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Understanding Decentralized autonomous organizations.
A version of this article was first published in The Next Web
A DAO, or Decentralized Autonomous Organization, is an organization working without a central government, usually operated by shareholders, which has a transparent set of rules encoded on a computer program.
The famous DAO Hack: In 2016, a hacker found a loophole in the coding and used it to drain Ethereum. In just a few hours, over 3.6 million ETH was stolen, or $70 million at the time. In response, the ETH plunged over 30% in only one day.
How DAOs Work
The rules of the DAO are established by a core team of community members through the use of smart contracts. These smart contracts lay out the foundational framework by which the DAO is to operate. They are highly visible, verifiable, and publicly auditable so any potential member can fully understand how the protocol is to function at every step.
Once these rules are formally written onto the blockchain, the next step is around funding: the DAO needs to figure out how to receive funding and how to bestow governance.
This is typically achieved through token issuance, by which the protocol sells tokens to raise funds and fill the DAO treasury.
In return for their fiat, token holders are given certain voting rights, usually proportional to their holdings. Once funding is completed, the DAO is ready for deployment.
At this point, once the code is pushed into production, it can no longer be changed by any other means other than a consensus reached through member voting. That is, no special authority can modify the rules of the DAO; it is entirely up to the community of token holders to decide.
How to get involved
Once you’ve found a project of interest, there are a few different ways to get directly involved. I feel it is important to note that not all DAOs operate with the same purpose so the first step is figuring out the core function of each DAO.
For DAOs focused on technical governance, it’s important to understand what sort of voting rights are granted to token holders and what kind of proposals are at stake.
In some instances such as Uniswap, token holders can vote on distributing a portion of the fees that the protocol collects amongst themselves. In other protocols such as Compound, token holders can vote on distributing these protocol fees towards bug fixes and system upgrades.
This approach also allows freelancers and those generally interested in the project to be able to join ad hoc and receive compensation for their work by way of DAO grant-funded projects (DAOs regularly post these sorts of ad hoc projects on their Discord server).
