Decentralized Autonomous Organizations (DAO) are social organizations with a transparent system of legal regulation, controlled by its members, and not by the government. It is based on the famous blockchain technology. Some traders compare DAO with a system of collective payments or a shared wallet.

DAO was born in the new digital space called Web 3.0 in 2016. You can read about new Web 3.0 projects in this article. The first organization was called The DAO. Unfortunately, it turned out to be a failure. About 14% of all Ethereum (ETH) that was in circulation on the market in those days was invested in it (about 50 million US dollars at the exchange rate of that time). But the members fell victim to crypto-hackers. Investors have lost a lot of money. 

In 2022, the popularity of DAOs skyrocketed. More and more organizations are appearing on the crypto market, inspired by the idea of ​​​​creating a new form of business. All DAOs usually have same main factors:

• Сommon mission or ideology. This is what its members generally come for. It can be absolutely any mission that connects the souls of like-minded people and requires a solution. For example, there are climate DAOs that fight environmental problems and global warming, social DAOs, media DAOs, DAOs for NFT, and about two hundred more other types.
• Common financial fund and management system. Members of the organization together decide what to do with the income based on a DAOs mission.
• People control the DAO. There is no central leadership, no person controlling everything. As well as, hired staff do not exist here – all members are motivated by a common ideology and by being rewarded with internal tokens.
• Voting. Any issues are resolved by internal voting.

All DAOs should have the same features. This concept, for instance, gives equal rights to all members of the organization. It doesn’t have any bosses. People are combining their resources in order to solve a common problem. DAOs are a flexible and comfortable way of work with individual consideration of the skills of each participant. Most importantly, there is no space for corruption, it is excluded by default – all actions are transparent.

Pros and cons of the DAO 

Participants of such decentralized organizations point out many advantages of this system.

• Democracy. All DAO members have the right to make decisions, participate in voting on various issues related to project management.
• System transparency. All data related to the management system and the financial part are recorded in the blockchain and remain in the public access.
• No hierarchy. All members of the organization should benefit from the decisions made by DAO.
• Open access for new members. There are no interviews, test tasks and applications in the DAO system – anyone can join the organizations. 
• Trust. Some DAOs require a minimum fee, they ask to buy their tokens in order to join.  But not the amount of purchased tokens is important. Your ideas are valued there above all else. You might share your thoughts with other members – that will help you to gain their trust. 

Along with the advantages, there are also disadvantages:

• Absence of a leader. Many are confused by this approach of working without a chief, because of that the risk of internal conflicts increases. But, as the DAO members say, working on a common idea makes everyone move in the same direction.
• Fork risk. A problem arising from the previous point. If the DAO community begins to disagree, then the organization may split and create a fork in case with cryptocurrency market. In fact, that has happened to Ethereum in 2016.
• The risk of concentration of power. In DAO, the voting system is linked to the amount of tokens, which are given as a reward for contributing to the project. The more tokens users own, the more available votes they have and the higher their influence within the group. On the one hand, this is justified, but on the other hand, it creates some kind of hierarchical system.
• Vulnerability of smart contracts. There is a risk of crypto hacking and losing tokens.
• Legal uncertainty. Decentralization and independence from the government is a good thing. It gives DAOs freedom. But if there are some legal violations that require a legal consideration outside the digital reality, then it will bring some problems. For example, in the United States, the creation of DAOs format is prohibited by law. In the event of a legal conflict or violation, all members will be held accountable – since there is basically no leader in the DAO system.

Development of Web 3.0 will bring major changes in all areas of life – legal, financial, social. Some believe that all this should happen in the near future, digital reality will soon transform all traditional foundations. In the new world, DAOs will act like traditional law firms, but in a more democratized way. Would you like to learn more about existing DAOs? Then read our articles about BadgerDAO, Unifi Protocol DAO, Lido DAO and vEmpire DDAO.

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SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.