DAO: What Is It? And How Can It Change The Future Of Business?
A decentralized autonomous organization (DAO) is an entity with no central leadership. It essentially comprises a group of individuals who have entered a contract with one another to achieve a coordinated goal that can be anything from collecting rare NFTs to funding blockchain-based projects. Instead of the typical top-down management style applied in many of today’s organizations, the decisions are made from the bottom up in DAOs where every member has a say in how the organization is run and its direction. In short, DAOs have “flat hierarchies” with no leader and relies on the entire community to make the decisions.
The first DAO, known as “The DAO”, was created by developer company Slock.it as a way to raise money in 2016. At the time, the DAO was relatively similar to a Kickstarter or GoFundMe with the exception that the DAO offered all its members/ investors the ability to participate in the decision-making process of how the company spends its raised capital. The DAO eventually expanded into a decentralized version for a venture capital fund. It held approximately 14% of the total amount of the Ethereum cryptocurrency that existed at the time, making it the largest crowdfunding project in history as of 2016.
However, The DAO was hacked in June 2016. The incident caused The DAO a loss of approximately $50 million, and it unfortunately never managed to regain its original status. Although the term “DAO” was first coined by The DAO, the term has subsequently been adopted by other firms and blockchains, becoming more of a descriptive acronym than an actual name.
While each DAO may have a different mission, DAOs commonly exist to take full advantage of decentralized finance (DeFi). DeFi enables cryptocurrency holders to make and exchange digital transactions without needing to go through a centralized institution such as a bank. With it, crypto holders can engage in virtually any kind of digital transaction. Hence, DAOs can organize individual traders into a larger user base, creating a symbiotic relationship between themselves and DeFi.
Aside from DeFi, DAOs have the potential to transform the media and marketing industries given their high capital. Some publishers, including the crypto trade publication Blockworks, see lucrative potential in pitching DAOs on advertising opportunities such as event sponsorships.
“DAOs are becoming the new institutions. There are DAOs with more than $10 billion in their treasury [and] media companies have not recognized this,” said Jason Yanowitz, co-founder of Blockworks.
The enticing benefits and novel idea of DAOs may prompt many to hop on the bandwagon, but DAOs are not without their risks. The DeFi world remains to be relatively new, making it susceptible to scams and hackers. According to reports by the blockchain analytics company Elliptic , DeFi users and investors have suffered total losses of $10.5 billion in 2021 which was a drastic increase from the recorded $1.5 billion in 2020. As DAOs heavily rely on DeFi for coordinating their finances and funnelling them toward their missions, this leaves room for increased risks of online thefts as witnessed in The DAO’s hacking case. Fortunately, DeFi will witness progress on this front as DeFi regulations are finally becoming a reality in 2022 with the conversation around crypto regulation transitioning into action.
In summary, while a DAO’s novelty leads to certain drawbacks, advanced technology is on its way to rapidly resolve the matter. With its growing list of advantages and the world’s ongoing digital transition, it is safe to say that DAOs are here to stay, and they could even possibly be the first step to a new age of business.