The Basics of a Decentralized Autonomous Organization (DAO)

The release of Bitcoin in 2009 catalyzed countless technological innovations that we see developing in distributed computing today. Acknowledging blockchain as the underlying technology that gives Bitcoin its legs, Vitalik Buterin, and a few other savvy entrepreneurs created the distributed computing platform and operating system, Ethereum in 2015. A smart contract platform and the second generation application of blockchain, Ethereum was yet another catalyst for great technological change. The project allows users to build decentralized applications or “dApps” on top of the protocol, allowing users around the world to create endless incentivization mechanisms on top of the blockchain. The use of smart contracts allows users in an ecosystem to make financial agreements that are executed by code and allows for the automation of decision-making and other managerial practices within an organization. One use-case, born from Ethereum and smart contracts, is the concept of a decentralized autonomous organization (DAO). A powerful combination of technologies, DAOs may play a significant role in the future of finance and administration. To fully grasp the power of a DAO we must first understand the smart contract. 

The term “smart contract” is used quite loosely today, and with such a lack of regulatory clarity, its misuse only adds more fuel to the fire. So, what is a smart contract? As defined by Nick Szabo, creator of Bit Gold in 1996, a smart contract is “a set of promises specified in digital form including protocols within which the parties perform on these promises”. It is important to note that smart contracts can, but may not, be actual contracts. Depending upon the contents of a smart contract and the legal jurisdiction of the parties, it may or may not be legally enforceable in a court of law. Without diving any deeper into the legal aspects of smart contracts let us note that with or without the presence of a legal intermediary, a smart contract will execute upon the agreed terms regardless, leaving little need for legal interference in low trust environments or where legal systems often fail. Now that we have a better understanding of smart contracts, let us shift the focus to the use of smart contracts in a decentralized autonomous organization.

So, what is a DAO?

A decentralized autonomous organization is an organization represented by rules encoded as a computer program (typically using smart contracts) that is transparent, controlled by stakeholders and not influenced by a central government or entity. Simply put, a DAO is a decentralized application that allows users to form a company or organization that has no formal leader. Stripping away the downfalls of traditional hierarchical structure, DAOs create an environment where all participants are equally important. No executives, no managers, no supervisors. Only stakeholders and shareholders utilizing votes. Like a traditional blockchain, DAOs typically have a native token or currency. This native token is often used to assign holders the right to propose ideas to the DAO and to vote on such proposals as they are introduced. The voting weight of governance token holders is usually determined by how many such tokens they hold. This allows for a fair and democratic voting process where those that are most interested (economically) in the success of the DAO are the most influential voters in the DAO. Now we have a better understanding of a DAO, but how does a decentralized autonomous organization offer an alternative to the traditional centralized organizational structure?

Primarily, a DAO allows for heightened transparency of processes and relationships within an organization. Not only is there opportunity for transparency in all of the DAOs financial transactions, but also in the process of hiring and voting on the direction of the organization. Transparency for the voting process means a great reduction of bureaucracy within an organization. Now, “managers” cannot shoot down a proposal coming from the “janitor" before “executives” get a chance to see it. Ideas can now naturally flow through the organization without bias or prejudice suppressing their path. On the financial side of things, all participants in the DAO can see exactly where the organization’s funds are going with its inherently public, auditable, and immutable ledger. This creates an environment where it is much more difficult for participants, regardless of their share in the DAO, to partake in money laundering, collusion, or nepotism. The flattening of leadership structure allows participants to be fully responsible for the finances, operations, and governance of the organization unlike ever before, eliminating contingencies for corruption. 

A successful DAO today means more fair organizations, but what does a fully functional DAO look like in the future? Imagine ATMs, vending machines, cashier-less stores, all run by a decentralized autonomous organization. Contractors around the world could be responsible for the upkeep of physical machines owned by the DAO and could be paid directly by the DAO itself. As artificial intelligence technologies advance, the world could have a new method of delivering public goods and services, a new way of paying taxes, a new form of government. DAOs may even be a glimpse into a dark dystopian, future of technology where machines run the world. Thankfully, the engineering behind a DAO with this level of integration has yet to be established and the DAO’s ability to reach such a level lies in the hands of regulators around the world. Let us digress from a hypothetical future and return to a much more relevant use case where users can access highly competitive lending and borrowing services at the click of a button.

Only months away from launch, the Defi Money Market (DMM) DAO is set to be one of the most sophisticated ever released. The DMM Foundation has already built a robust ecosystem that allows users to earn a stable interest rate of 6.25% on select digital assets including Ethereum. The yield paid to participants is backed by real-world assets that generate income greater than the interest owed to mAsset holders (those earning on deposits). Already providing details on the status of real-world assets via the DMM Explorer, the foundation aims to bring much more transparency to the ecosystem before launching its DAO. To increase security and trust in the current ecosystem, the foundation has partnered with Chainlink to provide real-time data about the real-world assets that back the ecosystem on-chain. This partnership will be critical in the decentralization and automation of the ecosystem by providing real-time data about assets in the ecosystem as the DMM Foundation launches its DAO. The reality of a successful and fully functional DAO may seem far away, but this year has already thrown everyone for a loop. Leaders of the International Monetary Fund and other global organizations mention an acceleration towards a digital society, where we can imagine that digital currency, smart contracts, and decentralized autonomous organizations are likely to be with us on the other side of our transition. 

About DMM

DeFi Money Market (DMM) is an ecosystem built on the Ethereum blockchain that bridges interest-generating real-world assets into the Decentralized Finance (DeFi) ecosystem in a transparent, trust-minimized, overcollateralized, and permissionless manner.

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