Decentralized Autonomous Organizations (DAOs) - (Explained)

WHAT'S A DAO?

A Decentralized Autonomous Organization (DAO) is a new type of organization that operates on a decentralized platform, such as a blockchain, and is governed by smart contracts. A DAO uses decentralized technology and smart contracts to create a transparent, secure, and democratic way of organizing resources and making decisions.

• A smart contract is a self-executing agreement that is encoded in lines of code (basically, instead of writing a contract on Microsoft WORD, you would have an engineer write this contract/agreement using a coding language like Solidity for example). A 'smart contract' specifies the rules and conditions of a contract, and automatically executes the terms of the agreement when certain conditions are met. Smart contracts allow for secure, transparent, and tamper-proof transactions without the need for intermediaries.

• A blockchain is a decentralized and distributed ledger of transactions. It records transactions in a secure and transparent manner, without the need for intermediaries. The transactions are grouped into blocks, which are then linked together in a chain, hence the name "blockchain". The decentralized nature of a blockchain makes it tamper-proof, as every participant in the network has a copy of the ledger, making it almost impossible to manipulate the data.

Think of a DAO like a club or group that has specific rules and goals. In a traditional club, the members elect leaders or make decisions together at meetings. In a DAO, the rules are encoded in the form of smart contracts, and the decisions are made by all the members through a decentralized voting system.

When I say that a DAO operates on a decentralized platform, this means that all members have equal access to information and decision-making power. This creates a more democratic and transparent system compared to traditional organizations, where decision-making power is often centralized and limited to a few individuals.

Now, I know, I know, I know - I keep talking about Smart Contracts. There's a good reason for that - and that's because it a huge component to making DAOs work.

• Smart contracts are self-executing agreements that are encoded in lines of code. These contracts automatically enforce the rules and decisions of a DAO, making it more secure and tamper-proof. Additionally, smart contracts allow a DAO to operate 24/7 without the need for intermediaries or manual intervention, making it more efficient and cost-effective.

Example: Using a DAO when Starting a Business with Friends

Let's use an example to help understand a DAO. Imagine my group of friends and I wanted to pool our resources to start a business. In a traditional organization, the friends might elect a leader to make decisions and manage the business.

In a DAO, the friends can use smart contracts to define the rules and goals of the organization and make decisions through a decentralized voting system. The members of this group can create a special smart contract can specify the following:

• that the organization's funds can only be used to purchase supplies for the business

• that any profits must be distributed equally among the members.

• any important decisions, such as expanding the business or changing the product line, must be approved by a majority of the members through a decentralized voting system

This type of decentralized decision-making makes a DAO more secure and transparent than a traditional organization, as all members have equal access to the same information and decision-making power. Additionally, the smart contracts ensure that the organization operates according to a set of predefined rules, regardless of the time or location of the members. (In case you're wondering how DAOs can still ensure minority voices are still heard & have influence, you can read my article called 'How to give the Minority a voice in DAOs ' which will provide a lot of insight into that subject).

In Conclusion...

In conclusion, a Decentralized Autonomous Organization is a new type of organization that operates on a decentralized platform and is governed by smart contracts. DAOs offer a more secure, transparent, and democratic way of organizing resources and making decisions compared to traditional organizations. With the potential to transform the way we organize resources and make decisions, DAOs represent a promising technology for the future.

*Shoutout to Kai Chen , from Parasol ??, for being the catalyst that led me to go down the rabbit hole to fully understand what a DAO is and it's purpose.

Thanks everyone for reading!