A Decentralized Autonomous Organization (DAO) is "decentralized" in that it runs on a blockchain and gives decision-making power to stakeholders rather than executives or board members, and "autonomous" in that it uses smart contracts, which are essentially applications or programs that run on a publicly accessible blockchain and trigger actions without the need for human intervention if certain conditions are met.
Simply said, DAOs offer a new method to fund initiatives, govern communities, and share value. They distribute decision-making authority and financial benefits using Web3 technology and quickly growing governance and incentive mechanisms, rather than a top-down hierarchical structure. They usually achieve this by providing tokens in exchange for participation, contribution, and investment. Token holders can then submit proposals, vote, and profit from the project.
Those who were around back in 2016 would remember The DAO, an early Decentralized Autonomous Organization (DAO) and venture capital fund. 11,000 people committed 11.5 million ETH (14% of the entire supply at the time) for a total of $150 million, which they expected to spend in crypto projects together. Unlike a typical fund, where institutions and high-net-worth individuals (Limited Partners or LPs) spend money in a fund that other people (General Partners or GPs) invest in firms, investors in The DAO would be able to vote on proposals based on pre-defined rules written forth in smart contracts. The quantity of tokens each individual possessed, which was depending on how much they had invested, was used to weight each person's vote. The smart contract automatically invested The DAO's funds into the project's ETH wallet if a proposed project earned enough votes. Then, on June 17th, less than two months later, hackers broke into The DAO and stole 3.6 million ETH. That amounted to roughly $50 million at the time. With ETH pricing at $1,851 today, the stolen ETH is worth $6.6 billion, making it one of the most expensive thefts ever.
What can we learn from this incident? Just like designing a secure, scalable, and decentralized blockchain. There’s much thought that goes into designing a functional and effective DAO.
The way governance works varies from protocol to protocol. Blockchain governance matter, we have the opportunity to establish dramatically different power structures and program the future we want for ourselves now that blockchains are developing as the new global infrastructure. Designing a blockchain governance framework is one of the most high-leverage activities available.
Let’s take a look at how existing protocols are governed:
Bitcoin
Coordination takes place primarily off-chain. Developers communicate via a mailing list and the Bitcoin Improvement Proposals (BIPs) procedure. Miners may cooperate on-chain because they are the ones who build the chain. The developed checks and balances system is similar to that of the US government and has a number of advantages. Developers send pull requests in the same way as the Senate submits new legislation. Miners, like the judiciary, decide whether or not to put the laws into operation. The network's nodes, like the executive branch, can exercise veto power by refusing to run a version that corresponds to the version used by the miners. Users, like citizens, have the ability to revolt. Finally, economic considerations demand that maintaining faith in the system is in everyone's best interests. For instance, if miners alienated all consumers, the value of the tokens would plummet, and they would go out of business. It's astonishing that Bitcoin, as the first system of its sort, is still continuing strong.
At a high level, the Bitcoin’s ecosystem looks like this:
Source
Algorand
The Algorand Foundation envisions an Algorand environment that is completely decentralized. With a decentralized ecosystem in which everyone can make policy decisions, Algorand will be best able to create the shared destiny of the Algorand network. The primary principle of this scheme is that any Algo holder can join up to serve as a governor by devoting three months' worth of Algos to the program and voting during that period. At the end of the three-month period, governors are honored for their service to the Algorand community. Importantly, the Algorand Foundation will cede control of the Algorand Ecosystem Resource Pool (AERP), a pool of Algos described in the initial announcement and now containing over 3 billion Algos, to the governors. The Decentralizing Algorand Governance proposal is based on a combination of Silvio Micali’s original proposal and the governance discussions on the Algorand Governance Forum.
Algorand recently announced a network-wide vote on the governance program. For authorizing new features, such as voting on consensus updates, the Algorand blockchain uses a pure-proof-of-stake system. We'll utilize this technique to allow current Algorand network members to vote on whether or not the proposed governance program should be approved. The referendum is open to all online Algorand accounts that are participating in the consensus. See here for FAQ regarding community governance on Algorand
Conclusion
DAOs are currently at the experimental stage. The idea behind it is to find a meta-product-market fit. Many people are drawn to construct DAOs at this point because they are curious and want to try out new methods of community engagement, innovation, and collaboration. DAOs don't need to be better just yet; they only need to be different. The group is incredibly friendly and helpful, and the spirit in the space is contagious. That could be the soaring crypto balances speaking, but they did so during the last crypto winter and will do so again if and when one occurs.
