What is a DAO?

Source: CritpoTendencia Original Title: What is a DAO? Original Link: The essence of cryptocurrencies lies in their decentralized nature, a complete break from the traditional model where control is exercised by governments or central banks. In this new ecosystem, power does not reside in a single entity but in the consensus of a global network of nodes that, through blockchain technology, guarantee levels of privacy and technical security unattainable for fiat currencies.

Inspired by this freedom offered by digital assets, in 2016 a group of developers took this concept to the next level by creating the first DAO (Decentralized Autonomous Organization).

This proposal was born with the goal of transferring the autonomy of currencies to the very structure of an organization, allowing management and decisions not to depend on a human hierarchy but on transparent code that can be executed by the community itself.

In simple terms, what is a DAO?

The acronym DAO comes from the English Decentralized Autonomous Organization, which translates into Spanish as Decentralized Autonomous Organization. It is a type of organization that raises and allocates resources to assets on behalf of its community.

These organizations leverage the power of Web3, the decentralized Internet, to try to make the resource allocation process more inclusive.

In its most basic form, a DAO is a group that comes together for a common purpose, such as investing in startups, managing a stablecoin, or purchasing a bunch of non-fungible tokens (NFT).

For its part, Vitalik Buterin, co-founder of Ethereum, defined it as: “An entity that lives on the Internet and exists autonomously, but also heavily depends on hiring people to perform certain tasks that cannot be automated.”

History of The DAO

In 2016, the crypto ecosystem witnessed a historic milestone with the launch of The DAO. Created as a decentralized investment fund on the Ethereum network, this organization eliminated the figure of the traditional fund manager.

Through transparent code, any user could propose projects and, if they achieved consensus from more than 20% of the community, the ETH funds would be automatically released. The success was immediate: over 11,000 investors joined, raising a record amount of $150 millions.

However, the story of The DAO is also a lesson in resilience. In June of that same year, a vulnerability in its code allowed an attack that resulted in the theft of $3.6 million worth of ETH. This event forced the community to make a decisive decision: perform a hard fork to recover the funds.

This measure split the network into two paths: Ethereum (ETH), which chose to revert the attack, and Ethereum Classic (ETC), which maintained the immutability of the original chain.

Despite everything, this incident did not mean the end of the concept. On the contrary, the fall of The DAO served as the ultimate testing ground to improve the security of Smart Contracts.

Main features of DAOs

• Autonomy: Operations are executed automatically through Smart Contracts, reducing human intervention and associated risks.
• Global collaboration: Anyone with an Internet connection can participate, making DAOs borderless organizations.
• Decentralization: They are not governed by any centralized entity.
• Transparency: All code, financial movements, and voting results are publicly available on the blockchain.
• They are open source, transparent, and incorruptible.

How does a DAO work?

The operation of a DAO is based on blockchain technology. Smart Contracts record and automatically execute decisions agreed upon by participants.

These contracts are programmed to execute transparently and securely, without the need for a central authority. Investors can buy tokens of a DAO, which grants them ownership rights and participation in decisions.

• The first step in building a DAO is to establish and define the rules that will govern the entire ecosystem. These rules are written and stored in a Smart Contract. These contracts automatically enforce rules when certain conditions are met.
• Funding phase: During this phase, each member receives a token representing the DAO’s shares. These tokens also give users certain rights and privileges within the environment. For example, proposals, whether to allocate a budget or launch new initiatives, are presented to the community and put to a vote. Only those that achieve a majority are implemented.

Why are DAOs relevant in the crypto ecosystem?

DAOs have become key pieces of the blockchain ecosystem because they represent the technical execution of the decentralization principle. By disrupting traditional centers of power, these structures mitigate the risks of critical failures and arbitrary decisions, strengthening community cohesion and giving each participant real power to co-create the project’s direction.

Beyond technology, these organizations enable operational models designed for the Internet era. They are disruptive structures where anonymity and pseudonymity are not obstacles, allowing actors from anywhere in the world to collaborate efficiently without the need for blind personal trust, delegating that security to the immutability of the code.

Advantages and challenges of DAOs

DAOs offer several significant advantages:

• Promote transparency, as all transactions and decisions are recorded on the blockchain, ensuring traceability and preventing data manipulation.
• Decision-making is carried out collectively and democratically, encouraging participation from all investors and avoiding power concentration in a few.

However, DAOs also face disadvantages. They can be vulnerable to coding errors and malicious attacks, as demonstrated by the collapse of The DAO.

Likewise, they face legal and governance challenges, as they must comply with relevant regulations and establish effective decision-making processes.

Examples of DAOs

• MakerDAO: Considered the project that laid the foundations for Decentralized Finance or DeFi. It allows users to create CDP (collateralized debt position) to withdraw a stablecoin called DAI as a loan.
• Uniswap DAO: Oversees the development of the decentralized exchange and manages its technical proposals.
• Bitshares: A platform that allows trading cryptocurrencies without leaving the blockchain.
• FlamingoDAO: Focuses on buying and managing NFTs such as the famous Bored Ape Yacht Club collection or unique pieces by digital artists.
• Friends With Benefits (FWB): A DAO functioning as a community where decisions are made on how to spend the common budget and what events to organize.

DAOs are also being used to fund group investments, launch NFT collections, build decentralized social networks, or create collaborative worlds within gaming.

In conclusion, with blockchain technology at its core, these organizations offer a new and more inclusive way for people to pool their resources and allocate them collectively. As more people learn about the benefits of DAOs, we are likely to see an increase in their adoption.