What is Dao?
DAO is the acronym of Decentralized Autonomous Organization and can be described as an open-source Blockchain protocol governed by a set of rules, created by its members, which automatically execute certain actions without the need for intermediaries.
DAOs are entities that operate through smart contracts.
Decentralized: there is no single point of failure. One of the main characteristics of crypto currencies is that they are decentralized. This means that they are not controlled by a single institution as a government or a central bank, but are issued and managed by a variety of computers, networks, and nodes.
Autonomous Organization: It has mechanisms that are capable of managing the organization without the need for an intervention.
The lack of a centralized authority reduced costs and, in theory, provides more control and access to investors.
Characteristics of a DAO: advantages and disadvantages
The rules of a DAO are embedded in a software code, which is executed by itself depending on the behavior of the protocol. It is not necessary to interpret these rules, as they are executed automatically when the specified conditions are given.
Both the rules of the program and the subsequent actions are recorded in a transparent and safe Blockchain, which can not be manipulated thanks to an immutable time mark and the distribution of information to network participants.
The concept of a DAO was proposed for the first time by the founder of Bitshares, Steemit, and EOS (Block.one) Dan Larimer in 2015, and was then perfected by Vitalik Buterin.
The first DAO was simply called "The Dao" and was created by Christoph and Simon Jentzsch. The launch was an unexpected success since it accomplished gathering 12.7 million Ether (with a value of about 150 million dollars at that time), which made it the greatest crowdfunding of history, back then. In a given moment, when Ether traded at 20 dollars, The Dao's total Ether had a value of more than 250 million dollars.
In essence, the platform allowed anyone with a project to present their idea to the community and potentially receive funding from the DAO. Anyone with DAO tokens could vote on the plans, and then receive rewards if the projects obtained benefits. A kid of decentralized platform for venture capital.
With such great premises, The DAO seemed to be destined for greatness, but it didn't go well, and, in a while, we'll see how and why.
Other DAO's features
A DAO helps maintain a secure and optimized network without the need for manual intermediation by its members. The participants are not required by a legal contract but are encouraged by rewards in the form, usually, of native asset tokens that help them work towards some kind of goal.
Also, the rules defined by the protocol or smart contract guide the behavior of the participants and execute an automated consensus. As third parties are not needed, a DAO helps accelerate decision-making and network actions, drastically reducing management costs.
For example, suppose that an organization wants to distribute funds for a new project. Instead of going through the bureaucracy to get and distribute the funds after approval has been granted, the pre-programming of the DAO guarantees that the assets are immediately distributed to the appropriate parts without any other administration or paperwork.
To attract the necessary funding to manage a DAO, the Protocol will issue Governance tokens to investors who represent not only the membership but, what is more important, the rights of voting (similar to the rights of shareholders) needed to make changes to it.
The rules that govern a DAO can be very complex and difficult to change after it enters into work since any change would depend on the new code and the approval of the network by consensus. This inability to quickly react to code errors leaves a DAO vulnerable to hacking attacks that could exploit security failures and then drain the funds from the crypto users.
The DAO under attack
The most infamous example of that is, of course, the June 17, 2016 hacking of "The Dao", a crowdfunding project that achieved record funding despite having several security failures in its code. A few days after its launch The DAO was hacked, At that time about 3.6 million ETH (the equivalent of 70 million dollars of the time) were stolen and their consequences lead to an Ethereum Hard Fork to reverse the hack. That is the reason why today we have both Ethereum and Ethereum Classic. Many newcomers don't know about that and still believe ETH is the original chain, while, actually, ETC is.
In this exploit, the attacker was capable to "ask" the smart contract (DAO) that returned the Ether on multiple occasions before the smart contract could update its balance
After that attack, DAOs underwent a period of relatively low popularity, compared to other blockchain projects. But the explosion of decentralized finance protocols (DEFI) has led to an increase in the popularity of DAOs by 2020, since many platforms of Yield Farming and decentralized exchange (DEX) such as Compound (COMP), Yearn.Finance (YFI ) And Uniswap (UNI) depend on them for governance.
Other very interesting DAO projects are:
- Pickle Finance, a humorous project which allows users to farm, stake, and harvest different stablecoins.
- Badger DAO, a platform that allows developers to use BTC as collateral for their projects.
- Maker DAO, where users can manage DAI stablecoin.
- The Movement, an amazing project which focuses on the freedom to create and develop useful ideas, in a decentralized, borderless, and permissionless way.
