How Does a Decentralized Autonomous Organization (DAO) Work?

One of the most significant benefits of Blockchain Technology is that we can build completely decentralized systems that do not require to be managed by a central entity or a team. Also, these decentralized systems can govern themselves and do not require controls or verifications from third parties. DAOs are instrumental in the future development of our financial systems.

What is a DAO, and how does it work? 

DAO is the type of organization just described – that is why it is called autonomous. A DAO can govern itself using programming language and protocols that are already established when developers write the code. However, we should remember that a DAO dramatically relies on its organization members to vote on the future governance of the project.

Cryptocurrencies’ decentralized nature inspires DAOs, which emerged in 2016 on the same principles used today in decentralized networks, from coins to dApps. Unlike other types of companies, corporations, banks, or institutions, Decentralized Autonomous Organizations are distributed through various nodes. They operate with Smart Contracts’ help since these can automatically execute functions when specific criteria are met. This idea was created and implemented to allow users to send digital assets completely anonymous, anytime, anywhere in the world.

These companies built on the Blockchain govern themselves using the organization’s native tokens. Whoever acquires governance tokens becomes a member of the organization and can vote for several pools and important projects directly tied to the DAO. The earlier example, which emerged in 2016, became a failure because the code behind it was not wholly technical – so the network was hacked, and approximately $50 Million was stolen.

Why do we need Decentralized Autonomous Organization? 

Many users are probably asking if we need these DAOs – or if the efforts might be in vain. Contrary to the first DAO that was hacked, the idea is to create an organization that is highly secured and trusted. Also, no central authority must have more than one voting right, as banks’ executives and corporations’ CEOs do.

When it comes to enormous amounts of money, a code that is correctly and transparently written (and can be verified by anyone) can be much more credible. This is because there will be no personal interests in governing and managing the organization.

To further compare it to a traditional company, a DAO is a completely democratized system, unlike the hierarchic model that we are used to. So, for example, once rules are voted in an Autonomous Organization, these will be implemented automatically, unlike the traditional way, where votes are counted and internally discussed, being controlled by people with hidden personal interests, while a DAO is entirely transparent. 

Possible disadvantages

  • The immutability of Smart Contracts

The security problem is still discussed, given the DAO hack that happened in 2016. Smart Contracts are immutable, something that is already considered an advantage, but if we need to change something after the order was executed, then it’s impossible to do it. Thus, mistakes will be challenging to solve.

  • DAOs require advanced knowledge for voting

On a decisional level, a DAO is a democratic organization that requires its members to possess enough complex technical knowledge. Besides this, those with enough technical understanding might lack the capacity to decide for the company because when voting, these people must be informed and have explicit opinions about things happening and developing to vote according to their values.

  • DAOs are still limited legally

From a legal standpoint, these organizations’ status remains in the air while DAOs are not recognized through law on an international level. However, an organization must operate within certain legal limits to properly work in today’s financial world. For example, it needs to have departments with people that deal with suspicious situations that seem illegal and prevent money laundering using cryptocurrencies. Thus, an entity is required that can be held accountable if needed, so the future of DAO is uncertain right now.

Decentralization is the bright future of technology, and Your Friendly Crypto Exchange is aiming to bring this future closer. Register now on IXFI to start trading 450+ cryptocurrencies and 1000 pairs in a safe and reliable environment.

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