What is DAO

DAO which stands for Decentralized Autonomous Organization is basically a blockchain based organizational structure. Unlike the traditional Org structures, where the board of directors sits at the top above the executive officer and comes down to the bottom in a hierarchical way, DAO is not hierarchical. There is no board of directors, chief persons on top and central leadership as the structure is linear and all members have the right and authority to govern the organization and make decisions from the bottom-up.

DAOs normally come into existence for a specific purpose like fundraising to buy NFTs or investing in start-ups, etc. 

DAO, as a new application of blockchain is in its early days and it is likely to revolutionize the investment, ownership and governing definition in the near future.

How does DAO work?

Smart contracts are the main building block of DAOs. The terms, conditions and criteria differ from DAO to DAO, and this is the smart contracts that makes the DAO operate once those criteria are met. DAO is governed by its members through their voting right that normally comes with crypto tokens. They are tokens that come with certain rights to vote on certain decisions. Like mentioned earlier, smart contracts establish DAO rules and token holders can influence decisions on how to move the project forward by using their voting rights. Every single decision, proposal or new project can only get approval once the majority of stakeholders approve it. Hence, it won’t be the board of directors, like traditional org structure, who make decisions.

An Example for better understanding

Think of a group of small scale investors who are interested in investing in the Dubai real estate market. They need to raise sufficient funds to purchase a valuable apartment in Dubai Marina. From a blockchain perspective, they have two options. The first one would be asking the owner to agree on tokenizing the property and sell tokens to the group of investors. In this case, investors would be able to fractionally invest in a property in Dubai. But, what if the owner disagrees with tokenizing his property? The group of investors can make a DAO and develop smart contracts to get all  terms and conditions together. After money is raised under all stakeholders supervision, it’s time to use the raised fund to purchase the property. Stakeholders can then make decisions on tokenizing the property to trade on the NFT marketplace, leave it as it is or renting it out.

DAO Advantages and Disadvantages

DAO is an extremely new application of blockchain, so the real advantages and disadvantages are not yet clearly identified. In theory, here are the main advantages of DAO: 

DAO Pros:

• More transparency

DAO is more transparent than traditional organization, as the important decision is made on-chain and all stakeholders are involved in the decision making process.

• More democratized

Again, in contrast with traditional organizations, where important decisions are made by board of directors and executives, in a decentralized organization, all stakeholders can vote and influence the decision making process.

• Faster and cost-efficient

In general, DAOs are project specific. In other words, they come into existence for a specific project, so they are faster than traditional organizations who work on several projects. Besides, utilizing smart contracts in a DAO eliminates the intermediaries like lawyers, accountants and banks, as the whole process is administered by smart contracts. That would significantly decrease the project cost.

DAOs Cons  

• Legal Risks

DAOs are not regulated yet. There is significant risk of falling into legal issues if something goes wrong with a DAO project. In such circumstances, you and your money are not safeguarded by the government

• Security Risks

DAO is quite new and the security loopholes are not identified as yet. There is no sufficient data on actual projects for the sake of investigating the security risks that may be caused by hackers and cyber criminals.

• High Cost 

The transaction fee is high and participants may charge up to USD 100 for a single transaction.

Final Words

DAO is almost the newest blockchain-based application. It seems to have the potential to make significant positive changes to all markets, while it might end up with failure. The most important risk associated with DAO is regulatory risk. There is no appropriate legislation for DAO, so DAO projects not only suffer from lack of governmental support, but also legal complications and tax implications are very likely to happen for investors and participants. As such, to safeguard your money, be very careful when investing in a DAO project.

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