DAOs: Decentralized Autonomous Organisations 🏢 (Part 1)

What are DAOs? How do they work? Why are they important?

Oct 12, 2021

Hi, Ravdeep here. 👋

Perfunktory is a newsletter that aims to break down trending subjects in the field of Music, Technology, Gaming and Culture as perfunctorily as possible. We also have a podcast in the works which can be found here on Spotify, Apple Podcasts and Google Podcasts.

Welcome back to a new issue of the Perfunktory Newsletter. Have to make that distinction, now that we have a PODCAST 🎉🎉

To be honest, I still don’t know what I’m doing but I am learning as we go. Expect the first episode of the podcast to be out by the end of this week or next Monday when the new issue comes out. If you haven’t heard the trailer yet, linking it here.

Today we’re going to talk about something that I believe has a lot of potential to be the new normal in the next few years. I’m sure you must’ve read about DAOs somewhere or the other in the last year and wondered what it was, or you might not have come across it at all. We’re going to enter the world of decentralised organisations and learn more about them together. I promise to keep this issue light and I am also dividing this into 2 parts for easier understanding.

What is a DAO? 🏢

When you look at digital currencies, one feature that stands out is that they are decentralized. Decentralized means that they are not controlled by a single institution like the government or a central bank. So, how do they work then? The control is divided among a variety of computers, networks, and nodes. This decentralized status is used to achieve levels of privacy and security that standard currencies might never reach.

This decentralization of currencies inspired a group of developers with an idea for a Decentralized Autonomous Organisation, or the more popular term DAO, in 2016. (We will discuss more about the original ‘The DAO’ in the next part)

Coming back to the topic, DAOs are internet-native businesses that are collectively owned and managed by its members. The treasuries are built-in that no one has the authority to access without the approval of the group. Decisions are governed by proposals and fair voting to ensure everyone in the organisation has a voice.

How do DAOs work? 🏋️‍♀️

DAOs are built on the backs of a smart contract that acts as it’s foundation. This smart contract defines the rules of the organisation and also holds the treasury of the DAO. Once this smart contract is live on the blockchain, no single member or outsider can change the rules of the contract except by a vote from the entire organisation. Since the treasury is also defined by the smart contract, this means no member can spend the money without the entire group’s approval. The group makes decisions collectively and payments are authorised automatically when the vote passes.

How does one know if the smart contract has not been tampered with? Because the code becomes public once it goes on the blockchain and it can’t be changed without other people noticing it.

Now that we know what DAOs are and how they work, let’s ponder a bit:

Why do we need DAOs? 🤔

DAOs, being a part of the internet, have a few advantages over traditional organisations. As organisations move to the digital front, there need to be mechanisms to facilitate easy and efficient working. DAOs address these mechanisms, or at least try to address them, with new offerings. One significant advantage is that in DAOs, you need to trust the code more than you trust the people working with you in the organisation. A traditional organisation on the other hand requires a lot of trust in and among the people.

Another one is that a DAO has no hierarchical structure. Yet, it can still accomplish tasks and grow while being controlled by stakeholders via its native token. (These tokens can trade on exchanges, they can have real-world monetary value.) These stakeholders might be situated in the remotest parts of the world and still be working together towards a common goal. That is something that even traditional organisations are facing difficulty with in the post-Covid world.

Also, by allowing investors to pool funds, DAOs also give its members a chance to invest in early-stage startups and decentralized projects while sharing the risk or any profits that may come out of them.

These are some of the few use-cases that I believe are important to understand the need of DAOs and how they replace traditional structures. More on this below.

DAOs vs. Traditional Organisations 📝

DAO

Flat hierarchy
Democratised through voting
Voting required by members for changes to be made
After the vote, the outcome is implemented automatically with no manual input
Activity is transparent and public

Traditional Organisations

Hierarchical
Thrives on structure and form
Changes can be made by one person or a select group of individuals
Votes are counted internally and outcome is manually implemented
Activity is private and not fully open to public

I think we’ll keep this issue short and tackle the more complicated parts in the next issue. We will be talking about how to join a DAO, different membership types in a DAO, how to make a DAO, disadvantages or shortcomings and also talk about how it all started with ‘The DAO’ back in 2016.

Recommended viewing this week

Working for DAOs with Gaby Goldberg, Cooper Turley and Alex Zhang

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