Discover the world of the crypto DAO projects (Part 1)
Decentralized Autonomous Organization
A "DAO" or Decentralized Autonomous Organization designates a project where the contributors write the rules of governance within smart contracts.
Each crypto DAO project has its own native crypto, allowing token holders to vote.
Today, with the arrival of Web3.0, it is important to understand what a DAO is and how it represents, in a certain way, the "corporate branch" of the new Web.
Indeed, this type of decentralized organization is the essence of a brand new organization.
One where the rules of governance will no longer be established by companies such as GAFA, but by us, the users, with all the stakes that this entails, including a collective mindset.
There are already projects organised in the form of DAOs and a number of them are developing little by little, every day (we will talk about them soon).
So, how does this type of organization work? What are the advantages and are there any constraints? What influence does it have within Web3?
Several questions that we will answer in this new article.
Origins of the crypto DAO projects
To understand how DAO works today, it's worth starting from the beginning.
It all starts with the DASH (also called the Xcoin, then Darkcoin later on), a new generation crypto-currency that appeared in 2015.
With it, the very idea of decentralized and autonomous governance was developed.
In the months that followed, there was finally a greater interest in it, realizing that it could perhaps, address the limitations faced by centralized management that inhibits the corporate spirit.
In 2016, "TheDAO" made its debut on Ethereum.
It is then a platform that wants to facilitate the system of participatory financing through the blockchain.
The whole, governed by smart contract, without intervention of a third party.
As a result, investors are won over by the project and introduce more than $ 150 million (12.7 million ETH) in exchange for which they get DAO tokens.
The problem is that at that time, we have not yet mastered all the subtleties of smart contracts, especially in terms of security.
A hacker will detect a flaw in TheDAO and more than $50 million will be released.
Following this event, Ethereum simply decided to modify its protocol as well as the rules on its network. TheDAO project is then cancelled.
Further investigation will reveal the potential identity of the hacker. Learn more about this story full of twists and turns.
Finally, the story of TheDAO demonstrates the current challenges of smart contracts and the importance that must be given to security, especially if DAOs are to be viable.
Nevertheless, the crypto community continues to believe in this concept and multiple projects will adopt this autonomous governance.
So where do we stand today? How do DAOs work in practice?
The uncover of a crypto DAO project
The analogy of the coffee machine
Among all the analogies we could take, we decided to use the one of the coffee machine. The same kind of coffee machine that you can find in companies.
As a consumer, you just have to put a coin in the machine, make your choice, add sugar if you want, and your coffee is served.
Now, what happens when there are no more beans or sugar, or even when there are no more coins to change?
That's where the maintenance team comes in, and they can replenish everything. In the same way, if the dispenser is out of order, the repairman will have to be called...etc.
In short, several teams are assigned a mission. Each one helps to keep the machine running.
A DAO works in the same way, except that the members of each team are replaced by computer code.
Each part of the project, in all its aspects, will be determined by a code.
The Business Analogy
Now, let's step out of our break room and look at the company as a whole.
Team meetings are held regularly to make decisions. Everyone has a say and can cast a vote.
After this stage, either higher teams or the CEO intervene. The latter take over the project and must ensure that the new measures are properly implemented... etc.
In the end, it's the classic scheme of centralized management. And guess what? This is exactly what a DAO tries to avoid.
The organization is done by means of rules written, in the form of code, within smart contracts* and approved by the investors.
*As a reminder, smart contracts are contracts whose conditions and terms are determined by computer code, without the intervention of a third party.
Going through the blockchain and developing a native crypto allows on the one hand, to ensure the reliability of the contract, but also to make the DAO project viable.
Why viable? In return for their funding, those who are now token holders get a proportional number of "votes" (1 token = 1 vote).
From then on, they can submit proposals for improvement, change of protocol, even enlarge the team that makes up the project...etc. If the vote of all contributors is favorable, the DAO code will be updated.
Note that one token in DAO is equivalent to 1 vote. So the more tokens you have, the more power of decision you will have when voting. Some drifts can be seen then...
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The governance of a DAO crypto project, advantages and disadvantages
As we said before, 1 token equals 1 vote. In other words, the more you contribute to the funding of the DAO, the more you will have your "place" in the project. Is this an advantage? Yes, as long as you are the holder.
A DAO has other advantages that make you wonder if the corporate organization will not be totally replaced by protocols and smart contracts.
Here is a non-exhaustive list:
- Anyone can participate and help improve, because DAOs are open-source projects. In other words, experienced contributors can invest 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 run continuously and independently. A plus in terms of reliability and sustainability. External intervention is not necessary (unless improved).
- Likewise, governments and institutions cannot interfere in the project as in a traditional company.`
To summarize, a DAO has similarities in its organization with a classical company (e.g. operating rules, voting rights, system maintenance...etc). But, it uses a decentralized and autonomous governance model.
Now, as you can imagine, and as we discussed in the first part, there are risks and abuses.
Disadvantages and drifts
Since the governance is decentralized, the decision making process can take longer. Although this point can be debatable if we stick to the examples of the physical world.
Moreover, we observe a certain mimicry that is reproduced in this new world.
The right to vote for example. Since a token gives a vote, an investor can find himself with a certain power.
The drifts? The culture of vote buyback is something that exists a lot in the corporate world, especially during general assembly. And this is also reflected in some crypto DAO projects.
In terms of security now, we're reporting some 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.
Finally, we could add a last point, that of transparency. Of course, on many aspects, transparency is favorable to a better organization.
Nevertheless, this means no industrial secrets or confidentiality rules, the whole strategy is revealed. Everything, absolutely everything is known to the public.
And this is sometimes what makes the success of some big brands.
In any case, DAOs are becoming more and more widespread, abandoning little by little the structured and hierarchical approach of centralized governance.
This will not only revolutionize the Internet, but globally, all new projects related to the Web3.
One of the main challenges will be to secure as much as possible the smart contracts ensuring their functioning.
Some promising crypto DAO projects?
Uniswap, Aave, DefiCoin, ApeCoin, Morpho ...etc. Many DAO projects are proving to be very promising for the years to come. To learn more, don't miss our next article on promising crypto DAOs (Part 2).
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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