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What Are DAOs?

by Finscanner

2 min read

Advanced definition

DAO is a decentralized autonomous organization and an open-source blockchain protocol regulated by a set of rules, designed by its elected members, that automatically execute certain actions without the need for middlemen. The infrastructure is based on smart contracts, and participants use governance tokens to vote on any decisions within the development of the ecosystem.

Simple definition

DAO is like a corporation or a kind of state in which there is no single authority, hierarchical structure, and multi-level bureaucracy. The open and transparent nature of this organization is aimed at the development of the ecosystem, without having to know or trust each other. Decisions are governed by proposals and voting so that everyone in the organization has his own equal word (vote).

Working principle & advantages

In a decentralized autonomous organization, the role of the manager is performed by the rules encoded as a computer program, but it cannot make decisions on its own. The decision-making is based on the community, and the program only executes orders. Any member can propose improvements to the decentralized protocol, and if the rest of the community votes for them, they will be accepted. DAO developers cannot delegate power to any person, thus they only implement changes after community approval by adding a new computer code.

Information about all transactions is stored in the blockchain, and any user can always look through what is happening on the network. In this matter, DAO is not only decentralized but also transparent.

All the advantages are on the surface:

  • Decentralization and transparency
    No need to trust intermediaries or protocol due to its open-source nature. The interests of the community participants can not be ignored by a single or a group of entities.

  • Autonomous
    The protocol works on its own without intervention from the governing bodies. Users perform transactions, and the smart contract controls the fulfillment of the obligations of the parties.

  • Low entry barrier
    People all over the world have an equal opportunity to participate and make decisions. DAO investors can participate in the project from the very beginning — no need to overcome complex regulatory hurdles or fill out complex paperwork.

  • Automaticity
    Once the rules of a DAO are in place, smart contracts fulfill decisions automatically, eliminating human error and cost.

  • Decision-making speed
    The imperfection of the bureaucratic mechanism is mainly conditioned by the need for time expenditures to reach a consensus. In DAO, there is a set period for making a decision, determined by the protocol, and that can also be changed by voting.

Remaining challenges

It is obvious that the situation in the legal and regulatory field of the DAO is completely uncertain since this activity is beyond the control of state jurisdictions. Thus, this can be a major barrier to the adoption of decentralized organizations.

Vulnerability risks
Despite the high potential of the distributed ledger in systems management, it hides many risks associated with the developed security of the protocol. The presence of errors in contracts was a frequent vulnerability in hacker attacks. The notorious case with The DAO platform in 2016 is a clear example of this.

Partial centralization
The initial rules are pre-set in the code of the protocol by its creators and will always be the central point of the project. But this problem can be solved by initially providing the possibility of modifying the pre-set rules. Another pitfall may be the weight of the participant's vote, which is determined by the number of governance tokens. This provides an additional advantage for the participants with a concentration of funds to manipulate the platform and actually take control of it in their own hands

Explore at Finscanner Marketplace

DAOs enable organizations and investors to break free from the shackles of traditional central government institutions. As an example, one can explore the Bitcoin network, which is rightfully considered one of the first simplified versions of the DAO.

Looking for more decentralized services? Check out the Finscanner marketplace — a reputable place to discover thousands of financial services for individual and business needs. If you have any questions, feel free to contact us.

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