What Is a DAO?
4 min read

What Is a DAO?

This article explains the concept that lured me to join the web3 hype: Decentralized Autonomous Organization or DAO.

This article explains the concept that lured me to join the web3 hype: Decentralized Autonomous Organization or DAO.


DAO or Decentralized Autonomous Organization: what does this mean?

The simple answer is that in standard companies there is a big boss making and executing decisions, in a DAO, the decisions are taken by a group of people and implemented automatically.

I’d like to give a fun example to understand DAOs. Not the typical example of a venture capital fund or a group of people that try to buy the oldest US constitution.

DAO Football Club

Imagine a DAO that owns a football team. We are one hundred partners, all with the same voting power. A few of us propose different starting lineups every week, and then the partners vote for the preferred proposal.

Individual partners can also propose buying this player or selling this other player to another club at the end of the season. All partners then vote on the proposals, and the players are sold or bought.

Applying the proposals to real-life needs trust. How can the partners be sure that the selected proposal is carried out? Someone has to take care of it. There is trust in someone that applies the decision.

DAO E-Football Club

Now imagine that we are not talking about football in real life, but a football video game like FIFA ‘22. If we create a DAO to manage a club in FIFA ‘22, the decisions can be automatically applied.

Selecting the starting lineup, for example: after the proposals are voted on; a computer program can connect with the FIFA ‘22 servers and select the lineup. In this case, nobody needs to apply those decisions; they are coded in a program.

Yet, we still rely on the people developing the platform where our code is executed. How do we know they won’t change the way we vote, or even what can be voted or not voted? Or change how the voting power is distributed? These changes happen every day on platforms like Instagram, Facebook, or Twitch. Platforms can make developments that change the rules without considering the users.

DAO E-Football Club On a Smart Contract

What if the rules could not be changed without all the partners agreeing to it? How do we ensure that the platform won’t change the directives?

This is where smart contracts running on blockchain technologies shine. Smart contracts are computer programs running on a blockchain. A blockchain is an autonomous decentralized database. So, for example, when we upload a smart contract on a blockchain, we can set it so that changes are only possible through proposals. This ensures that the smart contract is not owned by a single developer, company, or account.

If we develop the program that interacts with FIFA ‘22 and we deploy it as a smart contract on a blockchain, we can implement it so that nobody can change it directly. Therefore, there is no need to trust anybody. Instead, the rules are set, known in advance, and performed automatically after every decision.

For example, when the starting lineup is voted on, the program contacts FIFA ‘22 and changes the lineup for the next match. Or, when an agreed-upon proposal is set to sell a player, the program sends a request to the game. Because nobody can change the program directly, the partners know that the rules can’t switch inadvertently.

Trust Evolution

If we think about it, the change from DAO Football Club to the smart contract is a change in trust.

The first example needed trust in someone to apply the decisions made by the group of people.  This is akin to the standard companies where a board of directors relies on a CEO to execute their decisions.

The second example needed trust on the platform. This is the current situation with streamers on Twitch and influencers on Instagram or TikTok: they have to trust that the platform (Twitch, Instagram, or TikTok) won’t suddenly change the rules and ask for too much of their revenue.

The last example is the genuinely decentralized organization where no trust is needed except for confidence in the blockchain. We need to trust that the blockchain is decentralized enough and can’t be manipulated.

In a DAO, we don’t rely on a big boss to make or even carry out the decisions. We don’t even rely on a platform and its rules. Instead, the decisions are made by all the partners and carried out automatically after a decision is made.

I believe that DAOs won’t replace standard companies, the same way the internet has not replaced TV and the radio; it has embraced and even improved them.

DAOs enable new kinds of cooperation among people.

This new kind of cooperation is what attracted me to web3 and DAOs. What do you think?

Further Resources

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