Crypto 101 with Vin: DAOs
A DAO is an objective organization enabled by smart contracts on blockchains to facilitate decision making. They often raise funds via an initial token sale and these tokens represent voting power.
Governance guidelines are usually created to outline how the DAO should behave, use funds, and amend/change existing rules. Typical tasks are automated via the smart contract code. This means the DAO can take care of routine decisions based on the code without the latency that might come from working with people.
Smart contracts can do just about anything given the obvious limitations of blockchains. So, if you can code it, a DAO can be implemented to do just about anything as well. The primary factor limiting a DAO is it’s implementation or the code behind it.
Ideally, DAOs are:
- Trustless
- Transparent and Open
- Democratic to stakeholders
Firstly, A DAO shouldn’t rely on a central figure or authority. It is expected to be open source allowing a flat structure. Second, the actions of the DAO are taken in the open and anybody is able to view these actions or the code simply by virtue of being on the blockchain. Lastly, the DAO acts in the direction the stakeholders reach consensus upon by vote. Each stakeholder is able to propose and vote with certain conditions so it is accurate to say any stakeholder has the ability to voice their opinion in the structure.
What can be voted on?
A change that is being voted upon or is pending a vote is called a proposal.
The most impactful proposals are usually ones that make improvements or changes to code. They literally impact the infrastructure which the DAO is built upon due to being a code-driven organization. Other proposals are usually fund allocations, hiring, salaries, contracting services, or even marketing if its necessary.
What are the downsides?
The fact that the DAO’s code is open source means potential attackers already have direct access to analyze and identify vulnerabilities to exploit. The best way to avoid this is to audit the code and keep things simple and continually try to improve the code against exploits. Many crypto projects already go through auditing and offer bug bounties too hackers so that they can fix any potential exploits before they happen. Many DAOs have been hacked losing millions of dollars in capital. The most famous of which is The DAO.
The other downside to the open source attribute is that anybody could look at a DAO’s code and spin up a copy cat organization, so often times the uniqueness of a project is stripped away. What keeps some DAOs above the water in a sea of similar products and services is fervent community who want to continually improve whatever DAO they are a part of. In other words there are no trade secrets except to continuous innovation.
A final point on this is that basic voting is often times slow. DAOs may have to allow up to 24 hours minimum for token holders to vote whereas a centralized entity like the CEO of a company could be presented with a choice and come to a decision instantly.
Some Examples of DAOs
Aave AAVE and Maker MKR are examples of widely used lending protocols managed by a DAO structure.
Curve CRV and Uniswap UNI are decentralized exchanges although the latter is much more centralized. They provide a very useful base service of pools and swaps.
PleasrDAO and FlamingoDAO are types of investment DAOs seeking art usually in the form of NFTs, but Pleasr does possess Wu-Tang Clan’s unreleased album, Once Upon a Time in Shaolin.
This is just a very short summary of what DAOs can be and builders in Web3 are constantly finding other uses for the structure. Hopefully this helped you better understand how DAOs operate.
Thanks for reading and check in next time.
Kakavarna.eth — Automation Engineer(9–5), crypto investor, and gamer with opinions
