Discover the world of the crypto DAO projects (Part 1)
Decentralized Autonomous Organization
A "DAO" or Decentralized Autonomous Organisation is a project where contributors write their own governance rules within smart contracts (check the definition below).
Each Crypto DAO project has its own native crypto, allowing token holders to vote.
Today, putting one foot in Web3 also means understanding the new governance options according to the projects.
Crypto DAO projects, for example, are part of a new "corporate" logic.
Indeed, this type of decentralised organisation responds to a need for governance, where the rules are no longer established vertically.
Users are at the heart of the DAO concept and a number of projects are developing in this form (DAO projects, part 2).
So how does this type of organisation work? What are the advantages or constraints? What influences within Web3?
The origins of crypto DAO projects with DASH
To understand how DAOs work today, we need to go back to the origins of the concept.
It all starts with the DASH (also called the Xcoin, then Darkcoin later), a new generation crypto-currency that appeared in 2015.
With the DASH, the very idea of decentralised and autonomous governance was developed.
In the months that followed, interest began to be shown in it as it could effectively address the limitations some face with centralised management.
In 2016, "TheDAO" made its debut on Ethereum. This is a platform that aims to facilitate participatory financing methods using blockchain technology. The whole thing is governed by smart contracts, without the intervention of a third party.
As a result, investors were won over by the project and put up more than $150 million (ETH 12.7 million) in exchange for DAO tokens.
The problem is that at that time, we have not yet mastered all the subtleties of smart contracts, particularly in terms of security.
A hacker detected a flaw in TheDAO, causing the loss of more than $50 million.
Following this, Ethereum decided to modify its protocol as well as the rules established on its network.
TheDAO project was cancelled and further investigation will reveal the identity of the hacker (read more)
Finally, the story of TheDAO demonstrates one of the primary issues related to the use of smart contracts, that of security, especially if DAOs are to be viable.
For all that, the crypto community is hanging on to this new method of autonomous governance.
So where do we stand today? How do DAOs work in practice?
The typical operation of a crypto DAO
The candy box analogy
Imagine that you and your friends want to buy a big box of candy to share together.
But instead of having an adult manage the money and make the final decision on what kind of candy to buy, you decide to create a group where everyone can vote and decide together. This group of friends therefore represents what a crypto DAO is.
In other words, a community of people who get together to make decisions together through a decentralised voting system.
Everyone has an equal vote and decisions are made based on the majority.
There is no single leader to make decisions for the group, as members work together to determine the fairest and most beneficial choices for all.
In short, a crypto DAO is a community where everyone has an equal voice and can make decisions together fairly, like a group of friends buying candy together.
Smart contracts to automate decisions made in DAO
Smart contracts are computer programs that automatically execute transactions when a predefined condition is met (if A occurs, then B is initiated).
For example, if the DAO decides to invest in a new crypto-currency, a smart contract can be programmed to automatically execute the purchase of that crypto-currency once the majority of members have voted in favour of the investment.
Smart contracts therefore ensure that decisions made by the DAO are executed transparently and fairly, without the need to trust a trusted third party.
In short, smart contracts are computer programs that automate the decisions made by a DAO, ensuring that they are executed transparently and fairly.
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The governance of a DAO crypto project, advantages and disadvantages
Advantages
- The right to vote is equal (1 vote for 1 token). The more you contribute to the funding of the DAO, the more you will have your "place" in the project.
- Everyone can participate and help improve the project, as DAOs are open-source projects. This means that experienced contributors can contribute in the name of progress.
- The profit made is redistributed fairly to investors, also increasing the value of the token. The rewards are proportional to the investments.
- Apart from decision-making, the protocol is configured to operate continuously and independently. A plus in terms of reliability and sustainability. There is no need for external intervention (unless it is improved).
- Similarly, governments and institutions cannot interfere in the project as in a traditional business.
Possible doubts about the crypto DAO
- Since the governance is decentralised, the decision making time may take longer (debatable).
- For voting rights for example, since one token = one vote, an investor may end up with some power.
- Risks of vote buying? This technique exists in the corporate world, particularly at GMs. This could well be the case in DAO projects.
- In terms of security, there are now reports of certain flaws. We were talking about TheDAO, but there are others: Maker DAO, Aragon, Dash or GitCoin. This is one of the effects of open-source projects, the code being accessible to all, some hackers do not hesitate to try to interfere.
- Too much transparency kills transparency. Indeed, open-source projects have no secrets, the whole strategy is revealed. This is sometimes what makes certain large companies successful. The competition must therefore be taken into account.
See also, Promising Crypto DAO projects (Part 2).
CONCLUSION
- In a DAO, everyone has an equal voice, decisions are made collectively and fairly.
- Smart contracts are computer programs that automate the decisions made by a DAO, ensuring that they are executed in a transparent and fair manner.
- DAOs are often used in the crypto-currency ecosystem to fund projects or to make decisions about the future of a project or business.
The purpose of this article is above all to simplify technical concepts related to crypto-currency, in order to make them accessible to everyone. These words engage only their author. It is not intended to advise the reader on his investments.
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