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What Are DAOs and How Do They Work?

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Admin Nas Academy

02 Mar ·

What Is a DAO? 

You’ve probably heard the term “DAO” come up once or twice in crypto-world. But what is a DAO, and why are people talking about it so much?

DAO stands for Decentralized Autonomous Organization. It’s pretty big in the crypto world today because they are most likely going to end up being the future of employment contracts, home leases, business deals – and maybe even the future of your career.

So what does “decentralized autonomous organization” actually mean? Well, a DAO is simply a specific type of organization, and most of them run on blockchain technology. 

Think of it like the company you work for, but there’s no CEO, no supervisors, no board of directors – and no boss. 

Instead, the entire company operations are managed by computers. Everything that changes within the company is voted on and decided on by you – the employees. 

How Does a DAO work?

So how exactly does this system work, and who is able to join a DAO?

Think about it like the company you work for. The founders and CEOs built this company, and they created values and a specific company code that everyone has to agree on to keep systems running smoothly. And when you joined your company, you automatically agreed to follow those rules and those codes when you signed your employment contract.

DAOs work pretty much the same way – but there are a few modifications. 

Firstly, instead of signing an old-fashioned paper or PDF contract that is held and executed by a a person, DAOs use a special kind of contract – “SMART” contracts.

What Are Smart Contracts? 

Smart contracts are essentially digital contracts that are stored on the blockchain, and they execute themselves automatically. This is the “autonomous” part of a Decentralized Autonomous Organization.

DAOs smart contracts

But how can a contract self-execute – and what does that even mean? 

There are terms and conditions on any contract you sign, whether it’s smart or not smart. But in a normal job contract for example, it might say: when you work 40 hours a week, your compensation will be $1000.

This means when you hit your 40 hours of work a week, somebody has to approve your timesheet, then approve the payment before it’s handed over to you. There’s still someone behind the main execution of the contract terms – even if it’s digital, or you get paid with a direct deposit system. 

But with smart contracts, there’s no manager or person who needs to check your timesheet, no person who needs to approve the automatic deposit, and there’s no person who needs to record your payment or any of that boring stuff.

Instead, the computer just does it all by itself. It will automatically release your money once your 40 hours are met at the end of every week. 

Then the transaction history is recorded safely (and publicly) on the blockchain for everyone to see. Therefore, no one can tamper with the contract or refuse to follow through with it – because no one controls it, and all activity around the contract is recorded publicly.

Now, back to the “codes” that are built within a DAO and outlined on these smart contract agreements.

DAOs smart contracts

Another requirement to join a DAO aside from agreeing to it’s values, is that you have to hold what are called “governance tokens”. These are a special type of cryptocurrency tokens specific to that DAO.

When a DAO is built, the creators also build a specific amount of these governance tokens. They are basically your shares in the company, and they show that you are part of the DAO – and therefore give you voting power.

Remember: there is no CEO to make decisions, so everybody who is a member of the DAO has to work together to keep the organization running, and make all of the important decisions to change and improve the DAO.

Together, every member helps decide where money is spent, everyone decides on company changes, and everyone acts as a shareholder. This way nothing can change without the majority agreeing it’s the right move. 

All of these decisions and agreements are done through a vote.

Let’s say there’s something in the DAOs terms that someone wants to change. They bring up their concern, and then the community will hold a vote.

If 51% of people agree on the change, then the smart contract will be altered accordingly. And in these votes, the more governance tokens you have – the more voting power you have.

What Are the Benefits of a DAO?

With DAOs, networking, nepotism, and fraud aren’t as big of a problem. Companies can’t be pressured by governments to shut down because there’s no central authority to pressure – the “authority” is a bunch of different people from all around the world!

DAOs smart contracts

But – that doesn’t mean DAOs are completely immune to flaws.

DAOs may be easier to hack, and decentralized systems in general make hiding business secrets and operations from competitors a lot harder.

How Can DAOs Be Used Today?

DAOs do have the potential to completely shift the way our world works, and we’re already starting to see it in action today. Many people even say that the first example of a DAO was actually Bitcoin itself.

After all, it checks all the boxes: it’s a system with no central authority, it runs on blockchain technology, and it relies on the trust of the community to keep itself operating

But DAOs are also becoming more and more tied into the physical world. In fact, there’s an organization called CityDAO where members of the DAO bought a 40-acre plot of land in Wyoming, and they’re using this system to try and build a city from the ground up. 

But DAOs could also replace companies that we already have – like Uber. 

If Uber were to turn into a DAO, anytime you pay for a ride, it would all be done with a smart contract between you and the driver. 

This would mean that Uber drivers would make more money, because there’s no staff or management fees that are taken off your ride fare. 

We’re seeing more and more companies changing to embody the system of DAOs – from giving employees and the community more power, to automating tasks.

And over time, it’s likely we will see DAOs become the norm. As blockchain and Web3 technology starts to grow, we might just see business change from the centralized power structures we know them to be today – to being all about community.

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