If you’re curious about cryptocurrencies or their underlying technology, the blockchain, then you’ve heard of DAOs with a good chance.
DAO stands for Decentralized Autonomous Organization which is the most complex form of smart contract. As its name suggests, DAO is a decentralized-run organization, meaning it operates without needing the intervention of a centralized party to make decisions.
How do DAOs work?
In the cryptosphere, DAOs are entities whose role is to follow a set of programmatic rules granted by a decentralized consensus. In fact, Bitcoin (as a platform) is widely regarded as the first fully CAD. DAOs require initial programming, but once the rules are established, they operate autonomously and continue to perform their functions without interruption from external sources (the true definition of autonomy).
Another great advantage of CAD is the fact that they are transparent, mainly due to their open source nature. DAOs use tokens to reward specific activities and, having no hierarchical structures, the funding process takes place from the start.
Consensus is another very important term associated with CAD. Consensus refers to the majority of stakeholders who agree to decide to move or withdraw funds. In short, all decisions must first be approved by the vast majority of stakeholders. For example, even if a bug is found in the code of a DAO, it cannot be resolved before a voting procedure takes place and the majority of voters accept it.
The biggest advantage of a DAO is certainly its efficient way of managing an organization without the need for an intermediary and without the associated inefficiencies that accompany it. In order to understand CAD, users must first understand the fact that CAD cannot create products, write code or even develop any kind of software or hardware.
For this particular task, all CAD requires a contractor. The main way to make decisions in a CAD is through proposals. This is why DAOs also require a cash deposit to prevent users from overloading the network. As mentioned earlier, everything has to be voted on. The same goes for the contract which is appointed by vote (performed by all token holders).
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Do DAOs disrupt traditional governance?
Quick Replies: Yes! Governance can be characterized as the set of actions, laws, and norms and the interaction between different entities. Governance can lead to the Principal-Agent Dilemma phenomenon. This phenomenon refers to circumstances where decisions of an individual may influence another entity. This comes with its fair share of devotion to morale. DAOs use smart contracts to reduce the impacts of the Principal-Agent Problem. In short, DAOs, in general, are an effective way to ensure democracy through the use of cryptographic software, as each of the stakeholders get to vote to implement laws, change existing rules, etc.