Decentralized Autonomous Organization – Advantages – Disadvantages
Table of Contents
Decentralized Autonomous: Blockchain technology is characterized by its decentralized system. This means that there is no external control by third parties or intermediaries in all the operations in which this technology is involved.
A DAO or Decentralized Autonomous Organization is the one that collects this entire system that is regulated independently by computational algorithms. Technology is responsible for organizing this system and granting it independence from external controls.
Mainly, Do you want to know how a DAO works? Its advantages and disadvantages?
Join us, and you will find out!
What is a DAO – Decentralized Autonomous
DAOs became known thanks to the Ethereum blockchain network. However, its origin dates back to 1997, when Werner Dilger, a famous professor of computer science, published his work “Decentralized autonomous organization of the smart home according to the principle of the immune system.” He developed the DAO as an autonomous and self-sufficient system, a work ahead of his time since it was unfeasible.
Its adoption in 2015 by blockchain technology thanks to Vitalik Buterin, crypto-activist and co-founder of the Bitcoin and Ethereum Magazine, was the one that relaunched this concept in the cryptocurrency ecosystem.
Firstly, Let’s break this concept down to understand its meaningfully: Decentralized Autonomous.
- Organization: association of people regulated by rules based on specific purposes.
- Decentralized autonomous: that works on its own, independently of external agents. It is not under the parameters of a central authority; functions and decision-making are dispersed, and each of the members has the power to cast their vote.
However, With each part of the structure of this concept defined and knowing that it works within the framework of blockchain technology, we can already approximate what this concept means.
A DAO, for its acronym in English Decentralized Autonomous Organization, is a system based on blockchain technology that works together to fulfill a mission; people can coordinate and govern themselves and have a voice and a vote on all decisions that concern the organization.
How does a DAO work?
We have already said that a DAO works on blockchain technology. But what mechanisms of this technology are the ones that make it possible for the organization to function?
- Mostly, Smart contracts. Intelligent contracts are probably the most crucial element of Decentralized Autonomous. A smart contract is a document of instructions stored on the blockchain. It can auto-execute actions governed by a series of already programmed parameters. All this in a transparent, immutable, and completely secure way. In the field of DAOs, they are the ones who organize the organization’s rules and are also in charge of holding the group’s treasury.
- Consensus protocol. This has to do with the rules of the organization. The rules can only be changed as long as a vote approves them since they depend on a group that makes the decisions collectively. No agent outside the group can modify the rules of that group. The system will not allow it when someone wants to perform an action that does not comply with the rules or logic of the code.
- Issuance of a token. A token is the digital representation of an asset embedded within a public blockchain. This asset is the one that allows users the ability to have a voice and vote and works as the mechanism of exchange and economic reward between the participants. This mechanism or means of business is what guarantees the financial sustainability of a DAO.
- It is the last mechanism that DAOs have, and its purpose is to record everything that happens in the organization. Blockchain technology represents a chain of blocks configured as a distributed, shared, and secure database. It works as a public transaction document, where all movements register using codes. All information and transactions that occur within the decentralized organization store here.
The DAO depends on each of these mechanisms for its operation, and each of these elements depends on the other jointly.
Advantages and disadvantages of a DAO
The Decentralized Autonomous Organization has had a revolutionary impact on the financial sector and is beginning to consider the possibility of establishing itself in other sectors. Being a relatively new technology, it comes with its pros and cons.
- Moreover In Security and transparency. DAOs characterize by their security and transparency in all actions on the platform. All activities record in a blockchain ledger that cannot tamper with by any agent outside the organization.
- Outside of external controls. It is the characteristic and one of the critical advantages of Decentralized Autonomous. DAOs do not respond to external agents since computer algorithms regulate their entire operation. Thus, unlike traditional financial organizations that depend on government actors, they often do not rely on any intermediary for their operations and control.
- Automatic execution. They organize a computer code that executes automatically base on the protocol’s behaviour. Therefore, it is not necessary to interpret the rules of a DAO because, when the specif conditions met, they automatically.
- These organizations are democratizing access to services for many people without the need to be within specific borders. Its decentralized nature allows these organizations to offer their service universally, so it does not depend on walls but rather eliminates them.
- Creation of organizations. DAOs allow organizations to create relatively quickly. With just programming in the blockchain, you can start working. In addition, DAOs break with the hierarchy of organizations. Each member of the organization can contribute ideas and vote for themselves, and no one is above anyone else.
- However, Somewhat complex rules. Some actions to program a DAO can be tricky when working on relatively new technology like the blockchain. Automating tasks and having the ability to make decisions can be a significant challenge. With just one error in your programming, you can lose substantial money.
- Moreover, Regulation problems. In some countries, And also, it is not possible to comply with the regulation of a DAO. This is closely related to the lack of regulation in certain countries of blockchain technology and the crypto ecosystem.
- And also Security issues. Moreover, After the Ethereum DAO hack, many raised a more serious issue within these organizations: security. The attack caused the loss of a large amount of DAO funds. Many felt that this problem occurred because of the code’s poor compos of errors.
Finally, the DAOs are a revolutionary tool that has emerged to break all the parameters that traditional centralized organizations had established. And also, In this sense, this new technology comes with many new possibilities that have already occurred and others that are yet to come.