DAO stands for a ‘decentralized autonomous organisation’, which is the term ascribed for a group of people agreed to abide by a string of rules for a common objective. The rules are converted into the code (charter) of the organisation via smart contracts which are algorithms that execute when the criteria are met. In this article, brought to you by TokenMason we discuss what a DAO is, key principles and how to successfully launch your very own DAO entity.
Participants agree to buy into the organisation and can be organised for pretty much any purpose. Crucially there is no (central) governing authority, thus the “decentralized” part. DAO’s function on a flat hierarchy, that is all participants have a stake and not one single individual controls or owns the entire entity in the same way a traditional CEOs or directors would.
DAOs operate entirely online and utilise blockchain technology to form a ledger to record activities within the group, i.e. decisions made or currency changing hands. Examples of DAO’s range from groups crypto currencies (DASH) to groups of NFT investors who pool their capital and use smart contracts to execute actions.
Web3 proponents proclaim that DAO’s are the very next logical step for the business world, as all major and minor decisions associated with the running of a company can be divided among the entire organisation and automatically run. Theoretically, this should eliminate self interest or bad decisions made by traditional leadership structures.
To imagine what this may look like practically, imagine a white good’s business. If this business was run as a DAO, there would be no governing board as everyone would provide input with decisions. Calculations like replenishment, contractors, auditors, inventory, product demand and shipping costs would be automatically handled by algorithmically run smart contracts. The net result is a business that essentially runs by itself without the requirement for management
This all sounds great, but how is it supposed to function? How can a system guarantee the concept of trust? When DAO was first created, the rules were transcribed into its code via the use of smart contracts programmed to execute when predetermined actions take place. Everyone has agreed to abide by the rules when they purchased their stake to obtain access to the group, and should the rules be violated, the funds are frozen, and no one can use the DAO. In theory this is how the DAO ensures and guarantees everyone will abide by the rules.
Each DAO has a treasury built in to hold its digital currency reserve that members can only access with prior/current approval by the organisation, and all decisions are made jointly during set time window. The diagram below shows a general process map of a DAO for Zen token from inception to the first decision.
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We hope you have found this blog useful and learned more about DAO and how they work. Please visit our Blog page for more blockchain related news and articles. If you would like to learn more about DAO, please read Part 2 – Creating a DAO.
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