Decentralized Autonomous Organizations (DAOs) have been a controversial issue in the world of blockchain and cryptocurrency for some time now.
From the early days, as we saw in the Slock example. The German startup that led to the DAO, to current iterations, DAOs can create or break the crypto and decentralized finance (DeFi) industry and education will be the deciding factor.
Regarding recent developments, a misunderstanding of the true nature of the technologies behind most DeFi projects could be a contributing factor to the lack of regulatory clarity. Recent dialogue between MakerDAO representatives and Senator Elizabeth Warren shows that regulators have little understanding of the DeFi space or how the DAO operates.
In the conversations, the senator not only showed disinterest in the organization, but one delegate mentioned that he spent most of the time convincing the anti-crypto that MakerDAO and DAO 2016 do not exist as different entities.
U.S. Senator Warren, an ardent crypto skeptic, has raised concerns about the fast-growing stablecoin market, and proposed banning U.S. banks from holding reserves that support coins.
Could a lack of understanding of how DAOs like MakerDAO affect the perception of the sector by regulators? In this article, we will look at the different DAOs that develop in the DeFi room and how they serve their purpose, and provide a tutorial to help you understand better.
So what is a DAO?
Simply put, a decentralized autonomous organization is a concept of a specific blockchain organization that is created and collectively owned by its members. These organizations will rely on decision protocols embedded in smart contracts for governance, unlike traditional organizations that use centralized governance systems.
Because smart contracts are impersonal, an organization can be governed by a horizontal structure without a well-established hierarchy. DAO members can decide to create inline restricted lockers for approved members who meet pre-set conditions.
Without a central governing body, DAO members can submit proposals and collectively decide on proposals to be implemented through the voting system. Smart contracts can assist throughout the voting process and automatically make changes based on votes.
What makes DAO different from others?
In essence, the DAO is designed to address the age-old dilemma between principal and agent.
This problem is a common problem that arises when an agent (central organization or individual) finds themselves in a situation where they have to make decisions that meet the different goals, priorities and needs of the (main) group without compromising their own interests. …
While this dilemma is widespread among public and private organizations around the world, DAOs seek to address this problem by replacing the hierarchical and centralized decision-making process with an unreliable system built on independent smart contracts.
Smart contracts can be programmed to modify the incentives of all group members in a codified form embedded in the blockchain.
Through a well-designed DAO, all stakeholders in the organization will be able to participate in the management and decision-making of the group.
This is how DAO works
While the underlying DAO mechanisms differ from platform to platform, the general formula is one in which a number of smart contracts are distributed. These smart contracts can be programmed to accommodate future changes should an incentive program be needed to help the DAO grow and expand with new features.
A DAO can be created for just about anything from an independent network to a charitable organization and even a political government. Smart contracts create or destroy DAOs because they enhance transparency and allow the organization to operate independently without intermediaries.
Once the smart contracts are fully created, tested and distributed, the DAO will need funding to incentivize stakeholders to run and sustain the organization. Most DAOs will use a token that gives holders the right to vote as well as a reward for participating in the maintenance of the platform. With revised smart contracts and funding procedures in place, the DAO can be initiated and the organization’s members will be in control of the future.
Real-life examples of DAO
Various examples of DAO exist today. Technically, Bitcoin can be considered an early version of the DAO, where the network grows through agreements between miners and node operators, and there is no central administrative body.
The Bitcoin network can be considered the first example of a DAO. It is managed by a network of members (miners and node operators) who coordinate their activities for the benefit of the entire organization, as well as for the benefit of their own organization.