What is DAO? 

As the name would suggest, a Decentralised Autonomous Organisation (DAO) is an organisation governed by a set of rules or parameters encoded in a computer program and controlled by the users of the program rather than a central authority. 

Decentralised Autonomous Organisations are an integral part of many cryptocurrencies, exemplified by the use of publicly visible blockchains which provide secure ledgers to track transactions within a given network. 

How does DAO work? 

A smart contract is the foundation of a DAO. These contracts are set up in such a way that they act as the treasury, executor and guarantor to ensure the parameters of the contract are followed. 

The rules of the DAO are defined within the contract and contracts are unable to be fulfilled unless the requirements set out within them are met. Smart contracts typically operate on a consensus vote, meaning that no one entity can edit the original contract without the approval of the majority of the network. 

The autonomy and transparency of a DAO mean that there needs to be a majority vote of shareholders - those who have tokens or other ownership stakes - prior to any change being made in the application of the rules. 

Pros and cons of DAO

As DAOs are native to online commerce, they serve a valuable purpose in overcoming one of the most difficult hurdles to anonymous business - a lack of trust. With a DAO, however, the parties involved do not need to trust each other before entering into a contract, just the underlying code. This is possible as the code is publicly available and can be scrutinised and evaluated. 

As with any new technology, there are still many unknowns. Skepticism still exists regarding security as well as the legality of DAO in some jurisdictions, although these concerns are receding. 

As DAO parties can be spread widely across the globe, legal issues can become especially burdensome if they have to be dealt with in multiple courts with varying legal requirements. 

 Decentralized Autonomous Organisation examples 

The blockchain technology first used by Bitcoin is generally held to be the first functioning example of a DAO. Although a pioneer in the field, the definition of what a DAO is has evolved and blockchain would not fit within the current interpretation as there is no voting mechanism to allow users to vote on the allocation of a central treasury. 

An example of a current, successful DAO would be the crypto DASH. The structure of DASH allows users to have a say on how and when the central treasury is utilised to support the coin price. Many of the other successful examples are built on top of the Ethereum platform. 

An example of an unsuccessful DAO is “The DAO” (an organisation named after the DAO definition) which hoped to become a decentralised version of Airbnb. The company launched the most successful crowdfunding campaign in history and raised $150 million in Ethereum before its hastily released code was hacked to the tune of $50 million. 

Fortunately as the assets were held in Ethereum, the Ether network was able to execute a hard fork and reverse the original contract, although the move did shake confidence in DAO for quite some time.