What is a DAO? A Beginner’s Guide

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  • DAOs are becoming a popular way of operating a blockchain protocol
  • DAO’s embody the decentralized ethos of cryptocurrency
  • What is a DAO and how does it work?

Blockchain and cryptocurrency has brought us many things since Bitcoin’s creation in 2008, one of which is the DAO. The term ‘DAO’ stands for decentralized autonomous organization and describes the way in which the company operates, with several crypto companies operating a DAO structure rather than the traditional hierarchical business structure. But what is a DAO and why are crypto companies continuing to adopt it? Our beginner’s guide explains all.

No Corporate Structure

When you think of a company structure you think of a chairman, CEO, and department managers underneath them, or something like that. A DAO has none of that, with the founders handing over decision making capabilities to the community rather than themselves once the project launches. This means no board of directors or executives – instead, any changes to the protocol are driven entirely by the community.

The way a DAO evolves is through ‘improvement protocols’. These are improvements or changes to the platform, with anyone in the community allowed to suggest them. Improvement protocols that gain traction may end up being voted on by stakeholders – if the vote passes the changes will be implemented into the next upgrade. Such a system helps a protocol maintain stability over time rather than being at the whims of powerful individuals with ideas potentially contradictory to the ethos of the project.

The concept of a DAO is fully aligned with the decentralized ethos of cryptocurrency and blockchain, with no single person able to have undue control over a protocol. The most famous example is probably Ethereum, with founder Vitalik Buterin being a kind of figurehead and visionary for the project role but without the power of a CEO.

Hard to Shut Down

On a practical level, DAOs are also very hard to shut down. A DAO has no head office and all transactions are conducted in cryptocurrencies, so governments would find it very hard to touch them in a legal sense. In fact, a well-run DAO is almost impossible to shut down as there will always be someone who can resurrect it.

On a technical level, DAOs also operate autonomously, meaning that no individuals are involved in the mechanics of the platform. All transactions are dealt with through smart contracts, with users engaging with protocols through their own blockchain wallets rather than handing funds over to the platform. This further increases the decentralized aspect of a DAO.

Is the DAO the Future of Startups?

In many ways, DAOs are the embodiment of the decentralized economy, which is why they are so popular in the cryptocurrency world. They are starting to spread into the non-crypto environment however as the benefits are made clear, so expect the term DAO to become something you see on an increasing basis over the next decade.