Crypto 101: Decentralized Autonomous Organizations (DAOs)

Decentralized Autonomous Organizations, or DAOs, are a concept which has “by the people- for the people” written all over it. It regards governance, decision-making, and collaboration. In this blog post, we’ll dive into the world of DAOs, exploring their origins and possible use cases.

Understanding DAOs: A Brief History

Decentralized Autonomous Organizations, often abbreviated as DAOs, trace their roots back to 2016 when a project known as “The DAO” was made. The DAO was essentially a venture capital fund governed by code and executed on the Ethereum blockchain. Investors could buy DAO tokens, which granted them voting rights on investment decisions.

The concept of The DAO was groundbreaking, as it aimed to eliminate traditional intermediaries and central authorities, putting control directly into the hands of token holders. However, it wasn’t all smooth sailing for The DAO; it encountered a critical vulnerability in its code, leading to a contentious hard fork of the Ethereum blockchain.
“In June 2016, users exploited a vulnerability in The DAO code to enable them to siphon off one-third of The DAO’s funds to a subsidiary account. The Ethereum community controversially decided to hard-fork the Ethereum blockchain to restore approximately all funds to the original contract. This split the Ethereum blockchain into two branches, each with its own cryptocurrency, where the original unforked blockchain continued as Ethereum Classic.”

Despite the challenges faced by The DAO, its underlying idea of decentralized, autonomous decision-making through blockchain technology lived on. Today, DAOs have evolved and matured, becoming a fundamental building block of the decentralized ecosystem.

In memecoin trading, DAO’s are populair as well, most specifically to make it look better. Remember memecoins basically have no functionality, by adding the DAO feature to the token, it suddenly has a usecase.
When looking at serious crypto projects this may occur as well. The usecase of a token can be of importance. Sometimes a token basically has no usecase, other than acting as a token for a DAO. Arbitrum for example is a project which is considered to be a good project, it has a high marketcap and good functionality, however the token of Arbitrum doesn’t do anything other than being used for the DAO.

How DAOs Work: Code Is Law
At their core, DAOs are smart contracts that define rules and processes for decision-making within a decentralized organization. These rules are coded into the blockchain and are executed automatically when predefined conditions are met. Here’s how they work

  1. Token Holders: DAOs issue tokens that represent ownership and voting rights within the organization. These tokens are distributed to participants, often in proportion to their contribution.
  2. Proposals: Anyone with DAO tokens can submit proposals for various decisions, such as funding a project, changing rules, or even dissolving the DAO.
  3. Voting: Token holders vote on these proposals using their tokens. The weight of their vote is determined by the number of tokens they hold.
  4. Execution: If a proposal receives enough support, it is executed automatically by the smart contract. This might involve transferring funds or altering the organization’s rules.

Use Cases of DAOs: Beyond Governance
The flexibility and transparency of DAOs have given rise to a wide range of use cases.

  1. Decentralized Finance (De-Fi): DAOs play a pivotal role in governing many DeFi protocols. They manage liquidity, make lending and borrowing decisions, and oversee protocol upgrades.
  2. Collective Investment: DAOs can pool funds from investors and make collective investment decisions in assets such as cryptocurrencies, real estate, or art.
  3. Digital Art and NFTs: DAOs have enabled collective ownership of digital art and NFTs, allowing communities to acquire, manage, and even co-create digital assets.
  4. Charitable Organizations: DAOs are being used to create transparent and decentralized charitable organizations, ensuring that donations are used as intended.
  5. Decentralized Autonomous Communities: DAOs can govern online communities, with members collectively making decisions about content moderation, rule changes, and incentives.