What is a DAO? What is the advantages of it ?
DAO (decentralised autonomous organisation) is a special form of smart contract.
The idea behind it is an entirely autonomous entity existing only in cyberspace.
DAOs can perform various functions traditionally performed by institutions like companies, foundations, associations or cooperatives. DAOs may be created for different purposes. Certainly economic purposes will be the most frequent, and thus DAOs will really be analogous to companies.
Through the use of smart contracts, a DAO can work with external information and execute commands based on them – all this without any human intervention. A DAO is usually operated by a community of stakeholders incentivized through some kind of token mechanism
The first example of a DAO was an organisation called The DAO. The DAO was supposed to function as a decentralised
venture capital fund. The participants could pay funds into The DAO and obtain tokens in return. The tokens allowed the holders to vote on investments by the fund.
The rules and transaction records of a DAO are stored transparently on the blockchain. Rules are generally decided on by stakeholders’ votes. Typically, the way decisions are made within a DAO is through proposals. If a proposal is voted on by a majority of stakeholders (or fulfills some other rule set in the network consensus rules), it is then implemented.
In some ways, a DAO works similarly to a corporation or a nation-state, but it’s one that operates in a more decentralized fashion. While traditional organizations work with a hierarchical structure and many layers of bureaucracy, DAOs have no hierarchy. Instead, DAOs use economic mechanisms to align the interests of the organization with the interests of its members, usually through the use of game theory.
Once a DAO is deployed, it cannot be controlled by a single party but is instead governed by a community of participants. If the governance rules defined in the protocol are designed well, they should steer actors towards the most beneficial outcome for the network.
Simply put, DAOs provide an operating system for open collaboration. This operating system allows individuals and institutions to collaborate without having to know or trust each other.
Traditional Organizations VS. DAOs
In traditional companies, all agents of a company have employment contracts that regulate their relationship with the organization and with each other. Their rights and obligations are regulated by legal contracts and enforced by a legal system which is subject to the underlying governing law of the country they reside in. If anything goes wrong, or someone does not stick to their end of the bargain, the legal contract will define who can be sued for what in a court of law.
DAOs, on the other hand, involve a set of people interacting with each other according to a self-enforcing open-source protocol. Keeping the network safe and performing other network tasks is rewarded with the native network tokens. Blockchains and smart contracts hereby reduce transaction costs of management at higher levels of transparency, aligning the interests of all stakeholders by the consensus rules tied to the native token. Individual behaviour is incentivized with a token to collectively contribute to a common goal. Members of a DAO are not bound together by a legal entity, nor have they entered into any formal legal contracts.21 Instead, they are steered by incentives tied to the network tokens, and fully transparent rules that are written into the piece of so ware, which is enforced by machine consensus. There are no bilateral agreements. There is only one governing law – the protocol or smart contract – regulating the behaviour of all network participants.
As opposed to traditional companies that are structured in a top-down manner, with many layers of management and bureaucratic coordination, DAOs provide an operating system for people and institutions that do not know nor trust each other, who might live in different geographical areas, speak different languages, and therefore be subject to different jurisdictions. Instead of legal contracts managing the relations of the people, in the Bitcoin Network, all agreements are in the form of open-source code that is self-enforced by majority consensus of all network actors. DAOs do not have a hierarchical structure, except for the code. Once deployed, this entity is independent of its creator and cannot be censored by one single entity, but instead by a predefined majority of the organization’s participants. The exact majority rules are defined in the consensus protocol or the smart contract, and will vary from use case to use case. In some countries, like Austria for example, there are trends in the legal literature to see DAOs as a civil law partnership.