DAO – Definitive Guide
There is a new and better way to collaborate and invest together on the internet, with people from around the globe that you may have never met. This new way is called DAO, a smart contract backed decentralized organization with no central leader to call the shots and with 100% publicly verifiable financial transactions and code.
Welcome to the 6th edition of Web3 and More. We are still exploring the popular concepts of Web3 and today, we’re going to explore the concept of DAOs by addressing the following questions:
- What is a DAO?
- What is the difference between a DAO and a traditional organization?
- How can you create a DAO?
- Why should you join a DAO?
- Final thoughts
WHAT IS A DAO?
Decentralized Autonomous Organization (DAO) is a popular Web3 concept referring to a group of like minded individuals aiming to attain a mutually beneficial goal. Similar to traditional mutual funds or crowdfunds, each member can contribute any amount they can afford (a limit can be set via collective votes) towards the set goal and each contribution can be represented by a tokenized asset (NFT) which will also determine the amount of profit or dividend a member will receive over time.
“It is like a mutual fund but at the same time like a joint bank account where you can vote on what the funds are used for and also have shared access to the wallet but without the ability to move any fund until generally approved”.
DAOs are usually formed to invest into high end digital assets or build a capital intensive product in hopes of generating and sharing the proceeds together. The treasury (funds) is publicly viewable on the blockchain and can be moved or spent if only the majority of the group decides to do so. No greedy or malicious member can move the funds on their own accord, especially when combined with multisig security.
Unlike traditional mutual funds, DAOs are backed by the power of DeFi (Decentralized Finance) which enables them to operate outside government regulations and execute in an environment with uncapped growth potential. Further, smart contracts automates the process of determining share allocation and distributing profits which eliminates human error, biases or greed.
Some of the best Web3 brands we see today started off as DAOs with less than 10 members pooling resources together to invest and build towards a common goal. For example BitDAO, MakerDAO, IlluviumDAO, ConstitutionDAO and GnosisDAO, all stand to prove the viability of Decentralized Autonomous Organizations.
DIFFERENCE BETWEEN DAO AND TRADITIONAL ORGANIZATIONS
This tabular representation by Ethereum best describes what differentiate a DAO from typical investment groups or organizations.
HOW TO CREATE DAOS
Creating a DAO can be as easy as talking to your physical or online friends about your idea to invest in bluechip NFTs and setting up your Web3 wallet to start collecting funds. However, if you’re in it for the long term, here are few basics to consider:
1. Membership Type
DAO membership can determine how governance (voting) will work and how voting rights can be utilized, among other things. The most popular type of DAO membership is the token-based membership, where each contribution can generate a token which carries a voting weight. The tokens can be in the form of fungible coins or NFTs and can be generated in different batches (Genesis or Alpha) to give more importance to members who first joined the DAO.
This token-based membership is mostly permissionless and a member can choose to sell his tokens to another, hence that new member will automatically take on the rights and shares of the previous owner.
Another less embraced membership type is the share-based membership where authority is more centralized. A new member can’t join by simply contributing money or buying the DAO token, they’ll need to write and submit proposals for existing members to consider.
As a new DAO creator, you must determine what type of membership best fits your end goal and choose accordingly.
2. Smart Contracts
Smart contracts are the life-line of every DeFi product out there. They refer to the written set of code that determines exactly how a decentralized application or protocol works.
DAOs are powered by smart contracts that define how the group’s pre-arranged principles will be executed. Once the code is deployed to a smart chain, it can no longer be changed or edited, hence, preventing foul plays.
Alternatively, if you and your group of friends cannot spare a few thousand dollars to develop a verified smart contract, you can still utilize the services of platforms like SyndicateDAO to get started and equally secure your funds by setting up a multi-signature wallet at Gnosis-safe.
Assuming you’re starting with 5 members, a multisig wallet can require each of the 5 members or 3 voted members to approve a transaction before any money leaves the DAO wallet. In essence, there’s no worries about one member running off with all the money or locking the rest out since power is safely distributed.
WHY SHOULD YOU JOIN A DAO?
As time has proven to us, many written business agreements end up in court and trusting friends in business hasn’t always paid off. So, what is the guarantee that pooling funds with complete strangers on the internet would succeed?
Thanks to the integration of smart contracts, DAOs have proven to be safer than even written business contracts. You do not need to trust anyone before joining a DAO. You simply need to find out if their target goals align with yours and then check the smart contract code on the relevant explorer to verify if it’s safe to interact with. If they are using a third party platform like SyndicateDAO, then DYOR about how the platform works and if there has been any hiccups on the platform with other groups before.
Another reason you might want to join a DAO, is if you don’t have enough money to get started on your own or you have enough money but don’t know how to get it done in the specific area.
Collaborating with others through DAOs has more upside than downsides if executed correctly. Many beginners with limited capital or knowledge are quickly climbing up the success ladder in Web3 by utilizing this method to share losses and profits together and build products that establish their presence in the industry.
Like any other concept in Web3, nothing is fixed and no one knows how DAOs will evolve over time, but at this very moment, it more than serves its purpose.
Do you have any questions or ideas regarding DAOs? Feel free to share in the comment area or inbox me.
I’m not a guru of any kind, but I hope that I can help you and others to make informed choices in Web3 and More.
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