The current organizational structures in companies and businesses across the world make strategic decision making a slow and privatized process. Most of these decisions are made by a select few persons in management while the consequences affect the majority of stakeholders. This has called for the creation of decentralized autonomous organizations to make the decision-making process more efficient.

Imagine a scenario that allows total control of decision making without the management team or board of directors. To simplify the narrative, imagine a driverless car that picks and drops passengers at their destinations, collects their fares and uses the cash to fuel and pay for service itself. The car is able to work and complete the tasks without having a driver or any person controlling it. Sounds cool, right?

The DAO is an example of a decentralized organization built on Ethereum (Image: Shutterstock)

This is how decentralized autonomous organizations, also known as DAOs, are structured to work as organizations continue to turn digital. No need for bureaucratic governance or a ‘driver’ for the company. DAOs offers a framework to run governance in a decentralized environment.

The word “DAO” has been synonymous with failure so far in the industry as the first company to employ the structure, “The DAO” had a problem in its code leading to failure. The company, however, is different from the technology as seen in this article.


Decentralized Autonomous Organizations (DAO)

“A Decentralized Autonomous Organization (DAO) can be described as the most complex form of a smart contract, where the bylaws of the decentralized organization are embedded into the code of the smart contract, using complex token governance rules.” – Blockchain Hub

Decentralized Autonomous Organizations illustration (Image: Blockchain Hub)

Decentralized Organizations work similar traditional organizational structures with the difference being the decentralization and digitization of the systems. These DAOs are controlled using smart contracts to execute the needs of the organization unlike having the rules on paper.


How do DAO’s work?

DAOs functions autonomously with smart contracts playing a huge role in the governance of the platform. It relies on blockchains with users on the DAO able to vote for individuals to perform tasks that cannot be carried autonomously by the DAO.

For the proper functioning of a decentralized organization, some factors must be fulfilled. These factors include the rules to govern, funding, autonomous entity, a consensus mechanism, contractors, proposals from the participants and the voting mechanisms. We explain these factors in detail below and the importance of each in establishing a completely decentralized autonomous organization.

  • Smart contracts: These are digital rules that govern the autonomous organization on the internet. These digital rules allow the DAO to run without much interference from people.
  • Funding (DAO tokens): The DAO lacks a hierarchical organizational structure or a management team which limits the centralization of power. To incentivize the developers or reward activities, DAOs require a token with a value to make sure that people work on the entity.
  • Autonomy: DAOs are independent of control whether it is the participants or the creators. It runs on an open source platform that increases the transparency while the data records are stored on the blockchain for immutability. Such features improve the financial transactions on the platform by making them trustless and removing the need for third parties.
  • Proposals: These are the building blocks of the DAOs as they bring forth changes to the platform. There is a monetary deposit required to make a proposal to avoid spamming the network with proposals.
  • Consensus mechanisms: Changes made on the structure of the DAO including the movement of funds, changes on the protocol or fixing bugs must be voted upon. The participants must reach an agreement to allow any change to take place through voting. While the consensus mechanisms offer total decentralization, the system may be exposed to security concerns before the participants reach an agreement.
  • Voting processes: Once the proposals are submitted, participants can vote for their preferred proposals.

DAOs are mostly autonomous but some of the work is carried out by contractors who build a product, write code or develop hardware. These contractors are appointed through a vote of the token holders.

The DAO was an example of a DAO built on the Ethereum blockchain. Most of the current public blockchains are DAOs as they have a set of rules governing the platform, are decentralized and require a consensus to make changes. The recent types of DAOs use complex smart contracts on blockchains.

While the internet opened up the world to information transfer across the world, DAOs allows users to transfer economic value to anyone in the world. This includes raising capital, lending and borrowing funds, make payments, trade, invest and open up other economic ventures from anywhere in the world.


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