What is a DAO?

A DAO or Decentralized Autonomous Organization is a model for the management of a company that emerged in the wake of Bitcoin’s release in 2009. These organizations are envisioned as companies without a formal management hierarchy. The DAO concept mirrors that of Bitcoin which is a decentralized digital currency. There have been numerous efforts to make a DAO structure work, but to date the results have been less than impressive.

Explaining How a DAO Works

Many examples have been given of how a DAO is supposed to work. Imagine Red Box, the movie and game rental company that has many units throughout the US and other countries. The Red Box kiosks allow individuals to select and rent a movie or a game, pay for it, and receive the disc without the need for any human interaction. Furthermore, the kiosk is able to track which movies are available and which are not. It can also sell its inventory when the number of rentals justifies doing so. It collects credit card data and processes transactions, and it administers late fees when movies are not returned to the kiosk on time.

Let’s look at another example that has been frequently used to describe a decentralized autonomous organization. Imagine that the vending machine which allows you to purchase a soft drink was also able to reorder and restock its own inventory. The machine would also be able to hire someone when it needed to be cleaned or repaired. The type of products one orders from the machine dictate what products will be stocked in the future.

In both of these examples there is no human management which oversees processes. Instead, everything is automated by the use of computer code. This is a very simple illustration of how a DAO is designed to function. When Bitcoin was created it introduced a model of financial transactions that eliminated the need for a third-party. The premise of a DAO is the same, only applied to a company instead of a digital token.

A DAO should be distinguished from the company which was called DAO and attempted to employ this structure. DAO was a massive failure due to problems with its computer code. Today, DAO would refer to any such company or endeavor that strives to function in a manner similar to the examples above.

Bitcoin and a DAO

Technically, Bitcoin could be considered a DAO due to its structure. Some would even go so far as to say it was the very first fully-functional DAO to be created. Bitcoin has no central authority. Instead it is governed by a blockchain which follows a specific set of coded rules. It is autonomous. If we look closely at Bitcoin we can determine some of the things that are needed to create a DAO.

A DAO must have a specific set of rules. These rules will govern how the company operates. The rules can be created with the help of Ethereum’s Smart Contract concept, and the rules are developed as an autonomous computer program. Like Bitcoin, however, there are some tasks that the computer program or code will need others to perform. Yet, the code makes it possible for the DAO to autonomously enlist this help without the need for a management structure.

A DAO would then need to procure some type of funding or capital. There has to be a way for the decentralized autonomous organization to reward others for services. Hence the creation of a digital token like Bitcoin. If someone chooses to invest in a DAO they might be given voting rights or other input on matters of development, but there would still be no corporate management.

Once a DAO has been funded it could then be launched. At that point the DAO would no longer need the input of those who created it. It would be able to function completely on its own. You should now be able to see the similarity between a DAO and Bitcoin.

It is a possibility that those who have a vested interest in the DAO by means of an investment could be involved in decision making. We are seeing this model tested with Proof of Stake blockchains which reward individuals for holding digital tokens instead of solving math problems like they are required to do in a Proof of Work system. Those who have a stake in the DAO, meaning those who own tokens, could vote on proposals that are made. In order to make a proposal, a stake holder would have to pay a certain number of tokens and the DAO would autonomously implement the proposal. Once again, no human management would be required for this to happen.

This is a basic explanation of what a DAO is in theory. In other articles we will discuss: