You probably know how a vending machine works. It acts as the middleman for your food cravings. You pay the machine, and it gives you whatever snack you buy.
This advanced technological box, the vending, machine still needs humans to run it through. There need to be humans who pay the electric bill; there needs to be a human who checks it when it’s low, then when it is low, there needs to be someone who orders more of the product.
After the product arrives, someone still has to restock the machine, and even more so, someone has to collect the money and maybe replace some quarters.
Even though this is a technological box designed to help people without needing a human, it still requires humans.
Welcome, to Shavuna, the number one website for crypto education. Here we explain the topics of the cryptocurrency world using analogies, stories, and examples so that people like you can easily understand them.
In this blog post, I am going to explain what a DAO is, how they work, and we’re going to include a few examples of where they might be useful.
Let’s dig in.
What is a DAO?
First off, what is a DAO?
DAO is an acronym that stands for decentralized autonomous organization. This means it is roughly an organization run by code agreed upon by the people who started the DAO smart contracts.
If you don’t know what a smart contract is, you should definitely read our post on it. But smart contracts can do just about anything if you’re smart enough to program them to do so.
This means instead of asking for a raise from your boss, we’re trying to decide who to hire from a list of applicants. A smart contract will simply do these tasks making the whole organization self-sustainable or autonomous.
Now, we’ve found that this website seems to teach best by examples, so let me expand upon the vending machine example that we used during the intro.
If a vending machine was a DAO, then every part of the process where a human was needed would simply be replaced with code or at least a code version of human robots.
Basically, we would make sure that the vending machine could automatically check its stock.
When it was low, we would make sure that it could send its server the information of what products need to be restocked, then when the stock arrived, a robot would restock the machine with a new product and at this point in time also take the cash out to deposit to a bank.
Somewhere, in reality, this doesn’t seem possible, but it is essentially how a DAO works.
Speaking of that, do you know how big companies like Apple, Netflix, or Walmart; all have board meetings and at these board meetings.
Shareholders of the companies will meet together, and they get to vote and make decisions for the company and then the CEOs of this company get to make sure that the decisions are actually followed through using the chain of command in that company.
In a DAO, there are no CEOs; instead, once a decision is made, the code of a platform is changed so that the entire company, so to say, is changed immediately.
The purpose of this is so that computers and code will perform much of the decisions and simple routine operations that a company like Apple or Netflix, or Walmart requires to function.
You may be wondering; code can’t improve itself, and you’d be wrong, but at least you’d be on the right track of where this article is going.
DAOs can continually improve and grow, just like people, because their shareholders can submit and then even vote on their changes.
Usually, in the world of crypto, a DAO may launch with a few million tokens; every token is a vote, and whoever holds the most tokens can have the most significant votes. This gives the tokens a price, and it also gives them a use. It also allows the DAO to improve, make changes, and evolve as the world evolves.
This includes actually hiring, voting on a salary, and then technically even employing certain developers within the autonomous organization. It would then just pay them with cryptocurrency.
In the case of a vending machine, we can say if that vending machine made any profits, it would redistribute all of those profits to the shareholders through its native DAO token.
There are many ways this could happen, but any token holder would supposedly get an increase in value if the vending machine dial made a profit.
So this potential profit, along with voting rights, makes holding a DAO token much more valuable than any other useless token you might see on the subreddit crypto moonshots.
Next, I want to go over some of the benefits of a DAO.
Benefits of a DAO.
It’s trustless, and this is probably the most significant benefit of a DAO. In fact, you do not need to trust any CEO, manager, or leader with your decision-making skills.
The program or the whole organization will continue no matter if a significant developer stops working on the project or even if the funding goes away.
- Cannot be Shut Down
Another benefit is that they cannot be shut down. In the case of major corporations, the CIA or the FBI or any major government service can technically step in and be like; we’re shutting you down or even give us all the information you have on this guy, and if you’re in the united states you’d be forced to comply.
In a DAO, the only way they could make this happen is if they had a very large amount of tokens and then submitted a proposal to be voted on and then went through the voting process fairly.
In other words, a government cannot skip the line.
- Open Source
And the last benefit of a dow is that it is open source. DAOs are also open source which means that their code is out there for anyone to look at and even improve upon.
Open source projects are usually much more reliable simply because other programmers can help the leading developers find some bugs in their code and then even propose ways to fix them.
Even though there’s a ton of benefits to a DAO, I’m going to go over two downsides of them.
Disadvantages of a DAO
- Vulnerable to Attacks
The first downside is that they are vulnerable to attacks. Since anyone can look at the code, it also means attackers can look at it; if these attackers know intimately how the code works, they can then reverse engineer the attacks and even test the code before deploying it to make sure that their code works.
If it does, the DAO could be attacked.
- No Business Secrets
The second downside that we have found is that there are no business secrets. So research and development is usually corporate information that corporations have spent a lot of money and time on without any significant return.
They do this in hopes that one day it’ll pay off, and the payoff will be significant because no other company has its advantage.
In a DAO, though, business secrets are difficult to keep secret since the code is all open-source, and really anyone can look at how the DAO is set up.
So far, we’ve been over a lot of the theoretical stuff of how a DAO should work. Are there any real-life examples? Yes
Real-life Examples of DAOs
Here are a few:
- Maker DAO
- and the famous The DAO
Now, we’re going to go over the story of The DAO, which I think is something that you should know.
Probably the most important and most famous DAO is one called The DAO. The DAO is a venture capitalist fund created in 2016 that was well known for its failure.
In fact, around 20,000 investors pooled around 150 million dollars into this project. In short, the account of the DAO was actually hacked, and 50 million dollars worth of Ethereum was lost due to the attackers.
Now, this is actually why we have Ethereum and Ethereum classic.
Ethereum classic is actually the original blockchain that still has the money hacked. However, developers took the blockchain, realized that it wasn’t right for someone to steal 50 million dollars, and then also realized they could make a new blockchain where the money was given back, and this is how we have Ethereum today.
In fact, the main developers of Ethereum did what is called a hard fork, and if you’re interested in what a hard fork even is or how it differs from a soft fork, leave a comment below.
We love when we check our comments and see a bunch of people saying, “yes, please write a blog post on it. Comments like those get us even more excited to create it.
In short, for organizations, right now, we use people. However, maybe we will use smart contracts and code in the future.
As I end this article, I have a strange favor to ask, please share this blog post to help spread education around how this stuff works.
Thank you guys so much for reading this article. I hope that you’ve enjoyed it. I also really hope that you learned something, and even more so, I hope that you check out our other blog posts.