The blockchain and cryptocurrency rave is not ending anytime soon. And as more people are being introduced to revolutionary technologies in the digita
The blockchain and cryptocurrency rave is not ending anytime soon. And as more people are being introduced to revolutionary technologies in the digital space, new improvements upon these technologies are also being introduced. In the last couple of years, the DeFi and NFT industries have experienced immense levels of growth and, currently, metaverses and Web3 are the technologies making the digital space light up.
It is not yet clear where these disruptive technologies will lead us, but we are sure that there will be much value up for grabs. At the convergence of Web3 and NFTs lie many platforms looking to leverage technology and infrastructure to make the NFT ecosystem more decentralized, structured and community-driven.
Using both social building and governance, the decentralized autonomous organization disruption is a notch higher. The DAO is one major invention that is challenging current systems of governance. Utilizing NFTs, DAOs are changing our perspective of how organizations and systems should be run, and they put further credence to the idea that the optimal form of governance does not have to do with hierarchical structures.
With the principal-agent problem limiting the growth of organizations and preventing agents from feeling like part of a team, you can see why the need for decentralized organizations fostering community-inclusion is paramount.
Is there something you would change about your current organization if given the chance? Leadership? Structure? Payment system? What if your current organization could help you feel like a more valid part of the team by reducing the disparity between the principals and staff? Or, better put: What if you get to be a part of your organization’s governance? Sound interesting? This is what we’ll be discussing here.
Understanding DAOs
From its name alone, you can probably get an idea of what a decentralized autonomous organization is. A DAO is an organization that is focused on a specific mission, and its members work in coordination according to a shared set of rules encoded on a blockchain. The major purpose of the decentralized autonomous organization is to help eradicate a significant problem in many conventional organizations — the principal-agent problem.
As the popular English phrase goes, two’s company; three’s a crowd. Organizations need a more hands on deck. But with each new person joining the team, there is bound to be some divergence of interest, priorities and goals. This often results in parties making some selfish choices. DAOs avoid this problem by existing as a trustless system, removing the need for centralized leadership.
Related: DAOs are meant to be completely autonomous and decentralized, but are they?
There are a few criteria that a company must meet before it can be considered a decentralized autonomous organization. The governing rules and policies need to be set up as a smart contract on a blockchain — this helps to remove the need for a central authority, and it also prevents any party from making decisions that are different from the organization’s initial goal. The treasury of the organization must be accessible only with the consent of the whole group, or at least a predefined percentage.
A brief history of DAOs
The earliest application of DAOs did not go well simply because stakeholders did not put a standard precautionary measure in place. Created in early 2016, the first DAO was called, simply, The DAO. It was an open-source framework focused on venture capitalism. It became an instant success, raking in over $250 million worth of Ether (ETH) — note that ETH was priced at around $20 at this time.
This huge success did not last long, as a bug exploitation attack left The DAO reeling from a loss of roughly 3.6 million ETH in mid-2016. It didn’t recover. Since then, several attempts have been made to run a successful DAO, and many more are being created at this very moment. (The Faith Tribe, discussed later in this article, is one of the closest to full decentralization.) The success of a DAO lies in the strength of its smart contract. And, as an investor, you should spend time looking through the smart contract’s open-source code to check for any red flags or abnormalities.
Related: The evolution of DAOs and why they are expected to take hold in 2022
How does a DAO work?
Any DAO is premised on three major things:
- The smart contracts involved.
- The set of rules known to all members.
- A token that can be spent within the system for rewards.
The smart contract holds the rules and nitty-gritty of the DAO, ranging from a roster of its members, the amount invested, who the majority stakeholders are, the workflow, and the reward mechanism. The other two aspects depend on this important facet, as a faulty smart contract puts the project at risk. Any upgrade would also need votes from all its members, so it is important to get it right from the start.
Encoded in the smart contract is a token. The token is useful in allocating…
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