Setting the Context
Taking inspiration from ethereum.org, a DAO is simply a safe means to collaborate with strangers on the internet usually with the purpose of pooling in money for a specific cause.
Now the name “Decentralized Autonomous Organization”, makes sense huh? Well, maybe not entirely, but we’ll flatten out all the details in an easy to grasp manner in this post, so hold on.
So, to start off, let’s really nail the following questions down:
- What is a DAO?
- Why do DAOs matter in the world of Decentralized Finance?
- What are some of the most popular use cases and applications?
- Are there any downsides?
What is a DAO?
Imagine a group of people get together and decide to start an organization whose values, principles and rules are etched in form of code in something called a smart contract, that my friends is how a DAO is born.
What’s a smart contract? Think of a smart contract as a piece of code which sits on the Ethereum blockchain and has the ability to enforce rules according to the functions defined in the code without requiring a human to intervene in this process. It is literally a “smart” contract.
So, more formally, a DAO is a self-sustainable autonomous organization whose rules of operation are encoded in a smart contract. These smart contracts can be encoded to do just about anything. For instance, instead of dealing with tasks like “who to hire” or “who gets a promotion” within the organization, the rules within the smart contract will deal with all the decisions.
Why do DAOs matter in the world of Decentralized Finance?
Now, having an organization which operates as a DAO has several benefits. To start off, it is a system where we don’t need to rely on the trustworthiness of the people who are part of the DAO to run the organization fairly. All the decisions are enforced via the smart contract, whose code is open, transparent and publicly verifiable.
Anybody who wants to be a part of the DAO can just buy in and hold the associated DAO tokens. And as you might have guessed, the greater the number of tokens an individual holds the more valuable her vote is in the changes to be introduced into the smart contract and thereby the decision making.
Additionally, I think it’s important to re-emphasize on the fact that DAOs are open-source projects, meaning more reliable and less prone to regulatory troubles. Bottom line is, you can’t just change the DAOs rules (i.e. edit the code) without people noticing because everything is public.
What are some of the most popular use cases and applications?
According to Coin Market Cap, below are the top 5 DAOs by Market Cap as of January 16th 2022.
The size of each of these organizations is astounding and it resonates with how the popularity of the concept of DAO has been picking up over the past few years. DAOs have a plethora of use cases. They can be used to build a cryptocurrency exchange (example Uniswap), they can be used as a lending platform (like a bank, example MakerDAO and Aave), they are even challenging how traditional Venture Capital firms function.
Are there any downsides?
We have hammered down how great DAOs are especially since they are open source and autonomous. But it is equally important to understand the vulnerabilities that these two brilliant traits pose. DAOs are vulnerable to attacks since their code, rules and intricacies are publicly available and can be deeply studied by attackers who can then reverse engineer and test their malicious pieces of code before deploying an attack on the DAO. Additionally, there are no business secrets in the world of DAOs. The R&D is available for everybody to see and gives no proprietary edge to the organization.
That’s it for this article!
Until next time,
Coffee Time Finance ❤️