A Decentralized Autonomous Organization (DAO) is a digital entity, collectively organized and governed by its members, that operates based on automated rules predefined in smart contracts on a blockchain. Unlike traditional organizations with a centralized hierarchy (e.g., executives, boards of directors), a DAO has no single leadership; decisions are made by democratic vote by governance token holders.
Basic characteristics of the DAO
- Decentralization – There is no central authority. Members of the organization have voting control.
- Automation – Strict and transparent rules managed by smart contracts. Once the rules are programmed into smart contracts and implemented on the blockchain, they execute automatically when certain conditions are met, without human intervention.
- Transparency – All transactions and rules are public and auditable on the blockchain.
How a DAO works
- Hard-coded rules: the rules and operating mechanisms of the DAO are written in code (smart contracts) and recorded on the blockchain. Once implemented, these rules are transparent and can only be changed by community vote.
- Governance tokens: Participants in a DAO usually hold governance tokens. These tokens give them voting rights, and the voting power is often proportional to the number of tokens held.
- Proposals and voting: Members can propose initiatives, changes or expenses. These proposals are then voted on by the community. If a proposal reaches the required majority (set by DAO rules), the corresponding action is automatically executed by smart contracts.
- Blockchain treasury: Many organizations of this kind have a treasury (a pool of assets) managed by smart contracts, and expenditures from this treasury are also decided by vote.
Advantages of a DAO
These types of decentralized autonomous organizations are valued for the multiple benefits they bring to the management of organizations. Here are some of their main advantages:
- Impartiality: with no centralized leadership, decisions are made based on members’ votes, eliminating the risk of abuse of power.
- Full transparency: Activities and decisions are recorded on the blockchain, making fraud impossible.
- Global Accessibility: Anyone can become a member, regardless of location or status.
- Simple automation: No unnecessary bureaucracy or time wasted on approvals. Everything is streamlined by code.
DAO disadvantages and risks
For all their impressive advantages, DAOs are not without their challenges:
- Security risks: smart contracts can have security breaches, exposing funds to cyberattacks.
- Lack of legal regulation: Because DAOs are relatively new, potential conflicts or disputes are difficult to regulate in many countries.
- Fund-based voting: Wealthier members with more tokens can more easily influence decisions.
A famous example is “The DAO Hack” in 2016, when a hacker exploited a vulnerability in the code and stole massive funds, forcing the Ethereum community to hard fork.
Popular DAOs in the crypto world
Some DAOs are better known than others, and their successes have inspired a lot of similar projects:
- Uniswap: The DAO behind this decentralized exchange allows users to vote on protocol changes.
- MakerDAO: The stablecoin DAI’s stablecoin management is realized through proposals voted through a DAO structure.
- Aave: A decentralized lending protocol where users manage their resources and project direction through a DAO model.
If you want to know the price of your favorite cryptocurrencies in real time, we invite you to explore our special section dedicated to this topic.