What is the DAO? A big advantage of cryptocurrency, enthusiasts often say, is that it is decentralized, which means there is no central authority like a government or a central institution that governs the industry. All transactions depend on the underlying blockchain technology and are available to be viewed by anyone anywhere in the world. This decentralization also provides a degree of security and privacy not usually available with standard currency transactions. Inspired by this idea, a group of technology developers proposed to set up a Decentralized Autonomous Organization, or DAO. Thus, a DAO is an entity with no central direction.
The main idea behind the establishment of the DAO is to give the possibility to a large number of contributors to participate in its governance and its future development.
It is an Internet-native organization owned and managed collectively by its members. Decisions in a DAO structure are made via proposals that members vote on for a set period of time. And those decisions are governed by a community organized around a set of computer-defined rules enforced on a blockchain. These smart contracts allow participants to take an equal part in decision-making processes within the organization.
Decisions made by the community include how the company will use funding and resources. The DAO’s treasury can only be accessed with the approval of its members.
Initially, Bitcoin seemed like the first project to come close to a DAO. But when the Ethereum blockchain, with its smart contract capabilities, was introduced, DAOs began to evolve and came together to provide full transparency and community governance.
Also, as mentioned earlier, all DAO actions must be approved by the community; the process is transparent and verifiable.
DAOs have several advantages. One of them is the lack of trust necessary between two parties to enter into a contract. A traditional organization requires a lot of trust in the people behind it, but with DAOs, only the code should be trusted. Since the code is publicly available, it is much easier to trust it.
However, DAOs have also been subject to criticism. In 2016, some developers pointed to several potential security vulnerabilities and urged investors to be cautious when voting on future investment projects until these issues are resolved. Soon, hackers attacked the DAO and gained access to 3.6 million ether coins, worth around $50 million (about Rs 371 crore).
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