DAO: Decentralized Autonomous Organization

A decentralized Autonomous Organization (DAO) is a governance model implemented to democratize the decision-making process in any crypto or decentralized protocol. The famous examples of DAO are MakerDAO, Curve DAO, Uniswap, etc.

How Does A DAO Work?

DAOs work through a voting mechanism whereby anyone in the community can propose a change/modification and everyone else can vote using their native tokens. Since all voting and suggestions are available on a public ledger this adds to the transparency behind decision-making.

DAOs are operated using smart contracts which have pre-written code on how to handle decision making. Some examples of DAO-based decision-making through voting are an increase in circulating supply, burning of reserve tokens or announcing rewards for token holders. The voting power in a DAO resides with participants with most tokens. So, for two participants; participant A and participant B, the one with more tokens will have a higher weight in the voting process.

This exercise of more tokens, and more power restricts the large token holders to not act in bad faith as bad decisions will impact their holding's monetary value.

Risks With DAOs?

DAOs are frequent targets of hackers and there have many multiple large hacks in the past. The first and the most famous hack took place in 2016 when Decentralized Autonomous Organization (DAO) was hacked. The hackers tooks away $150 million worth of Ethereum tokens that were raised in the ICO.