing, etc., all without intermediaries. There is a huge potential problem with the voting system that even if a security flaw is discovered in the original code, it cannot be fixed until it is elected by a majority. While voting is taking place, hackers can exploit a bug in that code.
Finally, it’s important to note that a DAO is not capable of creating a product, writing code, or developing a piece of hardware. Instead, a contractor can be hired to perform a necessary task. This appointment is made through a similar voting process, while the smart contract will ensure prompt payment upon the correct completion of the task.
How to become a DAO shareholder and why?
Investing in a DAO is relatively easy, especially if you know how to buy Ether or Bitcoin and already have a wallet. All you really need to do is buy tokens of a particular DAO, which is the equivalent of buying shares of a company.
When the funding phase closes, you will be able to make proposals and vote on them and maybe even earn a profit. The number of tokens purchased will correlate with the amount of voting rights you receive.
Before you invest, however, make sure you know exactly what you’re doing yourself. DAOs are completely transparent and their underlying code is always open source, which means you have the opportunity to review the code to make sure that there are no bugs or errors in it.
What is dapp?
Dapps, which stands for Decentralized Applications, are essentially unstoppable applications that work on the Ethereum Blockchain and are powered by smart contracts. The main difference from regular apps is that, Dapps are completely autonomous, they don’t need any intermediaries to work, and are essentially immune to censorship. In other words, they establish a direct connection between the user and the service. Through it, users can fully control the information and data they share.
The DAO is basically a “breed” with the ambition of decentralized applications. As described in the Ethereum white paper, they fall into a different category, including voting and governance systems. The other two types of Dapps are money management apps and money related apps, but they also require a different niche (insurance, charity, property, etc.).
The story of DAO
“The DAO” is the name of a specific DAO, created by a team from a German startup called slock.it. They specialize in ‘smart locks’ that allow people to share their assets in a decentralized version of Airbnb. The DAO was launched in May 2016, when it was funded through a token sale. Somehow, the project managed to become the most successful crowdfunding campaign in history, raising over $150 million.
The DAO’s code isn’t perfect, and since it’s open source and available to the public, someone has found a bug to exploit. So on June 17th, an anonymous hacker, or group of hackers, started withdrawing from The DAO into a “sub-DAO”, replicating the DAO structure. Before withdrawals were halted, the hacker found a way to steal over $50 million worth of Ether.
Despite the fact that a bug in The DAO’s code was exploited to steal funds, this hack severely undermined both Ethereum’s reputation as a storage platform and the concept of the DAO. Furthermore, it caused the Ethereum network to split in two. However, it’s important to realize that all of this can be avoided with more code testing. Presumably, this hack is an important milestone in the history of the DAO’s development, revealing potential weaknesses, and it is certain that such weaknesses will be considered by future DAOs.
Advantages of DAO
The concept of the DAO itself is extremely interesting, as it tries to address everything that is considered a ‘flaw’ in the way modern organizations work. A well-structured DAO gives every investor an opportunity to shape the organization. There is no hierarchy, which means that any creative idea can be brought up by anyone and reviewed by the entire organization. A set of pre-written rules that every investor knows before joining the organization, as well as a voting system that leaves no room for disagreement.
Furthermore, since making a proposal and voting on it requires an investor to spend a certain amount of money, it motivates them to evaluate their decisions and not waste time on solutions. ineffective method. Finally, as all rules, as well as every financial transaction, recorded in the Blockchain, available to be reviewed by anyone, the DAO is completely transparent. Everyone involved helps with decisions about how money is spent, and they can track how those funds are spent.
Cons and Criticism
DAO, like almost everything else related to cryptocurrencies, is an extremely new technology, and to some extent it is a revolutionary technology. Naturally, projects like this will attract a lot of criticism. For example, the MIT Technology Review considers the idea of mass entrusting major financial decisions to a bad decision, and one that is unlikely to yield any profits. In their post, they say that many things in the world will have to change for DAO related projects to succeed of any size.
In addition to a rather conservative view that the majority cannot be entrusted with investments, there are other concerns surrounding the DAO. The most pressing issue, especially after the DAO hack, is security and it is connected with the principle of “unstoppable code”. During the attack, observers and investors watched helplessly as funds were withdrawn from The DAO, but they were unable to do anything, as the attacker technically followed the instructions. Rule. Of course, such attacks can be avoided if the code is well-structured and error-free.
Ultimately, for startups that operate like DAOs to be able to conduct business outside of the Blockchain network and communicate with a physical world of financial instruments and intellectual property, a framework is required. juridical. Legal uncertainty is a problem plaguing the crypto world as the technology within it is so new and radically different, but the solution seems to be only a matter of time.
Examples of DAO
Basically, any autonomous organization with a decentralized budgeting and governance system can be called a DAO. This makes all decentralized cryptocurrency networks a DAO, especially considering the initial crowdfunding phase before the official launch. Below is a list of some of the most successful and well-known DAOs.
Dash – An open source and peer-to-peer cryptocurrency that offers instant payments and private transactions.
Digix Global – The gold standard in peer-to-peer digital assets. Each Digix Gold token represents 1 gram of LMBA standard gold and is secured in Safehouse’s vault.
BitShares – A decentralized cryptocurrency exchange that bills itself as a fast and flexible exchange that offers crypto freedom combined with dollar stability.
According to TapchiBitcoin/cointelegraph
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