What is a DAO (Decentralized Autonomous Organization)?

Okay, no problem. Imagine we're sitting down for a cup of coffee, and I'll tell you all about this fresh concept called DAO.

What is a DAO? Imagine it as a 'Driverless' Internet Company

We're all familiar with organizations like companies and clubs, right? They typically have a hierarchical structure, with a boss, CEO, or board of directors calling the shots, deciding how money is spent and how things are done.

DAO (Decentralized Autonomous Organization) is a whole new way of doing things. You can think of it as:

An internet-native organization with no boss, managed collectively by code and all its members.

It's like a 'driverless' company, where the steering wheel is in the hands of all the 'passengers' (i.e., the members).

The Three Core Elements of a DAO, Explained Simply

To better understand it, let's break it down into three words:

1. Decentralized

   • What does it mean? There's no central authority, no CEO, no boss. Power isn't concentrated in one person or a small group; instead, it's distributed among all members who hold a 'governance token'.
   • In plain English: If there's something to discuss in a group chat, everyone deliberates together; it's not just the group admin making all the decisions.

2. Autonomous

   • What does it mean? The organization's rules and operational logic are written as code (what we call 'smart contracts') and published on a blockchain (like Ethereum). This code executes automatically, and no one can easily tamper with it.
   • In plain English: It's like a machine with a pre-set program: as long as the conditions are met, it will automatically carry out tasks, impartially and without favoritism. For example, if a 'salary payment' resolution is passed by vote, the program will automatically transfer the money to the respective accounts, without needing financial approval.

3. Organization

   • What does it mean? Ultimately, it is still an organization—a group of people gathered together for a common goal. They have a shared treasury and decide collectively, through collective decision-making, how to use these funds to achieve their objectives.
   • In plain English: Everyone comes together and has a shared 'class fund.' How to spend this fund—whether to buy books or organize activities—must be decided by a vote of all classmates.

For Example, How Does a DAO Work?

Let's say we want to establish a DAO with the goal of 'collectively pooling money to buy rare NFT artworks.'

1. Rules On-Chain: First, we find a programmer to write the organization's rules and regulations as code (smart contracts). For example:

   • 'Any purchase exceeding 10 Ethereum must receive more than 51% of votes in favor.'
   • 'Five NFTs can be nominated as potential targets each month.'
   • 'New members require approval through a vote by existing members.' Once these rules are published on the blockchain, they are set in stone and cannot be altered by anyone (unless a proposal to modify the rules is initiated and passed through voting).

2. Issuing 'Shares' (Governance Tokens): People who want to join our collection group can exchange money (e.g., Ethereum) for the DAO's 'governance tokens.' These tokens are like company shares, representing your ownership and voting power. The more money you invest, the more tokens you receive, and the greater your voting weight.

3. Collective Decision-Making (Proposals and Voting):

   • Proposal: I've spotted a Bored Ape NFT worth 50 Ethereum, and I think it has great potential. So, I submit a proposal within the DAO's system: 'Propose spending 50 ETH to purchase 'Bored Ape #1234'.'
   • Voting: All members holding our DAO's tokens can see this proposal. Everyone starts voting with their tokens. The 'yes' votes exceed 51%.
   • Execution: The smart contract detects that the vote has passed and automatically transfers 50 ETH from the DAO's treasury to complete the purchase. The entire process is fully automated, requiring no manual transfer from anyone.

4. Transparent Treasury: All of the DAO's funds are locked in a 'safe' controlled by code, and the ledger for this safe is completely public. Anyone can check on the blockchain at any time to see how much money is in the treasury and where every single penny has been spent. This absolute transparency prevents anyone from embezzling or absconding with funds.

Why Use a DAO? What Are Its Benefits?

• Extremely Transparent: Every transaction and every vote is recorded on the blockchain, visible to everyone, eliminating any 'black box' operations.
• More Democratic: As long as you hold tokens, you have a voice and voting power. The organization's future is decided collectively by all members.
• Borderless, Permissionless: As long as there's an internet connection, anyone from anywhere in the world can join or create a DAO without needing approval from any government or institution.

Of course, DAOs Aren't Perfect

• Slow Decision-Making: Everything requires a vote, which can make the process slow, unlike a boss who can make quick decisions on a whim.
• Security Risks: If the original smart contract code contains vulnerabilities, it could be exploited by hackers, leading to significant losses (the historically famous 'The DAO' incident is a painful lesson in this regard).
• 'Whale' Problem: If a 'whale' (someone holding a large number of tokens) acquires a majority of the tokens, it essentially becomes a one-person show, rendering the so-called 'decentralization' meaningless.

To Summarize

You can think of a DAO as:

A collective built on the blockchain, jointly owned and managed by all its members. It has no boss, its rules are executed by code, and everything is public and transparent.

It could be an investment fund, a gaming guild, a social club, or even an organization managing a software protocol. While still very new and having many imperfections, it is indeed exploring a completely new model for future human large-scale collaboration.