DAO (Decentralized Autonomous Organization) is a term that attracts new traders to the cryptocurrency market today. In this article, I will answer the question of what is a DAO and related questions.
What is a DAO?
DAO (Decentralized Autonomous Organization) is a decentralized autonomous organization. Unlike organizations such as Microsoft, Google, and Facebook that have management bodies, DAO can operate independently by using coded rules without human intervention.
DAO is a broad topic that appears in many areas of blockchain, DeFi protocols use on-chain governance models to groups that operate through on-chain voting and proposal mechanisms. All of them have one thing in common, that is, members of the DAO can easily access and verify the organization's proposals and activities, and they can intervene in the DAO's decisions.
How do DAOs work?
Understanding the working mechanism of DAO will help you better understand what DAO is. Through the use of smart contracts, DAO will receive and use external information and then execute orders based on that information.
All rules and transaction data are transparently stored on the respective blockchains. DAO works based on the community’s voting mechanism. Solutions proposed in the DAO will go through the proposal mechanism, and if the proposal has a lot of votes in favor, it will be implemented.
You can more simply understand that DAO operates as an organization, a country. The only difference is that countries usually divide into hierarchies and administrative levels, but DAO does not. It uses economic mechanisms to bind members and organizations together.
Members in a DAO will not have any binding contracts. Instead, shared goals and interests form the binding rules stored in the network's open source software.
The Current Context of DAOs in Cryptocurrency
The current trend of DAOs is the combination of blockchain and decentralization. They are gaining more and more attention due to the following factors:
The importance of decentralization is growing: Traditional financial institutions and national governments have put in place many measures to control traders. At the same time, powerful and influential giants in many fields are abusing their power. These agents enable participants to go beyond their limits and take back the benefits that belong to them.
Cryptocurrency is attracting more and more value: Cryptocurrency is growing very fast. In order to quickly get a piece of this lucrative pie, the creation of a DAO with multiple parties participating will help complement each other in terms of funds, experience, relationships and other factors.
For example: members of venture capital DAOs such as The LAO, Meta Cartel DAO, and Yield Guild Game gather together to create funds, and then mention them when investing in Crypto projects.
Advantages and Disadvantages of DAOs
advantage
The advantages brought by DAO are becoming more and more obvious. They help traders find the "rights" they should have:
An organization's plans, previously known and decided only by the top leaders, are now known and voted on by all members. In particular, the results will be decided based on majority opinion.
Organization members do not need to stress about knowing or trusting each other because now every action will be recorded on the chain, opening up new opportunities for collaboration.
Applying game theory, participants will hold a portion of the DAO. So they will choose decisions that will help develop the DAO, and the decisions made must create benefits for the majority.
In addition, DAO has many other advantages yet to be explored.
Limitations of DAOs
Flexibility: The work of DAO is based on previously determined smart contracts. Therefore, the flexibility of DAO operation is still quite limited. At the same time, security issues also worry many participants, such as The DAO hack.
Easy to make wrong decisions: All decisions of DAO members can be made by democratic voting. This may be because many members do not understand or know some complex academic issues and cannot vote, resulting in "wrong" decisions.
Decisions are often delayed, resulting in adverse consequences: Participants’ decisions require voting time, so in emergencies, they cannot be handled quickly, resulting in many “undesirable” consequences.
Transparency leads to many limitations: On a DAO, everything is transparent and traceable. However, it does give opponents the opportunity to predict future developments.
Types of DAOs
DAO has developed in many fields, but generally we can divide it into two types: Token-Based DAO and Organization (Shared-based DAO).
Token-based DAO
As the name of Token-Based DAO suggests, tokens play an important role in the operation of DAO. This is also the most popular type because tokens are the lifeblood and are ubiquitous in cryptocurrency:
Blockchains such as Ethereum and Bitcoin: Miners ensure network security and receive token rewards in return.
Protocols such as Marker DAO, Uniswap, Sushiswap, etc.…: Token holders have the right to vote on decisions in the protocol.
The outstanding advantage of this type of DAO is that it is very scalable and anyone can own a token. However, they have difficulties in using resources and reaching a common consensus.
Organization (Shared-based DAO)
A Shared-based DAO is a group or organization that represents a group of people or organizations with a common goal in a certain field. Typically, Ventures DAOs focus on investments, and their members will use their shares to vote on the organization's activities.
Example: LAO, a Venture Capital DAO, investors will receive shares in proportion to their investment and have voting rights to make project recommendations to members for consideration of investment.
Unlike token-based DAOs, where anyone can access the tokens and participate in the DAO, share-based DAOs are typically permissioned and require participants to meet specific conditions.
This model has the outstanding advantages of easy management and resource concentration, but it is difficult to expand.
NOTE: DAOs in the same domain may use different model types.
For example: In the Ventures DAO field, The LAO uses the Shared-Based model, and Yield Guild Games uses the Token-Based model using YGG token.
DAO in practice
The applications of DAO in the current social field are as follows:
Cryptocurrency sector
Bitshares: Good autonomy through enhanced voting system. Processing time is only 3 seconds, built-in DeFi platform.
Bitcoin: The operating rules of Bitcoin are based on majority consensus.
Dash: Operates based on monetary incentives for stakeholders who are masternodes. Members will have voting rights when they purchase Dash, and participating members make decisions based on established rules.
Marker DAO: This is considered a small part of the Marker Protocol system. It combines 2 crypto assets, Dai and MKR. Dai is responsible for allowing transactions to be conducted without the need for intermediaries such as banks or governments, while MKR provides voting rights to participants.
