What is DAO in cryptocurrency?
Considering those mentioned above, we may identify the following traits of a DAOs:
- Non-hierarchical system:
Unlike hierarchical systems, which executives, managers, or presidents own and operate.
- Self-sustaining:
By staking their tokens in liquidity pools, DAO members add liquidity to the system. To draw investors and venture capitalist companies, they might also advertise a crowdfunding initiative.
- Numerous applications:
DAOs can be anything; their protocols enable the development of decentralized applications (dApps), and digital tokens Dash is well-known. NFTs (Non-Fungible Tokens), for instance, and the community itself, as it is self-governing.
- On-chain governance:
To submit proposals for protocol modifications or other types they get the votes from other DAO memebers.
- Open source:
The code that makes up a DAO is developed and kept in its smart contract, which is accessible to all parties. Every DAO participant has access to historical information on transactions and protocol modifications.
2016’s DAO Hack: The First DAO
The first decentralized autonomous organization was the DAO. It was a venture capital fund that Simon and Christoph Jentzsch established in April 2016.
Regretfully, it went out of business in 2016 after a few community members discovered a security flaw in the smart contract’s code and proceeded to steal a third of the DAO’s assets, which had been raised by a crowdfunding campaign for about $168 million. A hard fork in the Ethereum blockchain resulted from this.
When the Securities and Exchange Commission (SEC) regarded the DAO’s token as an “unregistered security” and so subject to regulatory laws, the DAO also violated SEC regulations.
How Are DAOs Operational?
A DAO’s core is made up of smart contracts, which are digital contracts that activate when specific criteria are met.
Developers write the smart contract’s code to create an autonomous system capable of performing tasks without third-party assistance. Qualified members can suggest changes to this code, and if the changes are approved by a vote, the requirements may vary across DAOs.
- Establishing a DAO
Now, let’s try to simplify things by going through a streamlined procedure for creating a DAO in case you’re still having trouble understanding this.
- The Essential Positions
Before constructing a DAO, establish a non-hierarchical organization with distinct roles for each member, including community managers, developers, token holders, curators, and others.
DAOs can evolve into large, complex organizations, with their needs driving the creation or removal of positions.
Smart Contract in DAOs
The smart contract that will be implemented in the selected blockchain, which will serve as the foundation for the DAO, is usually written by developers. They look after the coding as well.
By possessing the native token, token holders enable the DAO and receive additional tokens in exchange for their degree of community involvement. Holders of tokens are also eligible to vote, assign their voting rights, and make suggestions.
- Curators:
Curators were created to prevent 51% of attacks. Their primary responsibility is to compile a whitelist of smart contract business proposal addresses. Regardless of how thoroughly their value has been explored.
Community managers are responsible for overseeing the DAO’s digital environment in general, as well as for administering the social media accounts, responding to inquiries from the community, and training new members.
- Financial managers:
DAOs can manage large amounts of capital, hence they need finance experts to manage fund distributions, financial reporting, diversification, and other activities.
A vault strategist is one of the other roles. A vault feature in a DAO allows for the generation of new tokens based on collateral secured within the system. This capability enables the development of a wide range of positions. From technical engineers, facilitators, and financial managers to community managers and content creators.
How do decentralized autonomous organizations DAOs work?
Decentralized Autonomous Organizations (DAOs) automate and enforce regulations. It is without the need for a central authority by using smart contracts on a blockchain. Decentralized governance distributes decision-making authority among participants through token voting. Members submit proposals and vote on them; the smart contracts execute the decisions. The blockchain ensures transparency by recording every transaction and judgment. DAOs use treasury systems to manage money, and their members vote on financial matters jointly. DAOs can function independently, change over time, and uphold an open, democratic process thanks to this structure.
Setting Up The DAO for Blockchain
Deploying the smart contract on the blockchain is the last stage. Once this is finished, the organization is completely functional. All of the dynamics will start showing that are mentioned.
Now, there may be difficulties since, once the system is operational, vulnerabilities like bugs, and security holes. Other problems could surface and jeopardize the DAO’s security.
A voting proposal is the sole means of modifying the smart contract’s original code. That is the only option to address security flaws or bugs. Malicious actors can exploit framework gaps and vulnerabilities during the voting process, as demonstrated by the DAO hack in 2016.
The following are the best examples of successful DAOs in crypto.
- Well-known DAOs Uniswap (UNI)
One of the most well-known decentralized exchanges with an automated trading mechanism that runs on its own is Uniswap. As of this writing, its governance token, UNI, has the most market capitalization among DAOs. It gets the Number #1 rank in Coinmarketapp.
- Aave (AAVE)
With Aave, a decentralized lending system, lenders can deposit money into liquidity pools to receive interest. To obtain flash loans, borrowers utilize this liquidity to produce cryptocurrency collateral.
- MakerDAO (MKR)
Among the first DAOs based on Ethereum, Maker was introduced in 2017. It permits the creation and dissemination of DAI, a stablecoin governed by the community and tethered to the US dollar.
- BitDAO (BIT)
One of the biggest DAOs in the world, BitDAO is run by its community of BIT token owners. By utilizing autonomous entities in the DeFi domain and next-generation web3 organizations. The project seeks to build a strong decentralized ecosystem.