What is a DAO? Why Are DAO's Important?

Hey, don't be alarmed if you have never heard about DAO by now. You are not alone if you are thinking about some big alien stuff; you know, "DAO" sounds like those movies where strange aliens with big green eyes arrive on earth to capture little boys. But if you have been in crypto space for some time, you should have come across it and probably have a faint idea of what it means. In the crypto world today, DAOs are becoming popular and taking up an increasingly important role in developing crypto and blockchain projects.

The recent explosion of interest in the metaverse and the blockchain gaming universe has also made DAOs more popular than they were three years ago. So I'm here as your enlightened guru to bring you knowledge and fill you with wisdom.

Let's get a cup of coffee and proceed, eh?

What Is a DAO?

DAO is an acronym that stands for Decentralized Autonomous Organization. A DAO is simply a set or group of people that have reached an agreement or contract to pool their resources towards common goals and are governed by a standard set of rules. The goal(s) of a DAO is not fixed, i.e., it can be anything from deciding what happens in a crypto project to collecting certain digital assets and even donating their resources to charity.

Think of a DAO as a management board in which everyone present has equal voting rights to make decisions regarding their commonwealth. You can also think of it as having a traditional joint account with a friend, spouse, or colleague, and you all have equal rights to decide what happens to the funds in the joint account. DAOs have unique characteristics that differentiate them from traditional joint accounts or commonwealth. These are:

• DAOs are online: All DAOs are online and built on a blockchain. The "decentralized" in DAO was coined from the concept of decentralized finance, the main idea, and feature of blockchain technology. The members of a DAO are typically virtual strangers who have had no prior physical contact but entrust their funds to the care of a decentralized contract on a blockchain. This is not to say that you cannot join a DAO with your bosom friend; you can join DAOs with members from anywhere in the world!

• DAOs rely on smart contracts: DAOs depend on blockchain smart contracts to function. If there were no smart contracts, there would be no DAOs, and any attempts at creating any would be at risk of fraud and financial losses. Yeah, buddy, I know you want to ask what a smart contract is. So let's help you out, eh?

A smart contract is simply a blockchain contract that triggers itself following a set of instructions that are pre-written into its code. When all parties enter the contract agreement on the terms, they can add the rules and terms of the contract to the code and deploy it on their preferred blockchain. Once it is deployed, everyone abides by the same rules and can view all their transactions on the blockchain. No one can change the terms of a smart contract unless there is an agreement by the contributing members to that effect.

DAO members must contribute to the DAO via the chosen smart contract. The first members to join in are usually the founding members of the DAO and are called the core members if the DAO has not reached its stipulated number of contributors.

Structure of DAOs

DAOs were first built on the Ethereum blockchain, the first blockchain to support smart contracts. The idea of a DAO was first birthed by Ethereum's founder, Vitalik Buterin, in 2013. He called it Decentralized Autonomous Corporation, DC. But today, other blockchains such as Solana, Binance Smart Chain, and Polygon support smart contracts and DAOs. Although the smart contracts of these blockchains have some unique features, they essentially follow the same idea. You can, therefore, expect to find similarities between DAOs. Here's how a DAO is typically structured:

• A flat membership structure. There are no hierarchies, and all members have equal rights to vote.
• A smart contract to execute the DAO rules.
• Governance rules. These rules determine how members can join and how voting works.
• Membership size: The size of DAOs varies according to projects. Some of the biggest DAOs have thousands of members, while some smaller DAOs may have a few dozen.

How are you doing? Still following? Okay, you have a better idea of what a DAO is and what to achieve with it. Let's go further.

Why Are DAOs Important?

Let's go back to the first description of a company board. A traditional board is responsible for taking the executive decisions that govern a company. They meet regularly to discuss the policies and events and determine what works best according to their goals. But most traditional boards have an unequal voting system. For example, the major shareholders and the chairman may have more votes than others.

In the end, it is safe to say that most traditional board decisions reached by voting are most often the decisions that the majority shareholders make. Now, this is where a DAO becomes interesting.

In a DAO, members also vote to make decisions, but no favorites or political games are associated with traditional boards. Instead, in DAOs, members vote using the stipulated tokens, which, typically, are the native tokens of the project.

Another importance of DAOs is that they are typically easier to get into than the traditional boards. To enter or contribute to a DAO, you mostly need to have a certain minimum amount of the DAO token. DAOs also make it easier by providing incentivized work for contributors to earn back their tokens. Think of it as a board that pays you for partaking in the decision-making process.

Hey, I can't close this enlightenment lesson without discussing the few drawbacks that DAOs are experiencing. They are:

• The concept of a DAO is relatively new and, therefore, needs more research and testing. The first DAO failed due to certain mistakes that were later fixed, and more testing will ensure the integrity of DAO treasuries.

• DAOs are not legal everywhere; DAO agreements may not be honored in some places.

 

Should You Treat DAOs As Investments?

Well, that is entirely up to you. The primary aim and function of any DAO are to bring the power of blockchain technology to the decision-making process of any community. DAOs ensure a level playing ground for members while giving them complete power to make decisions for themselves.

Yet, we cannot ignore the rise of DAO tokens and how valuable they are today. Some DAO tokens have performed more than altcoins and continue to rise. So, here is my advice: if you want to be a part of something great in the future, then DAOs are for you. Furthermore, if you are looking at making quick and short-term profits, you can consider trading DAO tokens, especially when the market is on a bullish run.

That's all for now, buddy. Oh! Look at you! Shining with the light of knowledge. I can see the halo around your head, oh guru! I bid you goodbye until we talk again, buddy.