Bit DAO: BIT is a governance token with proposal and voting rights. BitDAO's goal is to build a decentralized crypto economy for everyone. The protocol is managed by BIT holders.
other areas
Audit firms: Help manage projects in an automated manner, improving audit activities through innovation and better security.
Non-profit organization: Individuals can accept anonymous donations, and the organization's members come from all over the world. Participating members have the right to vote on how to use the money.
Government: DAO will strengthen supervision, audit or vote on the performance of contracts, tenders, etc.
Current Featured Projects
There are several excellent DAO projects today that you can refer to to better understand how DAOs work in practice:
Token-based DAO
EThereum
Ethereum is a DAO that runs on a proof-of-work mechanism. That is, miners receive incentive fees and block rewards (the rewards miners receive when they code the blockchain), while miners mine new blocks, confirm transactions, and ensure network security.
This operating principle will remain the same even after the upgrade to Ethereum 2.0 with a proof-of-stake model, where stakeholders act as transaction validators and ensure network security in exchange for incentives.
In addition, miners have the right to vote on Ethereum development proposals (EIPs). In the future, the development of Ethereum may depend on the decisions of components in the DAO.
Compound
Compound is a successful on-chain governance protocol. By allowing token holders to vote and propose in the protocol, and with the launch of the COMP token on June 15, 2020, Compound has a clear plan for growth. Since then, it has maintained its position as one of the world's leading lending platforms.
Sushi Swap
Sushi is an example of how the community can play a decisive role in project development. In July 2021, a proposal to sell more than 50 million SUSHI tokens to VCs at a discount was not approved by the community, and Sushi continued to operate without VC funding.
I will not judge whether this decision is good or bad for the organization, I just want traders to understand that DAO occupies a very important position and the power of the community can be best reflected through DAO.
Based on shared DAO
The Lao
The Lao is the most prominent and active project among the decentralized investment funds established in April 2020. At present, The LAO has completed 35 investments, mainly in projects on Ethereum such as Gitcoin, Lido Finance, and Zapper.
The Potential of DAOs
Over the past few years, the DAO model has grown significantly with the emergence of numerous new projects. These projects focus on a variety of areas, helping you see the vast potential when applying DAOs.
Talking about DeFi protocol governance, this is a common use case for project tokens. The larger the project, the more valuable this use case is. In projects with the highest TVL (Total Value Lock - the total value of assets locked in DeFi), most decisions will be made and voted on by project participants. The DAO model seems to have become a must-have for the development of DeFi protocols.
The value of DAO is growing. The amount of assets in the general treasury of Ventures DAO alone has exceeded the billion-dollar mark. Not only that, DAO has also been applied in many fields such as society and services, so the value contained in DAO has huge development potential.
DAO Predictions
Currently, there are many DAOs in the market that use Tokens to accelerate the development of Shared-based DAOs, such as Yield Guild Game, Whale, Jenny DAO, BitDAO, etc. The purpose is to help DAO expand to a new level. Anyone can participate in DAO.
However, the question is, why doesn’t this model currently scale?
To make it easier to understand, I'll give you an example, projects like Yield Guild Game still have problems with resource allocation and revenue sharing, and BitDAO currently doesn't know how to handle the "huge" amount of money they earn. Donations.
The reason may be the current lack of a suitable framework to scale DAOs.
The current DAO (tentatively called Dao 1.0) seems to be not clearly divided and is still quite chaotic, with no order from work to revenue, and will not generate positive feedback from users.
In DAO 2.0, all of these are arranged and interact with each other. They work smoothly like traditional corporate models, with great scalability, and anyone who participates in the DAO has the right to contribute.
What is a DAO in the future? It is very likely that there will be a framework to allocate resources, share benefits reasonably, and not create any conflicts in the organization. At the same time, the limitations of the above-mentioned DAO will also be gradually resolved.
Investment Opportunities
Currently, the DAO model is still very new, but it is growing very fast. This is an opportunity for traders to look for potential investment branches. You can refer to the following excellent investment branches:
Projects developed by DAO
This is considered the most straightforward investment. Here are some criteria to help traders evaluate a successful DAO:
What is the protagonist of DAO? Is there any good direction for project development?
Although DAO is for everyone, there are always some influential people in it. Their proposals have a great impact, especially on the development of DAO.
For example: Compound, the most influential people in DAO decision-making are VCs, celebrities in the Crypto world. Their knowledge and foresight have helped Compound develop very good development plans over the past period of time.
Is the DAO community strong?
Network effects play a huge role in the development of any project. It is no coincidence that DOGE ranks among the projects with the highest market capitalization. A strong and supportive community can go a long way.
For example: Sushi Swap (SUSHI), Olympus DAO (OHM), Gitcoin (GTC) and other projects with strong DAO communities. You can quickly evaluate projects by just browsing our Discord and Telegram groups.
Making Money with DAOs
Projects like Yield Guidegame or Ancient 8, where participants can farm games, rent NFTs or accounts to earn profits. DAOs also provide many job opportunities for participants.
Participating in the DAO will help traders accumulate more experience, resources and gain support from the community, thereby accelerating profitability.
Find the Shovel Seller During the Gold Rush
Instead of filtering items about a trend, you can find people who provide necessary services for items about that trend. Therefore, you can narrow your search and get higher earnings.
You can refer to the necessary services of DAO below:
Infrastructure: Aragon, Snapshot, Colony, Gnosis Safe.
Front-end and analytics: Tally, DAOHAUS, Meeting Room.
Discussion: Discord, Telegram.
Payment: Superfluid, hourglass.
Identity: IDX, ENS.
And many more services.
