What is a DAO (Decentralized Autonomous Organization)?
Web3 and its terminology can be seen all over the media today. However, many don’t know what much of this terminology means or what it aims to do. To expand your Web3 dictionary here is an in-depth explanation of what DAOs are.
What is a DAO?
DAO stands for Decentralized Autonomous Organization – but what does that mean?
As the name implies, a DAO is a group of like-minded individuals who come together over a shared interest. However, what makes this group different than just any other club or organization is that they don’t have a central leader or company dictating their decisions.
How do DAOs work?
Since DAOs can function without a central authority, power is distributed among token holders. So, who are token holders?
Token Holders = members of the DAO who bought a specific governance token that allows them to vote on issues related to that DAO
When voting happens, the voting process will be posted on a blockchain, and users will choose between mutually exclusive options.
This voting power is usually distributed among stakeholders depending on the number of tokens they own. For example, a stakeholder that has 100 tokens will have twice the amount of votes as a stakeholder with 50 tokens.
The theory behind this tactic is stakeholders that who are more invested in these DAOs and own more tokens are inclined to act in good faith.
For example, if someone were to own 20% of a DAO’s tokens, they would be inclined to only vote on decisions that would benefit this DAO – because if they participate in bad acts, they would also be jeopardizing their own 20% of the holdings.
Launching of a new DAO:
In order to launch a DAO, there are usually three main steps that need to occur.
1. Smart Contracts
DAO's rely HEAVILY on the use of smart contracts. These coded agreements can dictate decision-making on underlying activity on a blockchain.
Developers who create the smart contracts behind DAOs must be meticulous not to overlook small details.
These smart contracts are logically coded agreements that are transparent
Now that the smart contracts have been written up, funding needs to be acquired in order to begin governance.
Tokens are sold to raise funds; these tokens now give the token holder voting rights within the DAO.
With everything now set up, the DAO is deployed into a blockchain. The developers who originally developed smart contracts for the specific DAO no longer have control. The control is now given to token holders and the DAO is made official
Pros and Cons of DAO’s
Because of the autonomous structure, DAOs ensure that every member of the organization is independent thus, removing management issues that can be seen in a traditional top-down structure
Concentration of Voting Power
As mentioned earlier, DAO’s run their governance via DAO tokens. This leads specific groups of investors to accumulate a high volume of DAO tokens. This results in a higher voting power given to these investors
Anyone can propose new ideas or protocol changes, and any member of the DAO can see these proposals. All token holders (investors) can control the future of the organization. This leads many investors not only look out for themselves but for the future of the company
Time for Transactions
We know that the community-based model for DAOs is one of their most prominent highlights, however, this model often leads to increased wait times when trying to implement change. What this means is voting mechanisms require a lot of time since they require the consent of every member. If there was a bigger problem within the DAO that needed immediate change, it would be much harder to implement
Because DAOs use smart contracts, everything is transparent for both the company and the token holders. Therefore, the DAO now can implement these rules with little or no intervention
If something were to go wrong within a DAO it is harder to implement new rules and regulations that are outside of the original smart contract
Due to the built-in transparency within DAOs, every member begins to feel accountable for their own actions within the organization. For example, every activity that happens within the DAO is documented within a specific blockchain. So, every member is aware of transactions and proposals happening within the DAO, reducing the possibility of new scams
Vulnerability of Code
When funding a DAO, investors put all of their trust in smart contracts. However, while countless measures are taken within these smart contracts to protect this code, there is still a slight vulnerability in the code that may offer future security threats
Investing in DAO's
With a little more clarity on what a DAO is and extensive analysis of both its positives and negatives, you may be thinking to yourself that you’re interested in investing in a DAO.
Perfect! We’re here to help and give clarity to your investment.
First, it’s important to note that not all DAOs operate with the same purpose, so in addition to the information that we’re providing, we’re highly suggesting that you do your own additional research.
Some DAOs function so token holders have a say in where the protocol fees are allocated.
Uniswap – token holders vote on the portion of fees that are distributed amongst themselves
Compound – token holders vote on distributing these fees to be allocated to bug and system fixes
Other DAOs like SharkDAO, exist as another investment form. They pool all the individual token holder’s funds and use them to acquire rare NFTs (non-fungible tokens).
The key to investing in DAOs is figuring out how much of a voice you want within that DAO.
Examples of DAOs
a. Olympus DAO
Olympus DAO is another decentralized finance (DeFi) platform that provides users with a transparent and stable crypto ecosystem while utilizing the OHM token cryptocurrency.
Unlike traditional banks, all changes made within the Olympus protocol are voted on by the community of OHM token holders.
Olympus is a cryptocurrency bank that utilizes a DAO platform.
How does Olympus work?
Written within the Olympus smart-contract states that the Olympus treasury will back all outstanding OHM tokens.
So when you purchase OHM, it is backed by the stable cryptocurrency DAI coin.
How does Olympus maintain a stable state?
When OHM begins being traded at a higher value than I’s original asset, the OHM protocols (written within the smart contracts) begin to mint and sell new OHM, thus increasing their supply and value.
Supply and demand strategy: OHM tokens are now able to maintain a stable floating value and never drop below the value of their original backed assets.
Bonds are another crucial component of how OHM can maintain a stable floating value. Bonds are sold according to protocol correlating with different assets in return the buyer will receive OHM at a discounted price. This allows control over the supply of OHM and begins to lock in the liquidity of the treasury.
Two main ways to benefit from Olympus:
1. Stacking: investors can stake their OHM and it will automatically yield a compound (easiest way)
2. Bonding: you can sell your assets to the treasury and then receive OHM at a discounted price (a more hands-on option)
b. Klima DAO:
Klima is a branch of Olympus DAO and aims to help fight climate change while buyers can simultaneously earn rewards in the form of KLIMA cryptocurrency.
How it works:
DAO sells bonds and distributes rewards to KLIMA holders
Every bond that is sold adds to a continuously growing treasury
Also has the power to improve the liquidity of environmental assets - a win for the planet and the holder!
Basically, every KLIMA token that you own is backed by a real-world carbon asset. These tokens are then used to offset carbon emissions
Every seven hours KLIMA tokens are minted and distributed automatically to different KLIMA holders thus continuing to grow holdings and reducing our carbon footprint.
That’s a Wrap
Many companies have emerged in the past couple of years utilizing the DAO format to run their companies. Many investors have also begun looking into DAO as a new form o investment. We hope this article clarified what DAO is and how different companies have begun utilizing it in their workforce.
NFA: Not Financial Advice. IYOPS or the author(s)/editor(s) are not registered investment advisors or brokers/dealers. All investment opinions expressed are from the personal research and experience of the author/editor and are intended as educational material. Despite our best efforts to make the information available as accurate as possible, occasionally, we err, as humans do.
DYOR: Do Your Own Research before making any investment decisions based on your personal circumstances. We recommend taking professional advice before making any investment decision.
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Olivia Meak is a content writer at the International Youths Organization for Peace and Sustainability. She's also a first-year BA, Political Science and Government student at the University of Washington.
Inputs and edits by Aswin Raghav R.