What Is DAO In Crypto & How Does It Work?

One of the biggest advantages of cryptocurrencies is that it is decentralized. It means that there is no central agency like a bank or government that can control the industry. Also, all the transactions depend on blockchain technology available to everyone to see.

Thanks to decentralization, crypto enthusiasts enjoy security and privacy, which is not available when it comes to transacting fiat currencies like USD, INR, EUR, or others.

Inspired by this idea, a group of technology developers proposed setting up a DAO. DAO is an entity with no central leadership.

To help you know more, here is a detailed explanation:

What is a DAO?

DAO stands for Decentralized Autonomous Organization. A DAO is basically a community led entity with no central authority.

DAO is fully autonomous and transparent. As it is backed by smart contracts, which lays the foundation rules. It also gets executed depending on decisions, and at any point, proposals, voting, and even the code itself can be publicly audited.

Crypto expert Sudhir Khatwani, who writes at TheMoneyMongers.com, explains “The main idea behind DAO is to make it governed by individual members who can make critical decisions collectively about the future of the project.” He further adds, “ For instance, treasury allocation, technical upgrades, and so on.”

In a DAO, community members can create their own proposals about the future operations of the protocol and then come together to vote on each proposal.

Proposals that get the highest votes get accepted and enforced by the rules instantiated within the smart contract.

Overall, the primary idea behind a DAO is to give the community members the ability to decide the future roadmap of a project. Decisions made by the community members will decide how the company will use its funding and resources.

Also, thanks to the transparent nature of DAOs, the funding details can be accessed by the approval of their members.

How does a DAO work?

The rules of the DAO are established by a core team of community members using smart contracts. These smart contracts are responsible for laying out the foundational framework by which the DAO is going to operate.

These smart contracts are highly visible, verifiable, and can be publicly audited. So any member can understand how the protocol is functioning at every step. This makes DAO transparent in nature.

Once the rules are laid down and formally written onto the blockchain. The next step is the funding. The DAO needs to understand how to receive funding and how to make community members’ governance.

This is achieved by issuing tokens to community members. The protocol sells its tokens to raise funds and fill the DAO treasury.

Also, individuals get certain voting rights by buying tokens of the DAO. These voting rights are usually proportional to their holdings.

Once the funding is completed, the DAO is ready for the deployment. Once the code gets into the production phase, DAO can no longer be changed. However, it can only be changed when there is voting happening by the community members.

There is no special authority that has the power to modify the rules of DAO. Instead, it is completely up to the token holders or community members to decide how the future roadmap of the DAO will look.

How to get involved?

As mentioned earlier, you can get involved in a project by buying its token. So whenever you find a project that really interests you, then you can obviously purchase their tokens.

But there are some other ways to get involved in DAO. However, as an investor, you need to understand the core function of each DAO. Since all the DAOs operate with different purposes.

Since DAOs are focused on community led governance, you need to figure out what sort of voting rights you are getting as a token holder and what proposals are at stake.

For instance, Uniswap token holders can vote on distributing a portion of the fees that protocol collects amongst themselves.

In other protocols like Compound,  token holders can vote on distributing these protocol fees towards bug fixes and system upgrades.

However, the question is, how would you get to know about newer DAO projects? Well, you can join different DAOs discord servers where you will get to know about actual projects and how you can get involved in them.

So Why DAOs?

By this far, I hope you have understood how DAO works, and thanks to its easy and public verification protocols, trust builds within the DAO and voting process.

All the services on DAO are automated and decentralized. As a result, it cannot be modified by a higher authority. Hence, DAO has a huge potential in the charities and contractors’ communities.

However, on the other hand, smart contracts may lack legal enforceability. Also, the DAO itself may not own assets as there is a specific individual or entity to do so. 

Smart contract structuring could alleviate some of the concerns associated with traditional contracts. But overall, DAOs are hugely useful when it comes to implications for blockchain based gaming and eSports.

Gamers and developers can collaborate as the DAO facilitates communication and community gathering via NFTs and cryptocurrency payouts.

Benefits of DAOs

As of now, DAO crypto tokens are being heavily used for purposes like investment, charity, buying and creating NFTs, fundraising and many more.

For instance, the Decentralized DAO includes a decentralized city planning committee in metaverse where they decide moderation of content, LAND policy, and auctions.

Also, there are a few benefits of using DAO in the real-world. Such as:

Decentralized, Automated, And Transparent:

One of the top benefits of DAO is that it is decentralized and transparent in nature. As a result, the members get full ownership to maintain the protocol.

Also, DAOs are automated as they are backed by smart contracts. Hence, all the decisions taken by the community members get automatically executed. Unlike traditional companies, there is no third-party who can manipulate the company’s operations.

Also, DAOs eliminate all third-party transaction costs, and the organization only “pays” for existing on the blockchain. As a result, they get to enjoy profit margins.

Community-Driven:

In a DAO, the token holders get the power to make a decision. This power is proportional to tokens held by a member. But it doesn’t give any member more rights or privileges. The token holders have the right to effect changes that further develop the protocol. This democratizes the protocol.

Potential Investment Returns:

Owning a governance token in a DAO is pretty much like holding equity in an early-stage startup. In case the project becomes successful at a later stage, your equity gets extremely valuable and brings you huge profit.

So as a DAO member, you get rewarded with a fixed percentage of the transaction volumes on the exchange.

As a result, it creates a stable token user base that has a long-term investment mentality. Also, thanks to its reward mechanism, DAO projects set it apart from other non-DAO projects.

Final Words:

 So that was all for what DAO is and how it works. I hope by now you know why DAO is important and how by involving with a DAO can be profitable in the long run. In case there is anything else you wish to ask, feel free to drop a comment below.

 


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