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DAO - what is it and how does it work?

9 min reading

Are you wondering what lies behind the concept of DAO? What is this decentralized autonomous organization and what benefits can it bring to investors? You've come to the right place! In this letter you will find simple answers to complicated questions!

dao schema

What is DAO?

Although DAO may seem quite complicated, in reality there is nothing difficult to explain about this after action. A decentralized autonomous organization is simply available, there can be no separate entity, governments or banks. It can be considered that it works on general principles, like cryptocurrencies. In fact, it was inspired by their decentralization. So it's possible that there is such a thing as Bitcoin (BTC) that has been removed in the corner of all financial intermediaries, you might as well use an organization that won't need them either. Such an idea appeared among the community shortly after the first cryptocurrency was issued.

Moke Hearn illustrated the idea in a very simple way. He bowed to his public to imagine a car without a driver circling the city in search of connections from which they could charge tolls. After completing the orders for profits from travel to the charging station. It doesn't need any outside help except joining.

That's what DAO is about. Decentralization means that such an organization is not supervised by one, superior unit. So there is no hierarchy for such a company. Each person's voice is equally attractive. What's more, this type of organization exists all over the world on thousands of servers, it has no offices or headquarters. They do not limit any jurisdiction. Not much can not be simply eliminated. The word autonomous means, maybe it decides about itself. Such a digital company receives pre-programming to set the rules, and then start to work automatically and do the tasks themselves.

Summary of information:

DAO is a decentralized autonomous organization that is an entity in a digital system supported by intelligent contracts. These, in turn, include digital tools and protocols that you should use to handle specific transactions or other elements of the contract.

What is DAO made for?

You know more or less what DAO is and how it works, so you guess it is created for some purpose. Well, first of all, the founders of such an organization believe that mistakes and manipulations of the investor fund can be eliminated, as well as transfer of decision-making powers in the hands of an automated system.

DAO also change towards evaluation and the fight against corruption. It is thanks to blockchain technology and the open nature of such organizations that transactional transactions within it are visible to all its members, as well as immutable.

A popular theory underlying DAO is that it arose after, the author: take away the authority of the director and all members at level level to prevent management adjustments and waste of financial assets. This organization assumes that the knowledge of people who have equal rights can be the key to success. Joint management is to be more fruitful than in the case of international institutions, where one man may be wrong.

DAO epithets:

  • Transparent
  • Anticorruption
  • Decentralized

On what basis does DAO cover?

To start operating, the DAO will need a token that can be used for the remuneration system. Recall, this is a digital unit representing this value. When buying tokens belonging to a company operating on a DAO account, investors are entitled to apply with the help Such organization cannot be influenced by any outside person. To withdraw the appropriate measures, the majority of DAOs must vote for a determination. Although there will be an error in the code, 51% of voters depend on further action.

The proposals cover the basic way of applying decisions in DAO. Often, however, too many of them can cause network congestion. To prevent spam, you may require in this case After submitting your application you must vote.


What was the DAO company and why did it fail?

In early May 2016, the team Slock.It created a decentralized autonomous organization, which he called ... The DAO. Well, perhaps the very intention of the creators of this digital company was due to the fact that they were recognizable. So, if you are interested in searching information on Google about what is important is DAO, you may also come across articles related to DAO.

Let's return to the main track. Well, The DAO has become one of the most popular examples of a decentralized autonomous organization, and not just because of the name. But it wasn't just good fame. Let's start with the fact that at the very beginning it would seem that The DAO has achieved incredible success. In less than a month, he managed to collect an amount of 12.7 million Ethers, which was the equivalent of $ 150 million. So this organization has become the largest crowdfunder in history.

The DAO platform allowed anyone who issued tokens to vote for ideas and then receive rewards if projects were profitable. It looked pretty good at first.

On June 17, 2016, everything turned upside down. It was then that one of the hackers found a vulnerability in the code that allowed him to withdraw funds from The DAO. As a result of this attack, he stole 3.6 million Ethers, or about 70 million dollars at that time.

Interestingly, the person behind all this said that he did not commit a crime because he did nothing that the code would not allow. The attacker simply asked the intelligent DAO contract to return Ethers many times before it could update its balance. When developing the smart contract, the developers did not take into account both the recursive connection and the fact that it first sends funds in ETH, and then updates the internal token balance. However, we will not go into further details.

What is the most important thing in this story? Well, understanding the fact that the error did not come from Ethereum itself, but from an application built on this network. The code written for The DAO had many drawbacks.

Are you probably wondering what happened to the stolen funds? Could the community recover them if the user behavior was not against the code? Well, in this situation, the only way out was the split of Ethereum blockchain itself, i.e. the so-called hard fork. This network is divided into two parts: Ethereum (ETH) and Ethereum Classic (ETC). Thus, the hacked funds returned to the accounts of the original owners.

This incident marked the beginning of the end of The DAO. Many Ethereum users also questioned the split of the network, claiming that it violates the basic assumptions of blockchain technology. As a consequence of all these negative events, in 2016 two cryptocurrency exchanges: Poloniex and Kraken removed tokens belonging to The DAO from their platforms.

As if that was not enough, in July 2017 the US Securities and Exchange Commission (SEC) issued a ruling in which it stated that the tokens offered and sold by The DAO were securities and were therefore subject to federal regulations. So this digital organization should follow the same rules as ICO (Initial Coin Offering). According to the SEC, both The DAO and all its investors have broken the law.

Main conclusions:

Although the DAO project no longer exists, it is a lesson for other decentralized autonomous organizations. He showed developers what they should and should not do. First, in the case of The DAO, the hook was not associated with the Ethereum blockchain, but a loophole in the code. If it had been spelled correctly, hacking could have been avoided.

Another important lesson was the development by companies of a way to circumvent the guidelines presented by the SEC. One way to circumvent the law is to use the so-called SAFT method. It says that tokens with a justified utility value on the blockchain platform violate the elements of the Howey case, thus they cannot be listed as securities, and thus are not regulated by the SEC.

Examples of other DAOs

It is worth knowing that The DAO was not the only decentralized autonomous organization. These types of companies include, among others:

  • Dash - a form of decentralized autonomous organization run by users called masternoods, i.e. the main nodes. It is also the 21 cryptocurrency in terms of market capitalization. In the case of Dash, the reward for each excavated block is divided between miners and nodes. One of the main advantages of this cryptocurrency is primarily instant transactions, this solution is called InstantSend. Another interesting thing that Dash offers is the so-called PrivateSend, which is a mixing service, it provides users with full anonymity.
  • Augur - it was written in JavaScript and Serpent. It was created on the basis of Ethereum blockchain. This platform assumes that more people are able to make a better decision than a minority. Users speculate on the results of future events, those who bet well, are rewarded. The Augur token currently ranks 48th in the CoinMarketCap ranking.
  • Maker DAO - a decentralized autonomous organization based on the Ethereum network. It consists of two parts, management - Maker and stablecoin - Dai. The former is used to vote on issues related to the platform's business model.
  • Aragon - a decentralized application built on the Ethereum blockchain. This is an open source project that aims to enable the creation of decentralized autonomous organizations.
  • Wings - a platform that allows users to create and manage DAOs. It uses public opinion to solve the problems of startups starting their business. Wings also uses a combination of standard DAO management and crowdfunding to achieve its goal.
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