What Are DAOs?

One of the major selling points of blockchain technology is decentralization. Over the years, the rapid development of blockchain technology has led to the rise of a new application called DAOs - also known as Decentralized Autonomous Organizations. DAOs present a decentralized way to operate traditional organizations and forego traditional structures.

While DAOs are still a relatively new concept and niche, a report by deepdao.io shows that over 4,831 DAOs are operating, with a combined $10.2 Billion in their treasury.  

Let’s dive deeper into understanding DAOs and the types of DAO structures you can expect to see at PurpleTrader.

Introduction: DAOs Explained

A Decentralized Autonomous Organization (DAO) is an organization designed and set up to be both decentralized and automated on the blockchain. They act as an open-source code-based venture capital fund while operating without a board of directors or usual management structures. What this means is that there is no CEO or central authority who makes the decision. Instead, members can vote and make proposals on the organization's direction. They have built-in treasuries that are only accessible with their members' approval. The DAO is usually governed by a crypto token, where the number of tokens usually determines the voting power of the individual.

How DAOs Work

DAOs are run by smart contracts - programs stored on a blockchain that run when predetermined conditions are met. These smart contracts help with the efficiency of carrying out organizational tasks by automating the execution of agreements. In other words, members can be assured of the outcome of their task, and it helps eliminate any time loss or uncertainty between the members and the DAO.

The governance of the DAO is done so by the token holders. These token holders can vote and make proposals on behalf of the DAO. For example, depending on the type of DAO, members can vote on new features, new members, new rules, partnerships, and more. Additionally, because most DAOs have a treasury, token holders can vote on where to allocate those funds.

A member's voting power is usually determined by the number of tokens they own.

Certain DAOs can be governed by an ERC-721 token (Non-Fungible Tokens), such as MeebitsDAO and NeonDAO. Other DAOs can be governed by ERC-20 tokens (Fungible Tokens).

Listed below are some key characteristics of DAOS to remember:

  • Democratic Processes: All changes and proposals are to be made and agreed upon by the members of the DAO. No single party can make any changes without the majority vote.
  • Open Access: The barrier to entry is low, and the only thing you need is internet access to get involved in a DAO.
  • Transparent: Blockchain enables everything to be seen on the ledger. The open source code ensures that anyone can go and see how decisions are made and where the money is going.
  • Goal Driven: Most DAOs have a mission that rallies the members to join and contribute. In certain circumstances, the DAO can cease to exist once the mission has been completed or failed. (Constitution DAO).
  • No Hierarchy: Unlike traditional organizations, there is no central authority or CEO. Decisions are made by the investors and members of the DAO.

Benefits of DAOs

DAOs present a wide range of benefits to both organizations and members. Here is a breakdown of these benefits.

  • Transparency & Trust: Because of blockchain technology, DAOs offer a level of transparency and accountability, unlike traditional organizations. As a result, there’s a sense of trust that is established with this openness.
  • Efficiency: DAOs can eliminate some of the inefficiencies that traditional organizational structures present, such as labor output, structure, and quality.
  • Sense of Community: Many DAOs are driven by a collective goal that members believe in. Also, a sense of purpose and belonging within a DAO helps contribute to more accountability from the members.
  • Low Barrier to Entry: An internet connection is all you need to start or join a DAO. With DAOs, geographical factors are no longer an obstacle to joining.

Difference Between DAOs & Traditional Organizations

Types of DAOs

DAOs can be created for different reasons, and there are various examples of different types right now. Here is a breakdown of some of the DAOs you might expect to see on PurpleTrader.

  • Philanthropy DAOs: These types of DAOs aim to advance a social cause by organizing around a common goal. One example includes the UkraineDAO, a DAO that raised public awareness and a financial support campaign to alleviate humanitarian hardships suffered by Ukrainian civilians.
  • Investment DAOs: These types of DAOs act like venture capital firms to fund all sorts of projects. An example of an investment is the Global Coin Research DAO - a community of crypto readers, writers, and investors that invest in companies.
  • Gaming DAOs:  These types of DAOs are created to help coordinate the gaming community of a project. It’s common for these sorts of DAOs to allow their token holders to help dictate the game's direction. Two examples are the popular metaverse gaming platforms, Decentraland, and The Sandbox.
  • Collector DAO: These types of DAOs pool their money to buy digital art or other collectibles. One example includes SquiggleDAO, a DAO that aims to acquire as many Squiggles, including rarer types, as possible for the DAO treasury, making it the largest collection of publicly viewable Squiggles in the world.
  • Social DAOs: These types of DAOs aim to bring like-minded people together in online communities. One of the most notable examples includes Friends With Benefits DAO - a cultural membership powered by a community of our favorite Web3 artists, operators, and thinkers bound together by shared values and shared incentives.

What Are the Downsides of DAOs?

DAOs are still relatively new, so many things are still being figured out. The onboarding process for new members can be complicated and troublesome, often resulting in losing potential members. Additionally, new DAOs can have difficulties incentivizing members to participate and vote, which slows down the progress.

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