How does a DAO Work (In Detail)
Last updated
Last updated
Basically, a DAO connects people around the world who share a common goal or common interests with or without knowing each other. The community members of the DAO could establish their own rules, and make decisions autonomously that are all encoded on a blockchain.
A DAO works without hierarchical management and can have a large number of purposes. Freelancer networks where contracts pool their funds to pay for software subscriptions, charitable organizations where members approve donations, and venture capital firms owned by a group are all possible with these organizations.
DAOs could use blockchain technology - the smart contracts, to execute consensed rules that are established by the DAO members. The smart contract is essentially chunks of code that automatically executes whenever a set of criteria is met. Smart contracts are deployed on numerous blockchains nowadays, though Ethereum was the first to use them.
The smart contracts execute the DAO’s rules. Before the execution, members with a stake in a DAO have voting rights to influence how the organization operates by proposing and voting on the governance proposals. For example, once a proposal is passed when the majority of stakeholders approve it, the passed proposal will be coded using the smart contract for auto-execution.
DAOs are fully autonomous and transparent. As smart contracts are built on open-source blockchains, it allows anyone to view the codes and transactions. Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions. One thing to note is that the proposal passing and failing rule vary from DAO to DAO as it is set by each DAO.
Smart contract creation: First, a developer or group of developers must create the smart contract behind the DAO. After launch, they can only change the rules set by these contracts through the governance system. That means they must extensively test the contracts to ensure they don’t overlook important details.
Funding: After the smart contracts have been created, the DAO needs to determine a way to receive funding and how to enact governance. More often than not, tokens are sold to raise funds, these tokens give holders voting rights.
Deployment: Once everything is set up, the DAO needs to be deployed on the blockchain. From this point on, stakeholders decide on the future of the organization. The organization’s creators — those who wrote the smart contracts — no longer influence the project any more than other stakeholders.
Trustless: DAOs operate using smart contracts, which are essentially chunks of code on blockchains that automatically execute whenever a set of criteria are met. While a traditional organization requires a lot of trust in the people behind it — especially on behalf of investors — with DAOs, only the code needs to be trusted.
Transparent: A DAO's code is always open-source and can be extensively tested before launch. Every action a DAO takes after being launched has to be approved by the community and is completely transparent and verifiable.
Censorship Resistance: A DAO can execute a decision as long as it is approved by the voting system. This ensures that, no governments or organizations can influence the decisions of a DAO unless they purchase a large proportion of the cryptocurrencies and proposed a vote (which may pass or fail).
Vulnerable to Attackes: Since a DAO's code is open-source, attackers may discover bugs and exploit them to their own benefits. Therefore it is usually a common practice to get the Smart Contracts audited by a reputable organization before they are officially deployed.
Legal Complexity: DAOs can be distributed across multiple jurisdictions, and there’s no legal framework for them. Any legal issues that may arise will likely require those involved to deal with numerous regional laws in a complicated legal battle.
No Business Secrets: Since a DAO's code is publicly available and its actions are usually transparent, it is hard to keep its own proprietary business secrets to itself.
