A decentralized autonomous organization (DAO) is a blockchain protocol governed by a set of rules, created by and collectively owned by its members. It is open-source and executes actions without intermediaries.
A DAO helps to speed up network decision-making and actions and drastically lowers management cost by giving automated power to token-holders instead of waiting for centralized decisions.
Decisions get made from the bottom-up, governed by a community organized around a specific set of rules that are enforced on a blockchain and open-source code that is carefully architected.
While nothing is 100% secure, DAOs are designed to be immutable, tamper-proof and democratic. They achieve security using three factors:
- Consensus voting
DAOs have no centralized leadership, they are run by member-owned communities, their rules and methodology are public, and they are governed by smart contracts on a blockchain. In order to attract the financing necessary to run a DAO, the protocol will issue governance tokens to investors that represent membership and voting rights.
DAOs help to keep a network safe and optimized without the need for manual intermediation by its members. Participants are not obligated by a legal contract, but they are incentivized by rewards in the form of native asset tokens that help the team work towards a unified goal.
To create a DAO, programmers will first need to write smart contracts that will determine how and when to enact governance or distribute tokens. DAOs should define all aspects of voting rights. The rules that govern a DAO can be complex and hard to change after they come into effect, as any changes would have to be carefully approved by consensus.
The DAO Hack
The first concept of a DAO was proposed by BitShares, Steemit and EOS founder Dan Larimer in 2015, and refined by Ethereum founder Vitalik Buterin in 2016 ahead of the launch of the DAO (organization).
Ironically, the name DAO was not to be branded. “The DAO” was the first digital decentralized autonomous organization that interested a lot of venture capital firms on crypto crowdfunding platforms.
The DAO launched in April 2016 with a crowdfunding campaign, but it was quickly delisted from every major exchange by September 2016 after over 3.6 million ETH (worth nearly $9 billion) were stolen due to a security flaw in the underlying code that crippled the project.
The DAO contained roughly 15% of all ether, so a failure of The DAO would have had a negative impact on the ethereum network and its cryptocurrency. The fallout rocked the Ethereum community so badly that it resulted in a hard fork into Ethereum Classic (ETC), which still trades today.
Technically, Ethereum Classic has not been tampered with since its inception in 2015, but that doesn't seem to matter to Ethereum investors. The market cap for Ethereum Classic currently stands at $6.6 billion, a far cry from the $317 billion market cap of Ethereum.
Undoubtedly, the DAO hack—and subsequent fork between ETH and ETC—is still considered one of the biggest black eyes to the Ethereum community as it backtracked on being a truly immutable blockchain.
DAOs and DeFi
Bitcoin is generally considered to be the first fully functional DAO, as it has programmed rules, functions autonomously, and is coordinated through a consensual protocol. Bitcoin is also considered the most secure DAO based on its hashing power and market cap.
However, most DAOs are built on Ethereum and include Uniswap, AAve, Maker, Compound, and other members of the DeFi community.