Decentralized Autonomous Organizations (DAOs) have been a controversial topic in the blockchain and cryptocurrency world for some time. DAO
From her earliest days, in the case of Slock. The German startup brought The DAO into its current iterations, DAOs that have the potential to make or destroy the cryptocurrency and decentralized financial (DeFi) industries, and the will to educate is a key factor.
If recent developments continue, a misunderstanding of the true nature of the technology behind most DeFi projects could be a factor in the lack of regulatory clarity. The recent conversation between MakerDAO delegates and Senator Elizabeth Warren shows regulators are unsure about the DeFi room or how DAOs work.
During the talks, not only did the senator show a lack of interest in the organization, but one of the MPs stated that most of the time was spent convincing the anti-crypto senator that MakerDAO and DAO no longer exist in 2016.
U.S. Senator Warren, a crypto skeptic, also expressed concern about the fast-growing stablecoin market and suggested that U.S. banks should be banned from holding reserves.
Could a lack of understanding of how DAOs like MakerDAO work be a factor in how regulators perceive the field? In this article, we take a look at the various DAOs growing in the DeFi space, how they serve their purpose, and provide a summary to help you understand better.
So what is a DAO?
Simply put, a decentralized autonomous organization is a concept that refers to a specific entity on the blockchain that is jointly built by and owned by its members. For governance, such entities would rely on decision logs embedded in smart contracts rather than conventional organizations using a centralized management system.
Since smart contracts are impersonal, the organization can be managed through a more horizontal structure without a fixed hierarchy. Members of the DAO can opt for built-in cash registers that are equipped with restricted access for approved members according to pre-established conditions.
Without a central management body, the members of the DAO can make suggestions and jointly decide which suggestions are to be implemented through a voting system. Smart contracts can help during the voting process and automatically make changes based on votes.
What is the difference between DAOs?
At its core, a DAO is built to solve the eternal dilemma between the main actor.
This problem is a common challenge that arises when an agent (a centralized organization or an individual) is placed in a situation where it must make decisions that match other goals, priorities, and needs with their own interests. .
While this dilemma is widespread among public and private institutions worldwide, DAOs aim to eliminate this challenge by replacing decentralized forms of centralized decision-making with a trusted system based on autonomous smart contracts.
Smart contracts can be programmed so that the preferences of all team members are tailored to an encrypted format that is built into the blockchain.
With a properly implemented DAO, all stakeholders in the organization can participate in the leadership and decision-making of the team.
This is how DAO works
While the underlying mechanisms of a DAO vary from platform to platform, the general formula is one that employs a wide range of smart contracts. These smart contracts can be programmed to account for future changes in the event that an incentive is needed to grow the DAO and expand into new functions.
A DAO can be created for virtually anything from freelance networks to charities to political governments. Smart contracts make or break DAOs as they enable transparency and enable companies to work autonomously without intermediaries.
Once smart contracts are fully created, tested, and deployed, the DAO needs funding to incentivize members to manage and maintain the organization. Most DAOs use tokens that give holders voting rights as well as rewards for participating in platform maintenance. With verified smart contracts and a number of financing processes, a DAO can be started and controlled by members of the organization in the future.
Practical examples for DAO
There are several examples of DAOs that exist today. Technically, Bitcoin can be imagined as the first version of the DAO, as its network grows through community agreements between miners and its node operators – otherwise there is no real central administration.
The Bitcoin network can be seen as the first example of a DAO. It is operated by a network of participants (miners and node operators) who coordinate their activities for the benefit of the entire organization as well as their own. However, it lacks the complex governance mechanism that has become a typical feature of all DAOs and would not really be considered a DAO by today’s standards.
The Dash cryptocurrency project can be seen as the first real attempt by a DAO. It was the first known DAO, at least by today’s standards, as its governance mechanism allows stakeholders to vote on the use of treasury.
Dash was first introduced in 2015 and operates on a network of 5,000 master nodes spread around the world. However, the Dash blockchain began as a diversion from Bitcoin, but has since evolved into a privacy-focused cryptocurrency.
The DAO, a decentralized autonomous organization on Ethereum that has since been dissolved, was designed as a decentralized risk fund for decentralized applications (DApps). DAO is being developed as an open source platform by Slock.it, a startup company based in Germany. During its inception, the DAO raised 12.7 million ethers (ETH), valued at around $ 150 million at the time.
The idea is that DApp developers present their ideas to the community and receive funding if approved. Although the DAO is one of the best-funded crypto projects to date, hackers were able to take advantage of a bug in their smart contract less than three months after it started. It is important to note that the bug or bug in the smart contract is not in the Ethereum blockchain, but in the application developed by Slock.it and provided on the Ethereum network.
As a result of the crash, the Ethereum community opted for a hard fork to offset the attack, while dissenting voices maintained the old chain that is now the Ethereum Classic.
Similar to The DAO, MakerDAO is a decentralized organization based on the Ethereum blockchain.
The project, a DeFi credit protocol led by the Maker Foundation, was first brought to the public in 2015. The project’s multi-secured Dai stablecoin was launched in November 2019.
According to the Maker Foundation, Dai’s stable value makes it a useful digital asset for lending and hedging against cryptocurrency volatility. However, Dai differs from other stablecoins in that its value is only marginally pegged to the US dollar. This means there is no centralized entity with a dollar reserve supporting Dai tokens. Dai uses collateral as an Ethereum based asset locked in smart contracts on the MakerDAO platform.
For each Dai token generated, the value of Ethereum-based assets locked in smart contracts must exceed the value of the Dai issued to the borrower. This allows anyone to lock in more volatile assets and get Dai, which is a more stable asset.
Uniswap is one of the newest successful DAOs in the DeFi area. After successfully rolling out a decentralized automated marketplace creation protocol in 2018, the team rolled out a governance token that will transform Uniswap into a decentralized user-managed community. Uniswap users can now not only make liquidity available to the decentralized exchange, but also submit governance proposals to the platform.
Risks of DAO
The DAO is a new organizational structure that challenges traditional organizations and thus brings with it many regulatory, operational and legal challenges.
For example, since a DAO may have its members spread across different jurisdictions, legal issues in dealing with cross-border contractual relationships and agreements can be quite a challenge. Since DAOs are managed using smart contracts, it can also be time consuming to reach consensus among DAO stakeholders.
In addition, malicious actors can exploit possible vulnerabilities in the smart contract code to compromise the security and functionality of the DAO, as was the case with the DAO in 2016.
While the principles of a DAO are geared towards enabling ideal and fully decentralized organizational structures, the underlying technology on which DAOs are built is far from perfect. Currently, existing DAOs still rely on some degree of centralization to make effective decisions, especially during …