What is a DAO?
If you are passionate about cryptocurrencies or their underlying technology, the blockchain, then there’s a good chance you heard about DAOs.
DAO stands for Decentralized Autonomous Organization which is the most complex form of smart contract. Just as its name suggests, DAO is an organization that runs in a decentralized manner, meaning that it works without requiring the presence of a centralized party to make decisions.
How do DAOs work?
In the crypto sphere, DAOs are entities with the role of following a set of programmatic rules granted by a decentralized consensus. In fact, Bitcoin (as a platform) is widely considered to be the first fully DAO. DAOs require initial programming, but once the rules are set up, they work autonomously and continue to serve their functions without interruption from external sources (the true definition of autonomous).
Another great advantage of DAOs is the fact that they are transparent, mostly thanks to their open-source nature. DAOs use tokens to reward specific activities and, since they don’t have hierarchical structures, the funding process takes place right from the start.
Consensus is another very important term associated with DAOs. Consensus refers to the majority of stakeholders agreeing upon deciding to move or withdraw funds. In short, all decisions must first be agreed upon by the large majority of stakeholders. For example, even if a bug is found in the code of a DAOs, it cannot be solved until a voting procedure takes place and the majority of voters agree on it.
The biggest benefit of a DAO is definitely its efficient way of running an organization without the need of an intermediary, and without the associated inefficiencies that come with it. In order to understand DAOs, users must first comprehend the fact that DAOs cannot build products, write code, or even develop any sort of software or hardware.
For this particular task, any DAO requires a contractor. The primary way of making decisions in a DAO is with the help of proposals. That’s why DAOs also require a monetary deposit to prevent users from overloading the network. As mentioned before, everything needs to be voted. The same goes for the contract that gets appointed via voting (performed by all the token holders).
Do DAOs disrupt traditional governance?
Short answers: Yes! Governance can be defined as the set of actions, rules, and norms and how various entities interact with them. Governance can lead to a phenomenon called Principal-Agent Dilemma. This phenomenon refers to situations when an entity’s decisions can affect another entity. This comes with its fair share of moral involvement. To reduce the effects of the Principal-Agent Dilemma, DAOs use smart contracts. In short, DAOs, in general, are an efficient way of ensuring democracy by making use of cryptographic tech, as any of the stakeholders get to vote to add rules, change existing rules, and so forth.
The story of “The DAO”
In order to fully comprehend the concept of DAOs, one must also know about “The DAO,” probably the most important event in the history of DAOs.
The DAO launched in 2016 on the Ethereum Network was intended as a consensus mechanism for voting the most relevant projects that should be funded on the Ethereum network. The plan involved participants receiving DAO tokens and vote which projects should be funded or not, making use of the so-called “wisdom of the crowds.” In short, it let the crowds decide which projects were worthy of investment.
Unfortunately, The DAO didn’t have a very long life since it failed in just a couple of months due to a hack. The hack was so brutal that it resulted in a significant loss of funds as well as a crash in the price of Ether.
Even though the hack was only possible because the DAO code didn’t receive enough security testing, Ethereum as an organization received a quite the hit, lowering the confidence in the platform.
The DAO started out as a very promising project with a successful crowd safe. In fact, it managed to raise more than $150 million. Interestingly enough, even during the crowd sale, users expressed concerns regarding the platform’s security which led developers to consider addressing the vulnerabilities.
Even though the team ended up announcing that The DAO is, in fact, very secure and no funds are at risk, an unknown attacker managed to steal over 3,6 million ETH. The attacker took advantage of a so-called recursive call exploit. In short, the attacker “asked” the platform to return Ether tokens back several times before the smart contract was able to update the balance.
The DAO tried to solve this issue with a soft fork which was not approved by the community. The other option was to perform a hard fork, which would return the Ether that been taken from The DAO to their original owners. The team behind Ethereum went with this second option which led the Ethereum community to split in two. After much debate, the decision to perform a hard fork was in direct contraction with the basic principles of the blockchain. The part of the community that disagreed with the new hard fork went on to develop the “Ethereum Classic” chain.
Before we end, there’s still one more concept that associated with DAOs, and that’s the so-called “unstoppable code.” Considering the basic nature of DAOs, it’s not difficult to understand that it can’t be changed easily. The fact that one person or an entity can’t change the rules is the DAO’s biggest advantage, but it can also prove to be its greatest weakness. For example, if someone spots a bug in a running DAO, developers may have a hard time trying to change the code.
Coming back to The DAO Hack, in theory, the hacker was following the rules deployed by the DAO. The development team, as well as the community, watched how the attacker slowly drains funds and couldn’t do much since every decision needs to be voted.
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