Smart contracts and blockchain are governance technologies that have the ability to increase openness while reducing bureaucracy through self-enforcing code. They can help companies reduce current principal-agent problems and the moral risks that come with them. In the absence of third parties, distributed network tokens enable incentives to automatically align interests.
DAOs address a long-standing governance issue known as the principal-agent dilemma by centralized autonomous organizations. So the question is: what is a DAO and how is it different from a traditional organization?
DAO Meaning Crypto: What Is a DAO?
A decentralized autonomous organization (DAO) is a blockchain-based program functioning as a capital fund, based on open-source code and lacking a traditional management structure or board of directors.
It provides users with a built-in methodology for collectively managing its code.
In simpler terms, a DAO is a self-organizing, decentralized organization. The DAO is not affiliated with any single nation-state in order to be totally decentralized, albeit using the Ethereum network.
Example Of Decentralized Autonomous Organization
Even though DAOs are still in their development stage, many of them exist now. Some of the examples of decentralized autonomous organizations are:
- DASH: A cryptocurrency administered by its users
- MakerDAO: A program that maintains a stablecoin
- Augur: A prediction market platform
Now that we have answered what is a DAO, let’s jump to our next question: how does a decentralized autonomous organization work?
Decentralized Autonomous Organization: Use Cases
- A charity can accept membership and any kind of donation from institutions and individuals all over the world, and the organization can determine how to spend the money.
- You may form a group of freelance workers who pool their money to pay for office space and software subscriptions.
- You may establish a grant and venture fund that pools investment resources and votes on which enterprises to support. The amount that has been repaid may be redistributed among the members of the DAO.
Decentralized Autonomous Organization: How It Works
DAOs are designed to resemble a corporate structure, with rules and regulations developed using open-source code and enforced via smart contracts. Let’s break it down a little.
The financial transactions and governance of a DAO are recorded on a blockchain. This eliminates the requirement for a third party to be involved in a financial transaction, streamlining those transactions via smart contracts. Smart contracts are contracts that are configured to execute if and only if particular circumstances are satisfied. The DAO stakeholders normally decide on these regulations.
Decentralized Autonomous Organization: DAO Membership
DAO membership can be of various forms. The voting system and other important key concepts of the DAO can be influenced by membership. The two types of DAO memberships are:
- DAOs based on sharing
- DAOs based on tokens
DAOs Based On Sharing
DAOs based on shares are more legal. However, they are still quite open. Any potential member can make a proposal to join the DAO, generally in exchange for tokens or labor. Direct voting power and ownership are represented by shares. Members can withdraw their fair part of the treasury at any moment. For instance, MolochDAO.
DAOs Based On Tokens
Depending on the token used, DAOs based on tokens are usually permissionless. These tokens are mostly exchanged on a decentralized exchange without the need for any authorization. Others must be gained either with the help of liquidity or a different form of 'proof-of-work.' In any case, if you have the token you will be able to vote. For example, Doodles NFT holders have the ability to vote on how to spend the funds in the “doodle bank.”
Decentralized Autonomous Organization: What Makes It Different?
DAOs are more democratically organized than regular corporations. They, unlike traditional companies, do not have a hierarchy.
DAO vs Traditional Organizations
Most Popular DAO & DAO Tokens
Here’s a list of the most popular DAO:
Decentralized Autonomous Organization: Tax Implications
Cryptocurrencies, in the United States, are considered property by the Internal Revenue Service (IRS). As a result, if you sell a DAO token, you'll face capital gains tax on the net gain. And how will that be calculated? All you need is the difference between the sale price and the cost basis.
You would pay the long-term capital gains tax rate if you kept the DAO token for more than one year. If you don’t, you would owe the short-term capital gains tax rate—or regular income tax rate.
To calculate capital gains and losses, you can use crypto tax software like ZenLedger that makes it simple to track bitcoin transactions across your wallets and exchanges. Whether you use DeFi or NFTs, the platform assists you in reporting taxes and identifying methods to save money through tax-loss harvesting and other tactics.
The Securities and Exchange Commission (SEC) has stated that digital asset transactions by "virtual" companies are subject to federal securities laws. So, unless there is a qualified exception, Initial Coin Offerings or Token Sales must register the securities. DAOs, on the other hand, are difficult to challenge because they are essentially software programs.
How To Create A Decentralized Autonomous Organization
To join a DAO, one must first purchase the DAO's cryptocurrency. Sometimes, DAOs require applications as well. When the users own assets they can vote on proposals and modifications proportionally to the quantity they own.
Decentralized Autonomous Organization: How Are They Being Used?
DAOs have been utilized for a variety of reasons thus far, including
And what’s even more special is that it has been achieving it all without the involvement of middlemen. So that you may get a better picture, a DAO, for example, can receive donations from any individual from any part of the world, and its members can select how the money is spent.
The Bottom Line: The Future Of DAOs
Many successful DAOs with tens of thousands of members and hundreds of proposals are excellent for crypto ventures that desire a decentralized framework. As more mainstream firms adopt decentralized governance, DAOs may become even more popular.