DAOs: Why the world can no longer do without them?

Summary
DAOs solve the problem of principal-agent dilemma
Decentralized autonomous organizations automatically execute transactions once the underlying set of rules is fulfilled
Community members make decisions through the voting mechanism
DAOs raise funds through the sale of their internal tokens

Decentralized autonomous organizations popularly known as DAOs solve the long time governance problem of principal-agent dilemma. This is a problem where one agent of an organization can make a decision, on behalf of others, which affects the operation of the company. Examples of well known agents of companies are managers who make choices which affect their entire organizations including the investors.
For example, the manager or CEO may make decisions which are not in line with the core objectives of the company. In some cases, the agent is at liberty to carry out risky actions, knowing that any potential impact will weigh heavily on the principal stakeholder rather than on him or her in person.
In contrast, DAOs overcome the principal-agent dilemma through collective or community governance of an entity. The various stakeholders voluntarily join the DAO knowing that they should abide by the smart conditions which the community dictates. Thus, they do not have an agent, such as a CEO acting on their behalf.

What is a DAO?

After the above discussion, one wants to know much about decentralized autonomous organisations (DAOs). A DAO is an organization which does not have a central decision maker. Instead, it is a community which is directed by a set of rules. And a very important thing with DAOs is that the set of rules governing all transactions exist on the blockchain.
In other words, there is a programmable code which controls the running of the organisation rather than a hierarchical leadership system. Thus, the blockchain automates trusted transactions as soon as the set of rules and conditions exist.
By the way, a blockchain is a decentralized ledger which keeps a record of transactions of various digital assets such as cryptocurrencies and non-fungible tokens (NFTs). It also keeps the rules and structures of DAO which can only be altered after a consensus by the majority of the members through voting.


Considering the above discussion, many people conclude that Bitcoin was the first DAO, although some analysts dispute this, pointing out that the Bitcoin protocol does not meet the broader conditions of a decentralized autonomous organization.
All these said, we can easily conclude that DAOs are internet based organisations collectively owned and managed by community members.


After exploring the broader spectrum of DAOs, it is time to focus on how they operate. Apart from executing transactions once the underlying conditions are met, the smart contract also keeps the full record of all coded activities. For example, it permits the sending and receiving of money without involving a third party and keeps a full record of these.
Also, since DAOs are public and transparent no one can alter the rules without many people noticing that. So, how do people make decisions in a decentralized autonomous organisation?

The decision making process

Although the organisation does not have a hierarchical decision making structure, the stakeholders control it through the governance token or shares . The absence of a centralized group of people who make decisions means that all members of the community have the right to determine how the organization functions. As such, any member of the community can make proposals on development issues.


Once there are proposals, eligible members of the community approve or disapprove them through voting. Primarily, all people who have a stake in the organisation, through ownership of the native governance token, can vote, thereby determining how it works.
In the same manner, people solve all disputes that may arise through voting. Therefore, there is no need for legal means of resolving the internal problems which the organisation faces.
It is important to note that the protocol can pass and uphold a decision even if other community members disapprove of it. Also, there is no need for a quorum, as the case with voting in the traditional organisations. Instead, it works through rough consensus, meaning that as long as the majority of the members support a certain position at any time, a decision is reached.

How to establish a DAO?

There are three basic steps to take in creating a decentralized autonomous organization. The first step is for the developer or group of developers to create a smart contract, based on a specific vision or need. During this stage, the developers code a set of rules or conditions into the blockchain.


The second step is to determine how to get the funding of the organization as well as to establish the governance system. The main means of raising the required funds is through the sale of the native tokens. In the end all governance token holders will participate in decision making through the voting mechanism.
The third and final stage is the deployment of the DAO on the blockchain. From this moment onwards, stakeholders make decisions on development issues and the smart contract creator stops influencing the functioning of the organization.

Why opting for a DAO?

DAOs enhance a new and reliable way of corporate governance which results in better performance than otherwise. The reason is that the people who participate in decision making have a stake in the organization. Therefore, they make the best decisions possible.
Apart from the transparency and trustless transactions, DAO automates the main activities in the entity. For example, there is automatic transfer of digital assets once the underlying rules are fulfilled.


Further to this, DAOs promote a culture of innovation as suggestions come from different people from all over the globe. Once a member or a group of community users make a proposal, all internal stakeholders have the right to make their independent decisions.
Also, with DAOs the community makes decisions fast enabling them to overcome competitions. This means that the organization implements innovative ideas very fast, leaving little room for competitors to copy their new initiatives before they are launched.

How do DAOs generate the money?

We have discussed how DAOs work and the means of raising funds. However, there is a missing link in the discussion. How do the DAOs generate the money? The fact is that DAOs sell their native tokens through cryptocurrency exchanges. These are the marketplaces for their coins or tokens.
And the DAOs should choose secure, reliable cryptocurrency exchanges. As a concrete example, Gate.io is one of the most reliable cryptocurrency exchanges with hundreds of tokens. Also, it has a large user base. Therefore, once a project lists its token on Gate.io it will have many buyers.
One interesting fact about Gate.io is that people can buy the tokens using different means which include credit cards and bank transfers. With this, you can buy these tokens from any country around the world.
Even DAOs that deal with NFTs can list them on Gate.io and benefit from its large client base. Furthermore, startup DAOs that list their coins on the exchange get an additional benefit. This is because Gate.io provides a special publicity service by including them under the section “StartUp”.


By Mashell. C, Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.