What is a DAO and how does it work?

A DAO (Decentralized Autonomous Organization) is defined as an organization represented by rules encoded as a transparent computer program, controlled by the organization’s members, and not influenced by a central government, or any other centralised entity. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles. 

In more basic terms, a DAO is also a way of organizing people globally into a movement, without their knowing each other, establishing your own rules, and making your own decisions autonomously, with all of that encoded on a blockchain.

Blockchain enables automated trusted transactions and value exchanges, but even so, internet users around the world want to organize themselves in a “Safe and effective way to work with like-minded folks, around the globe”, according to Ethereum.

Bitcoin is the original DAO

Bitcoin is the first example of a DAO. It has programmed rules, functions autonomously, and is coordinated through a consensual protocol. But it is the growth in DeFi protocols that have really shone a light on DAOs again.

Smart contracts are essential

For example, with a DAO, financial transactions and rules are recorded on a blockchain using smart contracts, thus eliminating any need for third party involvement in the transaction. The smart contract is very important because it represents the rules of the organization, and is where all information is stored. No one can edit the rules without people noticing, because DAOs are transparent and public. A DAO, unlike the current way in which we form companies by registering them and giving them legal status, needs none of that. A DAO can be structured as a general partnership.

According to Cathy Hackl at Forbes: “DAOs envision a collective organization owned and managed by its members with all of them having a voice. Many analysts and industry insiders affirm that this type of organization is coming to prominence, even potentially replacing some traditional companies.”

What DAOs are used for

So far DAOs are being used for many purposes such as investment, charity, fundraising, borrowing, or buying NFTs, all without intermediaries. For example, 3LAU is a DAO organization in the Metaverse that provides fractional ownership of NFTs, including songs. While DAOs are not exactly mainstream yet, they do seem to be picking up steam with many creators, and large brands and businesses need to keep an eye on them.

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