As communities like NFT and DeFi grow rapidly, the need for decentralized protocols becomes even more urgent. In the next few years, computer experts predict that such communities need to know governance how they can make collective decisions for the optimization of funds and operations.
Governance requires coordination to some extent, depending on what is being managed and as communities become more complex, the costs of coordination required increase as well. Why? Because the number of participants involved “in the voting” is increasing. But thanks to smart contracts, coordination costs can be significantly reduced, while allowing each participant to organize cooperatively in the safest way possible.
The exponential growth of cryptocurrencies came to impress everyone. But to be part of this market, you must first understand how it works and the tools you need to get started. In this article you will discover the correct path. Have you ever thought of joining with a group of people to buy the constitution of your country, a work of art or be part of a company or project where your contributions are rewarded with a percentage of ownership of it? If your answer was yes, then you need to know what a DAO is.
With the arrival of blockchain technology and cryptocurrencies, a wave of new terms and concepts began that are defining a new stage in the digitization process that humanity has lived through for some decades. The technology that makes this possible is the so-called DAO, a decentralized autonomous organization. This is a picture of a group of people with the same goals who, even without a leader among them, are able to achieve a common goal according to what has been decided.
For information, there are many new protocols built on blockchain systems and open finance. In some situations a DAO can be seen as a combination of a social club, company, and bank. They are all brought together in a “blockchain environment.” But despite what might be considered a combination, the DAO is not really fully autonomous as one needs to design a decision framework that ensures the DAO arrangement is carried out effectively and each participant can receive compensation. These two conditions are the main conditions for a DAO to grow. Without both, a DAO would not grow as expected.
The following questions arise:
- What decisions should be made?
- What types of financial incentives should be included?
- Under what conditions is DAO really needed?
- What are the main tasks of crucial government?
Before we can answer the questions above we need to understand how the DAO has developed so far. That way we can see if the decentralized structure has evolved in the last five years, and we will finally understand why financial incentives are one of the main factors in the governance of the DAO that will be set up in the future.
What is a DAO?
To understand what this new concept refers to, first, you have to understand the words that make it up.
- Organization: group of individuals who meet and work together to achieve a specific goal and purpose.
- Autonomous: entity that has the ability to act independently from external agents.
- Decentralized: it does not have a central authority; the functions are dispersed and each one of the members has the power to cast their vote.
Okay, now we can have a clearer idea. A DAO is a community that works together to fulfill a mission; decisions are made solely by community members and each of them has the ability to vote. This definition is a good first approach, but it does not capture the full essence of what a Decentralized Autonomous Organization means. To get a better overview, let's make a list with the characteristics of these organizations and see how they enrich and build on the previous definition, and thus, better understand what is currently understood as DAO.
Based on Blockchain and Smart Contracts
Within any organization it is important to know who makes the decisions and how they do it. Decentralized Autonomous Organizations are based on blockchain and the rules of the game defined within smart contracts, which are code scripts that perform a specific action based on an event. This feature makes this type of organization more transparent, since its activity is registered on the network and anyone is able to see what the organization is doing with its resources.
This also allows for better accountability and for members to be clear that the resources will be used for the purpose for which they voted, since this is defined within a smart contract whose code can be seen by anyone.
This type of organization is born from a goal that you want to meet. Members work together to create, capture, and share value in relation to a shared mission. The main goal may be to solve a problem, create value, or simply buy something.
For example, Constitution DAO is an organization that emerged for the purpose of purchasing a copy of the United States Constitution and raised millions of dollars for it. The organization did not achieve its objective and now the resources are being returned to those who supported the project.
Not all missions are as punctual as the previous one. Some DAOs have objectives that require years of work and are more structured and durable organizations. Examples of this are Maker DAO and Unsnap; whose mission is to promote decentralized finance.
Governance is a word that arises from political theory and refers to a form of government in which as many groups as possible are included to have a holistic view of the problem. In the world of DAOs, governance is understood as the inclusion of all members in decision-making; a horizontal governance structure is sought. This is achieved through tokens that represent your participation in the organization. These are known as governance tokens.
These tokens have an economic value and generally the way to obtain them is by buying them in an exchange or receiving them as a reward for contributions you make to the organization. The more tokens a person has, it is understood that they are more involved in the project and, therefore, they will have greater voting power.
DAOs collect and allocate resources to meet their goals just like any other company or organization, the particularity of DAOs is that the capital that is raised belongs to the entire community and it is the same community that uses governance tokens. he casts his vote and decides what to do with that capital.
Minimum Entry Barriers
The only barrier to entry to being a member of a DAO usually owns governance tokens. Depending on the stage of the organization, the way to obtain these tokens may change. Sometimes you have to buy them in an exchange, other times you can get them in exchange for delivering something of value to the organization, and other times, all you need is the desire to participate.
The DAO in its entirety belongs to the community that helps build it. All those who support the project and decide to invest in it, either money or time to achieve the mission that gave rise to the organization, are rewarded with a percentage of ownership of the project.
The combination of the above points is the reason why governance systems for DAOs can be developed in a scalable, fair, and decentralized manner. The DAO is the future of a financial ecosystem that is fair, resilient to disruption, yet flexible.