The DAO’s rules, established by a core team of community members, are built using smart contracts. These smart contracts are the foundation for the DAO’s activities and are transparent, verifiable, and open to public audit. They enable any prospective member to understand how the protocol will function at all times completely. They are also the key for organizations governed by DAOs.

Once these principles have been enshrined on the blockchain, the DAO must determine how to acquire funding and impart control.

To do this, a token issuance technique is typically used, in which the protocol sells tokens to generate revenue and restock the DAO’s treasury. In exchange for their money, token holders usually acquire voting rights that are proportional to their holdings. Once fundraising is finished, the DAO is prepared for deployment.

The DAO code is written in the “Solidity” programming language. A DAO is activated via deployment on the Ethereum blockchain. Once deployed, a DAO’s code requires ETH to participate in Ethereum transactions. Since a DAO cannot function without ETH, receiving ETH is the first order of business for a DAO. After a DAO’s code has been deployed, ETH can be transferred to the DAO’s smart contract address during the initial creation period specified in the code.

Organizations governed by DAOs

DAOs can be divided into many sorts based on their technology, structure, and mode of operation, as detailed below.

DAO protocols

Such a governance structure resembles protocol DAOs when tokens are used as a voting metric for enacting any protocol changes. For instance, MakerDAO’s DAI stablecoin has wholly changed the DeFi market. Another example is decentralized exchanges (DEXs) like Uniswap, which give native governance tokens to liquidity pool contributors. The tokens can be used to cast votes for decisions affecting the governance of the DEX.

DAO collectors

Artists who employ nonfungible tokens (NFTs) to demonstrate ownership of their works rely on collector DAOs. A Collector DAO loosens the constraints on NFT investments, such as PleasrDAO. An illustration of one such DAO is Flamingo.

Running programs

Operating systems are independent platforms, such as Colony, that businesses can utilize to build their DAOs.

Dienst DAOs

Service DAOs are initiatives like MetaverseDAO, which provides individuals and organizations with a talent-hunting service and supports acquisition models.

Financial DAOs

Investment DAOs are popular among millennials because they are transparent and accessible to everyone worldwide. They permit capital pooling to democratize investing for various DeFi businesses and are also known as Venture DAOs. An example of a DAO initiative run by basketball fans to run the National Basketball Association is Krause House.

Also Read: All About Decentralized Autonomous Organizations (DAO Guide)

Grant DAOs

In a Grant DAO, the community contributes money to the grant pool and casts votes on decisions on the distribution and allocation of that money. These DAOs fund innovative DeFi projects, demonstrating how decentralized communities are more adaptable with funding than conventional organizations.

Aave Protocol, one of the most popular Grant DAOs, uses the Grants infrastructure to support and expand its community of DeFi initiatives. This protocol enables people with extra cash to lend and those in need to borrow from the protocol’s participants.

DAOs for entertainment

Entertainment Decentralized autonomous organizations (DAOs) provide entertainment by letting artists take charge of the governance of their innovations. For instance, 3D NFT Flufs (a collection of unique bunnies) can be customized by Flufworld members and licensed for sale.

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Bored Ape Yacht Club (BAYC) will introduce its Entertainment DAO, letting holders of BAYC native tokens vote on their artistic choices.

A media DAO

Media DAOs enable content creators (readers, for example) to contribute directly to the native currency as a reward in exchange for their contributions without involving marketers. For instance, Forefront provides DeFi enthusiasts many opportunities, such as a crypto education hub and growth opportunities for incubated enterprises.

A social DAO

Social DAOs enable collaboration for social networking in the crypto world, such as Blockster. These platforms provide a digital democracy where everyone’s voice is respected, and everyday interests may be shared.

DAOs’ technology foundation

Blockchain technology is the foundation upon which several protocols (including but not limited to Dash, Cosmos, Colony, and Ethereum) are developed. On the platform, the level is businesses like DAOstack and Aragon, which use solidity and might be referred to as DAO software as a service (DSaaS) models.

The deployment of DAOs made with Aragon and DAOstack occurs at the application level. It is not always necessary to use these platforms to construct DAOs, though, as you can fork already-existing DAOs to produce the one that best suits your requirements. DAOs, for instance, are a component of the layer-2 ecosystem built upon Ethereum.

DAOs are included in the Layer 2 ecosystem.

Through a feature known as composability, cryptocurrencies and other digital assets can be moved directly within the DAO (a.k.a. money legos). Thanks to composability, protocol and applications can be chosen and built in various combinations.

Also Read: All About Decentralized Autonomous Organizations (DAO Guide)

What different DAO governance issues are there?

DAOs occasionally run into a variety of problems, and the most typical ones are described in the sections below:

Governing structures

All DAOs must include a decentralized governance system that involves tens of thousands or millions of people voting in concert. As a result, a DAO’s biggest issue is controlling the dissemination and sharing of information and findings to all members.

Controller nodes facilitate centralization.

In theory, it resolves the loyalty issues because nodes or speakers with the most significant token holdings stand to lose more due to bad governance choices. Controller nodes control the most tokens, and their votes have more weight in governance decisions. However, a sizable portion of the network is underrepresented. As a result, the network becomes increasingly centralized, with the minority with disproportionate authority making decisions. Conviction voting and quadratic voting are two voting procedures that try to address the problem.

In a process known as quadratic voting, each participant expresses their strong opinions on an issue in addition to their vote for or against it. Like this, conviction voting is a ground-breaking method of making decisions that fund concepts by the community’s collective preferences as they are stated in real-time.

Dark voting

By borrowing a governance token to cast a vote and then returning it to the lender, a token holder without an economic stake in the protocol casts a shadow vote, weakening the DAOs. As an illustration of shadow voting, the attacker might issue a flash loan without having to pay interest or bear the cost of capital.

Other illustrations of tampering with governance systems include decentralized cartels or dark DAOs that conceal how they purchase on-chain votes. In the best-case scenario, the attacker is required to pay interest over a protracted period of time, capital carrying charges, or risk having their collateral subject to penalties.

Protocols can affect the “cost of governance” by altering the time it takes to complete the voting process, even though they do not affect second-market interest rates. Any system where a token can control governance makes voting vulnerable to corruption and conspiracies on essential choices. This is one of the most critical attack vectors within a DAO. Therefore, cartel-like behavior must be addressed in the rulebook from the beginning for a DAO to be a successful, well-functioning, and robust entity.

Outlook for DAOs

It is unlikely that the typical person will work for a company in the future. People will find alternative ways to make money, such as by developing new talents, creating art, playing video games, or collecting information. This innovative future of work is made possible by the networks that develop around crypto protocols, which are growing as new means of coordinating, quantifying, implementing, and rewarding contributions.

The value capture from companies to individuals participating in crypto networks, such as in DAOs, is expanding due to this transition, which is already beginning to create chances for passive income for individuals.

DAOs will eventually replace the previous method of governance. Even if they are still in the beginning stages of development, they are no longer only romantic ideas. This is so because DAOs are available companies that oversee assets worth billions of dollars and develop fresh ways for contributors and network users to profit.

Although DAOs are still uncommon, they seem to be gaining popularity among many forward-thinking designers. Now is an exciting time for industrial and organizational specialists to address this new phenomenon with new theories and empirical research because DAOs are growing more prevalent. Additionally, organizations must stay on top of any changes affecting how they communicate with customers or vice versa.