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What is a DAO?

Beatrice Borghi - June 28, 2022
DAO smart contracts web3

What is a DAO?

What is a DAO - PXR Italy

The term DAO is an abbreviation for Decentralised Autonomous Organisation. The idea for the first DAO came in 2013, from Ethereum co-founder Vitalik Buterin, who developed the idea and gave it the initial name "Decentralised Autonomous Corporations" (DAC).

Literally, each word that goes to make up the acronym DAO has a meaning that refers to the symbolism of the concept itself:

  • Organisation: refers to a group of people working and collaborating with a common goal;
  • Autonomous: means that it is capable of self-policing without external influences;
  • Decentralised: refers to the technology on which these organisations are built.

A DAO indicates a new method of managing organisations through the use of smart contracts and blockchain technology. Smart contracts contain tools and protocols useful in transactions (e.g. exchange of goods or services for money) or in contract processing. Organisations of this type use cryptocurrencies and digital ledgers for their operations as they provide very high security in terms of corruption and hacking.

But let's look more specifically at how a Decentralised Autonomous Organisation works.

How it works and how to join a DAO

Smart contracts are the basis for the functioning of a DAO. In fact, these digital protocols automatically execute commands and define the rules and conditions on how the organisation acts.

They differ from traditional contracts because, thanks to blockchain technology, they are very secure and do not require someone to supervise them: as they are fully automated, the commands will start on their own.

To join a DAO, one must possess tokens, following the provision of capital for the organisation in question. Or, you can make a membership proposal that will be evaluated by the members of the Decentralised Autonomous Organisation. They will assess the user and check if he/she has all the necessary characteristics to be part of the organisation. Furthermore, when the user obtains a token, he/she will have voting rights within the DAO and will participate in decision-making processes as a member of it.

Advantages and disadvantages

Jademont Zheng, partner at Waterdrip Capital and an advocate of DAOs, says in an interview: "We believe that DAOs will play a leading role as the world moves to Web 3.0, paving the way for fully decentralised companies."

Nevertheless, Decentralised Autonomous Organisations have visible advantages and disadvantages which we will list below in order to have a full understanding of the phenomenon. One of the advantages is transparency; anyone can see the internal actions of the organisation. All members have a voice within a DAO and can speak their mind and have decision-making power in the company - in agreement with the other members - freely. The disadvantages are directly proportional to the advantages: given the strong sense of community that the organisation creates, disagreement among members is the order of the day. The structure is flat and, as there is no authority figure, business operations often run slowly and can take a long time.

DAOs in the global technology landscape

If we take a look at the 2020 numbers, we see that DAOs were struggling to emerge in the financial world and cryptocurrencies were the undisputed stars of the hi-tech market. 

Referring to a Messari report from 2022, we can see how Decentralised Autonomous Organisations have grown in recent years, reaching market values similar to those of cryptocurrencies. To date, the total DAO market is $21 billion and the top 5 DAO tokens (Uniswap, Aave, Maker, Curve DAO Token and Dash) hold a capital 13,2 billion.

There are nearly 1,7 million governance token holders worldwide, and as many as 497 thousand active constituents in the DAO ecosystem. Uniswap had the highest number of governance token holders (307,7 thousand), followed by Kusama (235,1 thousand) and Decentraland a (215,1 thousand). Ethereum is the most widely used token in the DAO landscape; indeed out of 181 organisations, almost 97 have used Ethereum. This means that owning Ethereum gives you voting rights in more companies (data: deepdao.io).

What does the future hold?

Interest in DAOs has been very strong in recent years and several developers are working on technical innovations and improvements to governance mechanisms.

Obviously, there are many changes and improvements to be made, but this has not stopped the growth in popularity of these organisations. Some of the new trends and innovations that will be brought to DAOs include anonymity, progressive decentralisation and improved participation incentives.

In any case, it remains a topic of great interest that will provide innovations in the mechanisms of companies and their operations.

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