A decentralized autonomous organization, commonly abbreviated to DAO, is an automated organization whose governance rules are immutably and transparently recorded in a distributed registry. It is a decentralized application that operates through one or more smart contracts.
Characteristics and advantages of a DAO
A DAO is generally like a traditional joint-stock company. A DAO uses a system of units (or shares) that are represented by digital tokens. In this model, each share gives the right to vote on decisions made by the organization and can provide a return called a dividend.
Everything is automated through a set of smart contracts (autonomous computer programs) running on a blockchain. The tokens are thus issued on the blockchain and their owners are the shareholders of the organization. Since their purpose is to be shared, these tokens are to be considered as security tokens. They can be distributed initially through an STO.
A DAO is entirely blockchain-based: although it may have a separate legal existence or centralized subsidiaries, the organization ultimately depends on the rules and execution of contracts on the blockchain. A DAO, therefore, dispenses with any need for a trusted third party, which theoretically allows it to exist outside the law.
It is this disintermediation that makes DAOs so interesting: to set up corporate governance without the need for all the underlying legal and judicial procedures.
A decentralized organization thus has the following advantages over a traditional organization:
- It cannot be stopped or closed by administrative order unless a clause to this effect has been included in the smart contract.
- All operations are transparent, allowing everyone to audit the organization and check that everything is working well.
- It is de facto international and open to everyone.
Examples of decentralized organizations
DAOs are many and varied, but here we will focus on just three: Dash, TheDAO, and Maker.
Dash, the first DAO
The Dash cryptocurrency protocol is unique in that one of its components is its internal governance system, which is a DAO. This governance system was implemented in Dash at the end of 2015, making Dash the first DAO to be created.
The shareholders of Dash’s decentralized self-organization are the master nodes, the master nodes that support the cryptocurrency’s special features such as InstantSend and Private Send. Each master node, therefore, has equal voting rights to intervene in decisions related to Dash, such as the direction to change the cryptocurrency or the allocation of funds for the treasury system: indeed, every month, 10% of the newly created DASH is distributed to fund the development, marketing, and adoption of Dash.
To be a master node, one must hold at least 1000 DASH and be able to perform the tasks required by the protocol. As a reward for this investment and service, master nodes receive a portion of the currency creation (45%) and transaction fees (50%). This is called proof of service, a variant of proof of stake.
Note that other cryptocurrency protocols have adopted similar models, such as Tezos or EOS for example.
TheDAO, the first project on Ethereum
TheDAO project was created in 2016 at the initiative of the Slock.it a start-up team. It was a CAD project running entirely on the Ethereum platform.
The project underwent an ICO in May 2016, during which investors sent ethers (ETH) to the project’s standalone contract and received TheDAO tokens in exchange. These tokens each represented voting right in the organization.
TheDAO’s objective was to organize the funding of the ecosystem, collecting the funds within the contract and redistributing them to different projects according to the vote of the token holders.
TheDAO. This objective was broken down into three functions:
- Evaluate submitted projects.
- Decide whether to fund these projects.
- Distribute the funds.
The DAO was made up of shareholders (token holders) and service providers, who were responsible for proposing projects to TheDAO, and if funded, for providing the goods and services related to those projects.
Unfortunately, this project was never really implemented. It was hacked on 17 June 2016, when someone was able to steal 3.6 million ethers, or more than $50 million, through a flaw in the contract code.
Following this hack, which diverted more than 4.4% of the amount of ETH in circulation, the main leaders of Ethereum decided to cancel the event altogether, by manually changing the state of the chain. This caused a hard fork between Ethereum, which was making the change, and Ethereum Classic, which decided not to.
Afterwards, theDAO project was abandoned. Nevertheless, other similar DAOs were created afterwards, such as Moloch DAO.
Maker, the central bank of dai
Maker, also known as Maker DAO, is a decentralized autonomous organization whose sole purpose is to ensure the stability of a US dollar-indexed cryptocurrency: the dai (DAI).
Launched at the end of 2017, Maker DAO operates on Ethereum. It is based on an ERC-20 token, the MKR, which represents a share in the organization, giving the right to vote in decision making as well as to reap the fees from the service provided by the organization.
To survive, the organization depends on the use of its decentralized stablecoin, the DAI, whose price it seeks to always maintain.
Unlike centralized stablecoins such as USD Tether (USDT) that are backed by real dollars held in a bank account, dai is backed by a decentralized lending mechanism where the collateral is a cryptocurrency amount. In a few words, the loan takes place when a cryptocurrency owner wants to keep it but also wants to take out a loan without going through a traditional intermediary: the user then puts their cryptocurrency in escrow to be used as collateral for borrowing dai, which is created for the occasion. The value of the collateral is higher than the value of the dais obtained.
The system is based on stand-alone contracts running on Ethereum. Nevertheless, the Maker organization can intervene to adjust the different parameters of these smart contracts. Among the things Maker’s shareholders can influence are
- The interest rate linked to the loan, which is rather high and can range from 5 to 20%.
- The collateral ratio required for the loan, which is usually around 200%.
- The crypto assets are available to be used as collateral: ETH, WBTC, USDT, etc.
- The choice of oracles that feed the prices of the different crypto currencies (in dollars) to the system.
Interest from decentralized lending is redistributed to Maker players, including MKR token holders.
Conclusion
Decentralized Autonomous Organizations, or DAOs, are organizations that do not require a trusted third party to operate and connect people directly and transparently. As we have seen, they can be used in a variety of situations and the possibilities are numerous. They even have enormous potential, in the sense that all companies, associations, cooperatives, etc. could be managed in this way in the distant future.
Finally, it should be noted that, although this was not always the case, it is nowadays quite easy to create your CAD. The OpenLaw standard makes it easy to set up a DAO on Ethereum. There are also other projects such as Aragon that specialize in this type of use.
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