The ‘DAO’ is a concept based on blockchain technology, which eliminates the need for a central governing authority. Recently, DAOs have been getting quite a lot of attention from developers. Let’s try to explain what having a DAO means in the crypto world.

What is a DAO?

A decentralized autonomous organization (DAO) does exactly what its name says - it is a group of people who work together to collectively govern and manage a certain project running on a blockchain. DAOs are different from traditional boards of directors in the sense that they rely on sets of rules encrypted in code, otherwise known as smart contracts.

Unlike the old way, there is no hierarchy in a DAO. Users can purchase governance tokens, and depending on how many tokens they own, they get to play this or that role in voting on proposals and therefore participating in the company’s future.

The first-ever DAO is believed to be the 2015 concept created by Stock.it. Wanting to raise money for Web3 startups, the team at Stock.it initiated an Ethereum-based crowdfunding smart contract and additionally added voting and ownership rights. Let’s just say it didn’t go as planned. The first-ever DAO was not properly audited, resulting in a major draining bug not being fixed. The DAO was attacked multiple times. In the first few hours of the attack, the hacker managed to steal 3.6 million ETH ($70 million at that time), and once he had done enough damage, he withdrew.

What is the purpose of a DAO?

The attack caused enough emotional damage in the community, and DAOs have certainly improved since then. Essentially, DAOs try to mimic a real board of directors. They are designed to make executive decisions backed up by open-source agreements.

N.B. Check out more on smart contracts and dApps here

Each DAO establishes a set of rules in the form of a smart contract, these rules typically being established by stakeholders. After that, a DAO enters its fundraising stage that is open to everyone wishing to participate. In order to go through with a certain decision, DAO participants have to reach a consensus. As mentioned above, they do it by voting on proposals. By having more governance tokens locked, users get a bigger say in what the future decision should be.

Most DAOs we have today are built on Ethereum. The second-biggest cryptocurrency describes the concept as “an Internet-native business that’s collectively owned and managed by its members”. To some extent, even Bitcoin can be called a DAO, as users buy and sell BTC after they enter into an agreement.

Let’s take a look at the top three trending DAO tokens, which are as follows: Uniswap, Maker, and Aave.

Uniswap - UNI

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Uniswap is a popular DEX with arguably the biggest and most influential DAO in the crypto world. Launched in 2020, Uniswap’s governance token UNI allows participants to vote on proposals regarding development, operation and infrastructure of the Uniswap Protocol.

Maker - MKR

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MakerDAO - a decentralized trading protocol - has its own governance token, MKR. With its help, the protocol distributes voting power among participants. MKR tokens can be minted and withdrawn based on MakerDAO’s ecosystem debt.

Aave - AAVE

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Aave is a decentralized, open-source, non-custodial DeFi protocol, which launched its governance token AAVE to help users collectively control the development of the platform. Participants can also take part in the process by staking their AAVE tokens (stkAAVE).

DAO: Pros and Cons

The concept of a DAO is still fairly new; however, it is already showing some real benefits for the entire market. While traditional governing organizations typically give power to a certain someone and there’s always a possibility of this power being exploited in one way or another, DAOs are set up in a way that the participants remain anonymous to each other, and the agreement they operate on is open to the public. This minimizes the chances of misuse and mistrust in the group.

There are other benefits to having a DAO. Smart contracts are way faster to generate than regular documents. Besides, they are similar in value and harder to violate. In the case of a charity event, it is also way easier (and quicker) to raise money without referring to a third-party bank.

Some DAOs are built upon the foundation of charity organizations. For example, launched in late 2021, Big Green DAO is a decentralized version of the Big Green non-profit organization, established by Kimbal Musk, Elon Musk’s brother, in 2011, which focuses on food justice. Big Green DAO is ‘the first non-profit led philanthropic DAO’ in the US. It emphasizes the importance of preventing climate change and regularly supports schools, communities, and families by making donations.

DAOs have not yet reached their final stage of development. In some cases, the power is not equally divided between participants, which can undermine the purpose of the organization. Despite some obvious drawbacks, DAOs could become the next best thing in the crypto community, granted blockchain technology keeps advancing.