DAO, a new type of crypto organization

Author: Chenzhizhi

1.What is DAO?

DAO (Decentralized Autonomous Organization), sometimes referred to as DAC (Decentralized Autonomous Corporation).

DAOs are organizations that, through a set of open and fair rules, can operate autonomously without intervention or management. These rules will often come in the form of open source software, and each person can become a shareholder of the company by purchasing shares or providing services in the form of shares. The shareholders of the organization will be able to share in the earnings of the organization, participate in its growth, and be involved in its operation.

The following three laws should be carefully put into the system guidelines of the DAO and be able to be tested by all shareholders to see if they are strictly enforced when practicing the DAO. Through these three laws, it will be possible to monitor the protection of shareholders' rights in the system and how other rules are changed, but they can never change these rules on their own.

The first law: the mechanism of integrity. rely on multiple DAO nodes to review each DAO node's behavior against each other to ensure that all rules can be enforced. In contrast, rogue behavior of individual nodes is simply blocked collectively. Even if the maker of the system does not follow the rules it will be ineffective, and a hostile high-handed control will be ineffective.

The second law: inviolability mechanism. The ability to ensure that any changes to the DAO rules (source code) are not enforced without the consent of a majority of shareholders, and that infringements on a very small number of nodes will not succeed without a collective vote of more than half to agree on adoption.

The third law: self-protection. The ability to allow the entire system to adopt additional means to ward off any threatening factors to the survival of the DAO. The first two laws already reduce the possibility of introducing bad nodes. A publicly available system or open source software is able to avoid the possibility of the entire system crashing due to the introduction of bad nodes by the above means.

2.How is DAO implemented in blockchain?

Through smart contracts, DAO can be seen as the most complex smart contract that is open source and transparent and once deployed will be independent of its creator and any outside forces. Its transaction records and program rules are maintained on the blockchain, an approach that eliminates the need to involve bilateral trusted third parties in financial transactions. It runs on the blockchain's incentives, which means earning pass-throughs through transactions.

To withdraw or transfer funds from a DAO, a majority of its stakeholders (this percentage can be specified in the DAO code) must agree on the decision. Even if bugs are found in the code, they cannot be corrected until a vote is taken and a majority of voters agree, which could allow known security vulnerabilities to be exploited by hackers.

3.Future use case scenarios

DAO has a ton of interesting use cases, but that's still where we're just getting started. With a DAO, we can quickly experiment with the governance system to quickly improve what works and what doesn't. For example, there could be a DAO that uses futarchy for decision making, which consists of members placing bets in prediction markets and then using the results of those markets to decide on actions.

We will also see meta-governance when the DAO itself serves a number of different protocols and receives governance tokens in return. the DAO will begin to vote and act as a representative in other DAOs.

One possible use case is a DAO where all members are anonymous and can build reputation within the DAO without having to reveal their identities. This could put members on a more level playing field and make it easier for the DAO to reward individual contributors rather than potentially catering to high-profile members who already have a large following.

Another interesting use case for DAO is having collective NFT artifacts, where each member can vote on different attributes of an artifact and have the overall artifact change based on individual attributes.

4.Potential Problems with DAO

DAOs are powerful ways to organize, but there can be potential problems and they are not the ideal system for everything. While DAOs can replace aspects of legal contracts with code and save significant operational overhead, in some cases there is no legal protection outside of the rules outlined in the smart contract that facilitates the DAO. This can be problematic if the control of the DAO is centralized or vaguely defined, although some DAOs may also form legal entities behind the DAO itself. There is a Wyoming DAO bill that passed a Wyoming Senate committee that would help create legally recognized DAOs.

Depending on how the DAO is set up, it may be more difficult to coordinate and act quickly than if central leadership, such as the CEO, were to make quick decisions when necessary. However, the DAO can set quotas that do not take too long and place requirements on how quickly DAO members can respond. Also at the beginning when there are a lot of decisions to be made, there can be more centralization among certain members, and then over time the DAO will decentralize in what is called "progressive decentralization."

There is also the possibility of voter apathy, where not all members want to vote, or are even best qualified to vote on all changes. In such cases, it is likely that voters will delegate their votes to members who can be more informed and active, and who are also aligned with their beliefs. These representatives are sometimes called Accord Politicians because they often campaign for members' proxy votes in DAOs, similar to what existing politicians do. We may have agreement lobby groups that try to influence the decisions of these politicians. Conversely, one day we may even see DAOs lobbying and becoming major political institutions in society themselves.

Another issue is that with membership being so open, there is the potential for lower quality and more noise within the DAO, but these can be addressed through a DAO screening process or minimum token holdings to at least ensure that participants have a price in the game and an incentive to see the DAO succeed.

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