Beginners Guide For DAO

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Decentralized finance has gained in popularity all around the world as a result of the creation of blockchain technology. Cryptocurrencies have enabled people to live without government intervention in their finances. DAO is the most recent decentralized autonomous organization (DAO) that empowers anyone to manage their money.

In this article, we will discuss what a DAO is, how it works, benefits and drawbacks of DAO.

What is the DAO?

The DAO (Decentralized Autonomous Organization) and labor unions have numerous parallels. The DAO decides the course that a token or NFT must pursue, much as labor unions choose to fight for their rights. On the other hand, it has found new life in cryptocurrency to make blockchain technology more accessible. In other terms, the DAO enabled investors to control the movement of a single token/coin/NFT.

How does DAO Work?

Assume you work at a video game development firm. This occupation places a premium on both aesthetic and technical talents. Furthermore, due to the intricacy of video game development, the so-called “increase in resources” is a concern. Organizational failure happens when the project continues to incorporate things that were not originally planned. Like Star Citizen’s case, this usually results in shambles, crippling costs, and a considerably longer development time.

Setting constraints for DAO finance on the Ethereum blockchain may prevent such a feature from occurring. Two examples are creating a budget and locking the smart contract money pool. To put it another way, every activity, from 3D modeling to programming to sound design to voice, is budgeted for.

Each team member is given a set amount of voting tokens. Team leaders’ tokens are likewise boosted in proportion to their status. Your vote will be invalidated if the number of votes cast exceeds the given budget. This would enable the team to identify the cost-effective scope of development.

Similarly, the DAO may be used to dethrone CEOs, pool resources to employ vendors or freelancers, issue incentives, and perform a variety of other things.

How are DAOs Managed?

A decentralized autonomous organization may use blockchain technology to enforce its rules or protocols. Smart contracts on the blockchain, on the other hand, record these rules, while network tokens incentivize users to safeguard the network and vote on the rules.

A DAO is built in three easy steps:

  • To build a successful DAO foundation, smart contract developers must have a solid grasp of what they are codifying.
  • Furthermore, developers describe tokenomics of governance as monetization to achieve a healthy balance between incentives and punishments for undesirable behavior.
  • Developers build a blockchain-powered DAO, preferably with the same token shares as the other interested parties. There is no power imbalance in this method. Developers often expose their stakes over time.

As a consequence, DAOs are transparent and self-governed. Voting rights are defined by the number of tokens a person owns, allowing you to concentrate on new governance projects. If too many ideas are submitted to the DAO at once, the DAO’s stability may be jeopardized. If a majority of stakeholders support the concept, it becomes legislation.

Pros of DAO

Following are some of the benefits of DAOs,

●     Decentralization

DAOs’ core purpose is to be decentralized in design. As difficult as it may be to complete decentralization, a decentralized autonomous organization is driven by the community rather than any individual. In a public company, the CEO and board of directors often have the last say, whereas customers or users may have little input on the topic at hand.

●     Game of DAOs.

DAOs flourish because each member has the opportunity to “play the game,” which is an important underlying mechanism. To begin with, DAOs that employ governance take the collective rather than any individual drives to vote, making voting more deliberate. Citizens have a voice in how the DAO is administered, and these governance tokens provide them the ability to do so. ‍

Second, since every vote on the blockchain is public, their reputation is online and available to the public every time someone votes. Based on the employee mentioned above salary example, it will be clear after the vote who favors retaining present employee wages and supports an overall rise.

●     Community-Based

Another benefit of DAOs is that community members worldwide may easily cooperate to build a vision of prosperity. Anyone with an internet connection and governance tokens may build Web3’s future. Even though the DAO is shaping the future of domains such as ENS or a popular way to generate money with cryptocurrencies such as Bitcoin, anybody may participate.

Cons of DAOs

While DAOs provide significant benefits, there are a few drawbacks to be mindful of.

●     Lengthy Decision-Making Process

DAOs, in particular, must ensure that all members vote on proposed modifications promptly. Because DAO members are dispersed worldwide, keeping them informed of the project’s progress may be challenging. It will be impossible to coordinate efforts if a simple majority must accept every decision. People that utilize a DAO for business must grasp how to make decisions based on a pre-determined framework. Regarding long-term success in a Web3 scenario, faster is better. Decisions made by persons in positions of authority may be made more quickly.

●     Safety

Although it is theoretically simple to establish a DAO with a few lines of code, DAO security remains a problem. Due to the extensive technical stack necessary to operate a DAO properly, keeping it safe may be time-consuming and expensive. Furthermore, many DAO participants choose to remain anonymous, providing an additional security risk to the network.

Top 3 DAOs

This list includes the top DAO candidates worldwide that are the most popular and significant DAO.

1.   Gitcoin

Unlike traditional Defi protocols, Gitcoin attempts to connect blockchain developers, similar to an UpWork or Fiverr-style marketplace for the trade of blockchain-based services. Gitcoin Grants were created as a mechanism to generate funds for the project. Gitcoin Grants employs the EIP 1337 token for quadratic voting and matches all donations.

2.   Aragon

Aragon is an open-source platform for creating new DAOs. This makes it very useful for folks who do not have strong programming abilities. Consequently, Aragon will manage smart contracts and the interface, while you will be in charge of determining how to operate your company.

3.   Digix

Tokens – DGX – are worth one gram of gold. Digix has a lengthy history of showing its authenticity as one of the first ICOs launched on Ethereum. Furthermore, the gold is secured by Safe House’s Singapore vault, which Bureau Veritas audits. In addition to the DGX token, which symbolizes gold ownership, the DGD token is used to vote on the company’s use of capital for future growth. DVDs are sent to subscribers every quarter.

Future of DAOs

Decentralized finance has produced value by making quantified economic decisions more effectively verifiable. Automated trust mechanisms have been proved to be successful for simple or complicated transactions since they offer simple criteria to assess the value of the decision.

It’s vital to remember that the legal status of this sort of business organization is sometimes ambiguous and may change depending on the location. According to the US Securities and Exchange Commission (SEC), an unregistered securities sale by DAOs was considered illegal in the United States in 2017.

Wyoming became the first US state to recognize DAOs as legal entities a year after CryptoFed DAO was founded, paving the way for the future of decentralized autonomous organizations. DAOs, like general partnerships, may be regarded as companies without legal status. Any known DAO members or anyone at the interface between a DAO and traditional financial institutions (regulated) may risk regulatory action if they breach multiple laws, even if this collaborative plan is lawful.

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