Decentralized Autonomous Organizations Explained. How Do They Work and What Do They Bring New?

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With the crypto industry gaining remarkable popularity, plenty of crypto projects are launched daily. And each new company, just like established ones, aims to contribute to one of the existing issues in the industry. 

Some of the companies everyone is talking about lately are decentralized autonomous organizations, a concept that was first in the spotlight in 2016. 

Decentralized autonomous organizations indeed innovate the crypto industry, but how do they do that exactly? And first, what is a DAO?

What Is a DAO?

A DAO or decentralized autonomous organization is a crypto-related entity that does not have a leader and is not controlled by any centralized authority. Instead, DAOs are community-driven projects that function based on smart contracts and leave the decision-making processes in their members’ hands. 

The first DAO was launched on April 30, 2016, on the Ethereum blockchain. Called “The DAO,” this project aimed to reduce costs by not having a central authority while also offering its investors great levels of control and access. 

Also, the primary purpose of The DAO was to build a venture capital fund for the crypto space, as the whole industry was still young (imagine that by the end of 2016, there were only 663 cryptocurrencies on the market, while at the moment of writing, there are almost 23,000 cryptocurrencies in existence). 

Of course, the fact that a DAO’s community controls the project does not mean it is not organized. In fact, a DAO is as organized as an art collector is with their masterpieces or a chef is with their spices. And even though art collectors and chefs do not use this while organizing their stuff, DAOs use a concept called decentralization, which is one of the basic bricks that helped build the whole crypto industry. 

But how do DAOs use decentralization, and how do such projects work, exactly? 

How Do Decentralized Autonomous Organizations Work?

As we mentioned before, DAOs rely on smart contracts. And they do that to provide an efficient decision-making process. 

Smart contracts are stored on the blockchain and build the framework of a specific decentralized autonomous organization, as they contain pieces of code that dictate how the DAO should function. This way, there is no need for human intervention to change or follow the protocol of a DAO since smart contracts are built to do that. 

However, the community of a decentralized autonomous organization is able and even encouraged to participate in the decision-making process by voting on various topics and changes in the organization. 

The voting power in a DAO is shared between all its members, according to their contribution to the project. Specifically, the more tokens you hold, the bigger your voting power will be. Thus, a user who holds X tokens will have a certain level of voting power, while an investor who holds 5X tokens will surely have a much bigger voting power. 

And this concept can encourage crypto enthusiasts to invest more in a DAO, while more holdings will bring them more power in the ecosystem. 

And there are many advantages that come with this strategy.

Why Are DAOs Innovative?

The ace up a DAO’s sleeve is that it provides surprising levels of transparency and neutrality. First, the smart contracts that dictate how a DAO functions are visible to anyone; thus, any investor or crypto enthusiast who wants to invest can access them and learn how the project works. 

Then, where there are smart contracts, there is neutrality. A decentralized autonomous organization is not controlled by any central authority, and there is no leader in such ecosystems. Smart contracts eliminate the need for human intervention when it comes to the rules a DAO relies on, as once they are stored on a blockchain and implemented, they work automatically. 

Then, decentralization should not be forgotten. Being one of the three blockchain principles, decentralization distributes both the data and the power across the entire network, making the ecosystem of a DAO surprisingly safe and secure. 

Moreover, DAOs are all about equality. Every community member is encouraged to contribute to the well-functioning and constant development of a decentralized autonomous organization, regardless of their holdings in the community. It is essential to always keep this in mind. However, that power comes according to the number of tokens a user holds.

DAO Use Cases

Until now, one thing is clear: DAOs have remarkable advantages and are one of the most innovative projects in the crypto space. But how are they helpful?

Governance DAOs

Governance DAOs allow token holders to vote regarding how a blockchain evolves. Such projects launch governance tokens, a concept with the main purpose of decentralizing the decision-making process and offering investors a way to influence the evolution of a crypto project. 

NFT DAOs

The DAO concept can significantly help the NFT industry, as it can contribute to developing NFT projects via community governance. Community members can contribute to the evolution of the NFT project by voting and even coming up with new ideas that are then voted on by the DAO community. 

A good example of an NFT DAO is MetFi, a DAO developed on BNB Chain that primarily aims to be the world’s first Metaverse and Web3 incubator, significantly investing in the next wave of Metaverse and Web3 unicorns. 

Social DAOs

Social DAOs focus on building a central network. While all DAOs focus on community (after all, such projects are also called community-driven organizations), social DAOs focus on building a community guided by a common interest or hobby, such as a sport, music, or even a particular religion. 

Investment DAOs

Particular decentralized autonomous organizations are developed for fundraising purposes only. Such projects are called investment DAOs and gather users willing to invest their resources to raise a company that will later bring them profits. 

Final Thoughts

Crypto is revolutionizing many other industries with innovative technologies and truly worthwhile projects. 

Among the projects launched in the crypto industry, some of the most complex yet helpful are DAOs or decentralized autonomous organizations. 

A DAO is an entity that functions based on smart contracts, has no leader, is not controlled by any central authority, and is community-driven. In a DAO’s ecosystem, token holders can vote for the changes affecting the project. The voting power is shared among all community members according to their holdings. 

DAOs provide high levels of neutrality, transparency, safety, and security. Furthermore, such crypto projects constantly focus on equality between the ecosystem’s members. 

Some of the most popular DAO company types are investment DAOs, social DAOs, NFT DAOs, and Governance DAOs.