What Is A DAO?

A decentralized autonomous organization (DAO) operates without a central authority. Decisions and policies are determined and overseen by a community governed by a set of regulations established and enforced on a blockchain network.

DAOs are a key section of important blockchain applications, including cryptocurrency and Web 3.0, a proposed architecture for the next generation of the web that is based on decentralization validated by blockchain.

Why Do We Need A DAO

A DAO works without hierarchical management and can have many objectives. Freelancers can form a DAO to fund software subscriptions collectively, facilitate generous donations among members of organizations, and establish capital firms owned by the group.

DAOs can be used to raise money for projects and form new business structures. They can also automate many financial processes on blockchain platforms like Ethereum to ensure stakeholders are compensated according to rules everyone agrees to. 

Being web-based organizations, DAOs have some advantages over traditional organizations. One crucial advantage of them is the trustlessness between two parties. While traditional centralized organizations require a lot of trust in the people behind them — especially for investors — with DAOs, parties just need to trust the smart contract.

Verifying a smart contract is simpler due to its public availability and the possibility of thorough testing before deployment. After deployment, a DAO must obtain approval from the community for every action it takes, ensuring complete transparency.

Such an organization has no hierarchical structure. Yet, it can still accomplish tasks and grow while being managed by stakeholders through its native token. A flat organizational structure allows every team member to introduce a creative concept that will be reviewed and enhanced by the whole team. 

Internal conflicts can be efficiently resolved by utilizing the voting mechanism and following the predetermined regulations outlined in the smart contract.

By enabling investors to combine resources, DAOs also allow them to invest in early-stage startups and decentralized projects while sharing the risk or any profits that may come from them.

Benefits of DAOs

Numerous factors may drive an entity or a group of people to consider adopting a DAO framework. This particular management structure offers a range of advantages, such as:

• Decentralization. Organizational decisions are not made by a central authority but rather by an entire community of stakeholders. Instead of concentrating power in the hands of one person or a small group like a Board of Directors, a DAO distributes authority among a much larger pool of people. 

• Participation. When people can directly participate in decision-making and hold voting power with an organization, they feel greater empowerment and connection to the entity. 

Although their voting power may not be significant, a DAO incentivizes token holders to actively engage by casting votes, burning tokens, or utilizing their tokens in a manner that aligns with their perception of what is most beneficial for the organization.

• Trans. In a DAO, blockchain technology enables casting votes, which are then made transparent for public viewing. This requires people to act as they deem most appropriate, as their votes and decisions will be visible. 

This incentivizes actions that enhance the reputation of voters while discouraging any actions against the community.

• Community. The idea behind a DAO is to inspire people from all corners of the globe to collaborate on a unified vision but without the need of a centralized authority. Through an internet connection, token holders can engage with fellow owners regardless of their geographical location.

Limitations of DAOs

DAOs offer a unique structure for decision-making and governance, but they also come with certain limitations. 

 

• Technical complexities: DAOs are built with smart contracts and blockchain technology, which can be challenging to understand and use, especially if you don’t have any technical skill in this area.

• Regulations: regulations surrounding blockchain applications like crypto and DAOs are still evolving. They are publicly legal in some countries and in some, there’s no stated regulation for them.

 

Due to differences in regulation policies, DAOs are quite limited to areas where they are legally recognized.

• Difficult to modify: There’s a limited number of functions in a DAO smart contract. These functions can easily be executed by passing one of the binding proposals in the Governance dApp, but the process for adding or modifying functions or Governance mechanisms within the DAO is much more complex. 

Making changes to the smart contract takes time and social momentum and sometimes, the entire smart contract will need to be rewritten.

 

• Time inefficiency: The multi-step proposal process, community discussions, and voting periods can all contribute to delays in implementing changes or making decisions, especially compared to traditional hierarchical organizations where decisions can be made more quickly.

 

This can limit the application of DAO in fast-paced environments where decisions need to be taken quickly. Additionally, the time commitment required for active participation in DAOs can discourage some potential members, limiting the diversity and dynamism of the community.