What is DAO?
Decentralized Autonomous Organizations (DAOs)
A simple explanation of DAO would be: a group of people who have entered into a contract with one another to reach a mutual goal.
It is an effective and safe way to work with similar-minded people around the world. From collecting rare NFTs to predicting stock market moves, DAO can be anything and it usually exists to raise money for a specific goal.
A DAO differentiates itself from traditional business in several ways:
|Exclusively online, members rarely interact with one another in real life||Can be physical and online. Members interact with one another in real life.|
|Usually flat, and fully democratized||Usually hierarchical|
|Voting required by members for any changes to be implemented||Changes can be demanded from a sole party, or voting may be offered|
|Votes tallied, and outcome implemented automatically without trusted intermediary||Voting allowed, votes are tallied internally, and outcome of voting must be handled manually|
|All activity is transparent and fully public||Activity is typically private, and limited to the public|
Examples of how you could use a DAO:
- Ventures and grants - you could create a venture fund that pools investment capital and the repaid money could later be redistributed amongst DAO members.
- A charity - you can accept membership and donations from anyone around the world and the group can decide how they want to utilize that fund
- A freelancer network - you could create a network of contractors who pool their funds for office spaces and software subscriptions
DAOs have no central leader and they rely on the community to make decisions. When someone becomes part of a DAO, he/she buys the group's specific crypto tokens. The more tokens he/she owns, the more votes they have.
Even without a recognized leader, members have a unified understanding that they have to follow a specific set of rules that are etched online as code. If someone defies the code, then the group's funding can be locked and no member can access it. An example of a DAO's rules is ensuring that decision is made with the majority's vote system.
Each DAO's rules are inscribed and coded on the blockchain as smart contract. These contracts are the foundation of any DAO as it ensures that a group's pooled fund will get utilized according to its mission/goal.
DAOs exist to utilize decentralized finance, also known as DeFi.
DeFi refers to peer-to-peer financial services on public blockchains. With DeFi, you can execute bank-related activities such as - borrow, lend, earn interest, trade derivatives, trade assets, buy insurance, and more - but it's faster and does not require complicated paperwork or a third party intermediary.
DAO and DeFi have a symbiotic relationship. Without DAOs, DeFi would lose a lot of users; Without DeFi, DAOs would have a hard time coordinating their members' finances and achieving the group's goal.
How does DAO Work?
Dao users usually use DeFi via software called daaps ("decentralized apps"), most of which currently operates on the Ethereum blockchain. Here are few ways of engaging with DeFi today:
- Lending: Lend out your crypto and earn interest and rewards every minute.
- Getting a loan: Get a loan instantly without filling in paperwork, including very short-term loans that traditional financial institutions do not offer.
- Trading: Make peer-to-peer trades of certain crypto assets.
- Savings: Put some of your crypto into savings account and earn better interest rates than what you'd typically get from a bank.
- Buying derivatives: Make long or short bets on certain assets; consider them as the crypto versions of stock options or futures contracts.
Benefits of DAO
- Open: It is accessible by anyone, all you need to do is create a wallet. You don't need to apply or "open" an account.
- Pseduonymous: There is no need to provide your name, email, address, or any other personal information.
- Flexible: You can move your assets anywhere anytime, without asking for permission, delay, or expensive fees.
- Fast: Interest rates and rewards update rapidly (as quick as every 15 seconds), and can be significantly higher than traditional Wall Street.
- Transparent: Everyone involved can see the activities/transactions.
Downsides of DAO
- Fluctuating transaction rates, mainly on the Ethereum blockchain, mean that active trading can get expensive.
- Your investment could experience high volatility, which is common for new tech.
- You need to maintain your own records for tax purposes since regulations can vary from places.
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