A decentralized Autonomous Organization (DAO) is a blockchain-based organization with no central authority or CEO. A custom set of working relationships is constantly self-organizing to achieve certain results and realize projects. DAOs work independently; they do not need centralization and a third party for management. However, any organization could be profitable and flourish without any centralization.
To enter the DAO, you need to “acquire a share in it” by purchasing tokens, and your share ownership will be documented on the blockchain. Once you become a member of the DAO, as evidenced by an entry in the public open ledger, the blockchain, you can earn income in two ways:
- By increasing the value of existing tokens.
- By earning additional tokens for doing particular work in the DAO.
The increase in the cost of DAO tokens is due to the balancing of supply and demand. Since the total supply of tokens of a specific DAO is either fixed or inflationary and is known to everyone, the value of tokens grows with an increase in demand. You can buy tokens or sit back and wait for their value to rise, and you can earn even more tokens by helping the DAO achieve its goals.
How DAOs Work?
To fully understand how this system works, you need to understand the key differences between DAO platforms and traditional organizations.
No Central Control — Unlike classical companies, in DAO, priorities are not controlled by a central government since there is neither command and control management nor a boss. And while within a decentralized system, there may be active participants who can set certain goals for the organization, such as creating a new website or developing a new application feature, no one is obliged to fulfill them.
DAO breaks the system of traditional governance, which is always centralized. It also solves the principal-agent problem, where everyone acts in their interests since the DAO uses smart contracts, which are programmed rules. They describe what actions can be taken in the system, such as distributing funds when more than 50% agree.
If a certain project makes the DAO more valuable, useful, or meaningful to its current and potential participants, its implementation becomes desirable. All participants in a decentralized organization become interested in the successful implementation of such a project. Because everyone in the DAO, without exception, wants one thing – an increase in the value of tokens.
Therefore, everyone is focused on maximizing the value and efficiency of the most decentralized organization and is not interested in any unproductive activity. And this opens up countless opportunities for everyone.
If you see a way to improve the efficiency of the DAO, such as making the site faster, you can register a contract and submit it to the community as your proposal. You state what you are going to do for the organization and how it will improve its effectiveness.
Other token holders can vote for your proposal. If it is convincing enough and the participants believe that it will increase the token’s value, then it is approved. If not, then it will be rejected. If you do not fulfill your obligations, you lose the community’s trust, and you are perceived as a person unable to improve the organization’s effectiveness. You likely won’t have many opportunities to earn new tokens in the future as your proposals won’t be voted on.
Of course, the DAO has its internal policies, just like any organization with more than one person. In the “traditional” administrative-command system, management determines the actions of the entire organization. Therefore, your boss may force you to come to an unproductive meeting. In a decentralized structure, the value that contributes to the project’s success is the factor that determines where to focus the overall effort.
Therefore, in the DAO system, you are motivated to bring maximum value to the common cause and do it solely based on your skills and beliefs and not trying to please the boss’s wishes.
People came up with DAOs to enjoy typical business features without bureaucracy and inefficient distribution. With DAO, time and effort are not spent maintaining intermediaries: the organization does all the work.
Adherents of this form of the organization say that this method can work not only in the case of cryptocurrencies but, in general, is a way to introduce democracy through cryptography. Members are given the right to vote to run the system, and each vote counts with an open mind. It can be used in logistics, asset management, and real estate, and despite the decentralized structure, the system can pay employees and service its expenses.