Cryptocurrencies and their underlying blockchain technology provide new ways of organizing and incentivizing human activity. We are experiencing a fundamental shift in how society organizes itself, and blockchain technology is at the epicenter of this change. Instead of relying on a CEO or a board of directors, we can now rely on code and mathematics. This new form of organization is called a decentralized autonomous organization (DAO).
A Decentralized Autonomous Organization (DAO for short) is a self-governing entity which operates through distributed consensus system and has no central point of control. Similar to a corporation, DAOs have their own assets, liabilities, revenues, profits/losses, stakeholders, employees, and customers. However, unlike a corporation, a DAO has no central point of control, no central point of failure, and no single leader.
How do DAOs work?
At the highest level, a DAO is a computer program that runs on a blockchain. The program is designed to digitally represent a set of business rules and processes that can be validated, executed and enforced using code. Each DAO is operated by a decentralized network of computers (nodes) which validate and execute transactions based on these business rules.
Are DAOs legal?
Unlike traditional corporations, decentralized autonomous organizations do not rely on legal contracts or company by-laws to govern their operation. Instead, they use smart contracts; unbreakable computer code which automatically execute financial contracts and organize internal operations. A DAO is owned by everyone who purchases tokens, but instead of each token equating to equity shares & ownership, tokens act as votes in a decentralized decision-making system.
Are DAOs secure?
All the information of a DAO is transparent, visible, and easily available to anyone. A DAO's financials are open to public scrutiny, its organizational structure is visible to all, and its decision-making process is transparent. This is possible because DAOs are completely decentralized. There are no legal or other barriers that would prevent this information from being available to the public.
Examples of decentralized autonomous organizations
Bitcoin was the first decentralized autonomous organization. It is owned by everyone who participates in the Bitcoin network and its monetary policy is controlled by all Bitcoin users around the world. No one can force changes to the Bitcoin protocol because all users are free to choose which software and version they use. There are no central authorities which can make changes without majority consensus of the network.
Ethereum is another example of a decentralized autonomous organization. Ethereum is a decentralized platform which runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference. Ethereum also provides a cryptocurrency token called Ether. It is used to pay for transaction fees and computational services on the Ethereum network. Just like in the Bitcoin network, no one can force changes to the Ethereum protocol because all users are free to choose what software and version they use. There are no central authorities which can make changes.
Most DAOs today are cryptocurrency-based. They are used to transfer value and incentivize behaviors on a blockchain. However, there is no reason why a DAO cannot be used to build a completely decentralized real-world organization as well. A DAO can be used to manage a charity, a community or a group of developers. In fact, a DAO can be used to run any organization or entity that currently exists. In the future, DAOs will be common, and they will change the way we do business.
Future of DAOs
DAOs are a new form of organization which is only starting to take shape. Their potential is vast, and it is impossible to predict where they will lead. However, it is clear that DAOs are here to stay. They are the wave of the future, and will continue to grow in popularity.