It also gives them a chance to invest in early-stage startups and decentralized projects while sharing the risk or any profits.
A decentralized autonomous organization (DAO) is a management structure that uses blockchain technology to automate some aspects of voting and transaction processing.
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DAOs are a key component of important blockchain applications, including cryptocurrency, as well as Web 3.0, a proposed architecture for the next generation of the web that relies on the decentralization enabled by blockchain.
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The grand vision is that DAOs could make it easier to create decentralized organizations that respect the interests of stakeholders outside the control of any one party.
They have been used to raise money for specific projects and form new kinds of business structures. They can also automate many financial processes on blockchain platforms like Ethereum to ensure that stakeholders are compensated according to rules that everyone agrees to.
They are also good at automatically facilitating shared votes based on a particular level of investment, support or engagement.
Proponents talk about using DAOs to replace trust that’s based on personal relationships or a central authority with a type of specially crafted blockchain program called a smart contract.
DAOs don’t directly automate physical and legal processes or the communications with government entities required for filing papers, paying taxes and getting permits.
How do DAOs work?
DAOs operate using smart contracts, which are essentially chunks of code that automatically execute whenever a set of criteria are met. Smart contracts are deployed on numerous blockchains nowadays, though Ethereum was the first to use them.
These smart contracts establish the DAO’s rules. Those with a stake in a DAO then get voting rights and may influence how the organization operates by deciding on or creating new governance proposals.
DAOs are fully autonomous and transparent. As they are built on open-source blockchains, anyone can view their code. Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.
Conclusion
Being internet-native organizations, DAOs have several advantages over traditional organizations. One significant advantage of DAOs is the lack of trust needed between two parties. While a traditional organization requires a lot of trust in the people behind it — especially on behalf of investors — with DAOs, only the code needs to be trusted.
