DAO is up there among the very best buzz words in crypto along with NFT and DeFi. But what is it exactly? And how does it work? A Decentralized Autonomous Organization is basically a company or organization that is operated by computer code instead of people. The goal is to eliminate the hierarchical structure that so often makes it impossible to progress with tasks efficiently. Investors also seems to admire the idea of gaining better control over the project that they invest it. The basic principle would be allowing the decentralized autonomous organization to take control in order avoid the abrupt issues that hinder progress.
Thanks to Bitcoin, we can see that there’s no need for a middleman when it comes to online payments. This has led to the thinking that perhaps it’s possible to do away with the middleman in companies by simply replacing them with technology. In turn, this led many to question whether an entire company or organisation could function without a CEO or a central leader? Many of today’s companies have directors who make unilateral decisions that can affect the company’s well-being, as well as the company’s investors. By implementing a DAO sort of decision making process, maybe this could become a possibility. It would give stakeholders i.e. the real investors of a company, a direct line of control over how the company should be operated.
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You’ll find that the idea of DAO is tied together at the waist with the cryptocurrency Ethereum. This is the second most popular crypto after Bitcoin. DAO is considered one of the best lofty ideas to come from Etherium. But what might seem like a utopia in theory, may all come unstuck in real-world situations. It’s quite possible that, though the principal idea is sound, it still requires wise decision making. Unfortunately this is not a common quality. In simplistic terms, you can look at DAO as a hard-coded set of rules to drive a company. They are based on Ethereum Smart Contracts, which allow them, when certain conditions are met, to carry out certain tasks. The great thing about Smart Contracts is that they can be automatically programmed to execute typical company tasks. For example, these can include such things as how profits are distributed among investors and shareholders. The stakeholders themselves are able to vote if they wish to, for example, change the rules, welcome new members or add new rules. One of the general foundation principles of DAO is that there is a required threshold of number of votes for any change to take place.
A functional DAO relies on a number of essential principals. The first of these is transparency. All coding used should be open-source allowing everyone to examine it. Being on the Blockchain, it allows anyone to look through the history and see how decisions came about. This leads to completely open access which means that anybody could hold DAO tokens or buy them. These tokens grant decision-making powers within the DAO structure. There can be no hierarchical management structure, as it’s the stakeholders who make all the decisions affecting the company or business in question. At the heart of DAO is democracy, and the belief that democratic principles offer the best solutions to today’s business problems.
In 2016, the very first DAO experiment took place. It was called, surprise, surprise, “ The DAO.” Thanks to a technical vulnerability, it ended up being a $50 million failure in only a few months. Nevertheless, this project is still held up as an example of the possibilities of the DAO and it’s technology. In the original plan, depending on how much each investor had invested, then they would be granted tokens, which they could then use to vote on projects to fund. Now, to select which projects they should invest in, they decided to rely on the idea of the “wisdom of crowds.” In other words, that decisions made by a larger group will lead to better outcomes than if just an individual, or maybe multiple directors, made the same decisions. As such the principles and ideas were sound.
In what sounds like a weird economic experiment with Socialism, if the investor’s projects produced profits, then those would be redistributed to the investors. So why did this lofty DAO project fail? Well, it all comes down to the fact that an” unstoppable code” can always flag up a security problem at any point down the road. And that’s exactly what happened. A piece of sloppy coding allowed someone with mal-intent to steal all the funds that were locked in the organisation itself. In fact, the poor outside observers, including the investors, were able to watch the exploiter slowly drain all the DAO funds. But because of the nature of DAO in itself, there is nothing anyone could do. For all intents and purposes, the hacker was simply following the DAO rules.
At the end of the day, the lead dev’s and coders from Etherium reversed the transaction history and allowed funds to be returned to their owners. This was a massively controversial decision and ended up leading to a serious break in the community. As to the best way to handle such a situation, it’s still up in the air, and there’s no general consensus. Because storing data on the Blockchain is immutable, it means that it’s very difficult to change any DAO rules once they’ve been deployed. The very framework that is used to prevent a bad actor from altering essential features in an organisation, without the general consent from the community, also leaves the organisation open to problems. Simply put, there were a huge number of gaps in the DAO Ethereum framework that are not so easy to close.
But that was then, and this is now. In both the world of DAO and crypto, as well as technology, five years is a long time. Today you’ll find many organizations including MakerDAO, Colony and Aragon are picking up the pieces and learning from this first experiment. Today’s DAO projects take into account a number of important factors that are considered essential to offering a better and more democratic utility. A good example would be how the Next Earth metaverse platform has chosen to distribute funds to charitable causes. This was done via a DAO voting system whereby the funds were divided up proportionately according to an online vote of stakeholders. In fact, Next Earth has made DAO one of their central foundational building blocks for their whole metaverse platform. It will be interesting to see how they implement DAO functionality across the whole business. Many will be watching closely with interest. But by believing in the democratic principles that DAO offers, along with a noble goal of supporting environmental charities, we believe that Next Earth will be one of the first entities where profits go to those the community of stakeholders feels are deserving.
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