What is a decentralized autonomous organization, and how does a DAO work? (Part One. This is important to learn.)

From Coin Telegraph.

A decentralized autonomous organization (DAO) is an entity with no central leadership. Decisions are made from the bottom-up, governed by a community organized around a specific set of rules enforced on a blockchain.

DAOs are internet -native organizations collectively owned and managed by their members. They have built-in treasuries that are only accessible with the approval of their members. Decisions are made via proposals the group votes on during a specified period.

A DAO works without hierarchical management and can have a large number of purposes. Freelancer network networks where contracts pool their funds to pay for software subscriptions, charitable organizations where members approve donations, and venture capital firms owned by a group are all possible with these organizations.

Before moving on, it’s important to distinguish a DAO, an internet-native organization, from The DAO, one of the first such organizations ever created. The DAO was a project founded in 2016 that ultimately failed and let to a dramatic split of the Ethereum network.

How does a DAO work?

As mentioned before, a DAO is an organization where decisions get made from the bottom up; a collective of members owns the organization. There are various ways to participate in a DAO, usually through ownership of a token.

DAOs operate using smart contracts, which are essentially chunks of code that automatically execute whenever a set of criteria are met. Smart contracts are deployed on numerous blockchains nowadays, though Ethereum was the first to use them.

The smart contracts establish the DAO’S rules. Those with a stake in a DAO then get voting rights and may influence how the organization operated by deciding on or creating new governance proposals.

This model prevents DAOs from being spanned with proposals. A proposal will only pass once the majority of stakeholders approve it. How that majority is determined varies from DAO to DAO and is specified in the smart contracts.

DAOs are fully autonomous and transparent. As they are built on open-source blockchains, anyone can view their code. Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.

Typically, a DAO launch occurs in three different major steps.

Smart contract creation: First, a developer or group of developers must create the smart contract behind the DAO. After launch, they can only change the rules set by these contracts through the governance system. That means they must extensively test the contracts to ensure they don’t overlook important details.

Funding: After the smart contracts have been created, the DAO needs to determine a way to receive funding and how to enact governance. More often than not, tokens are sold to raise funds; these tokens give holders voting rights.

Deployment: Once everything is set up, the DAO needs to be deployed on the blockchain. From this point on, stakeholders decide on the future of the organization. The organization’s creators – those who wrote the smart contracts – no longer influence the project any more than other stakeholders.

Note: Part two on the subject of DAOs will pick up with ” Why do we need DAOs?”