Blockchain has made a new format of organizations possible. Smart contracts give DAOs many advantages over traditional organizations.
In the fintech environment, 2020 has been declared the year of the DAO. Nevertheless, most people even in 2022, who even if they have heard of the word, will have to work significantly hard to understand what it is and how to apply it.
Blockchain technology opens up many opportunities to create projects that would not be possible in the traditional financial world. In recent years, the creation of DAOs has become popular. These are decentralized autonomous organizations with rules encoded in a smart contract, which are regulated by its members. This article focuses on the features of DAO and discusses its main advantages and disadvantages.
Decentralized autonomous organizations differ from traditional ones not only by their location on a blockchain. DAO is a form of collective business conduct, in which the rights and obligations of the participants are programmed by means of smart contracts. They are also exempt from the need for paperwork or record-keeping. For a DAO to function properly, several mandatory tools must be in place:
A robust smart contract. This is a program through which DAO participants can propose ideas, vote, and manage the organization.
A set of rules. These are spelled out in the smart contract and can only be changed through voting by DAO participants. The rules specify the provisions of the vote, the time of the vote, the required ratio of votes to win, and the distribution of the organization’s profits among the participants.
Organization Assets. Each DAO issues its own tokens. With these, participants vote and influence the development of the project. Everyone who wants to join a DAO will have to redeem these tokens.
Benefits of DAO
Blockchain has made a new format of organizations possible. Smart contracts give DAOs many advantages over traditional organizations, which we’ll discuss below.
Equality of voting power among participants. Traditional companies are managed by executives, a board of directors, or investors. And DAO is managed by all its members because they are on the same level. With tokens, any of them can vote for changes in a smart contract.
Lack of managers. Traditional organizations require managers to be hired to oversee the work of the rest of the staff. And DAO has no hierarchy among its members, so there is no such need. Smart contract protocol eliminates intermediaries and bureaucratic conventions.
No financial department. All financial transactions of a DAO are recorded in a blockchain. Therefore, there is no need to hire employees to conduct these transactions, monitor their implementation, and maintain documentation.
Reduced financial costs. Since there is no need for additional employees and documentation, there are no additional costs.
Equal distribution of profits among members of the organization. For example, DAO can finance a product or service and charge “outsiders” for its use. In this case, all the earned assets will be shared between the members of DAO or invested in the next project, depending on the outcome of the vote.
Transparency of the smart contract. All the rules of the organization are written in a smart contract, which is embedded in the blockchain. No one can make changes to the protocol without other participants noticing.
Transparent financing. Transactions of traditional companies are hidden from the public and only accessible to their employees or regulators. In a blockchain, all trading software companies can see the funding the DAO allocates to projects and evaluate the results of these investments. There is no possibility of withdrawing assets fraudulently through document substitution, as is the case with traditional organizations.
The market capitalization of cryptocurrency has exceeded $800 billion. That’s a lot of confidence in a market that is mostly created by decentralized organizations.
Will this change the way companies operate? Probably, especially if more and more projects start moving to this system.