A decentralized funding cycle (DeFi) is mature with specific use cases that serve specialized purposes. The concept of decentralized autonomous institutions (DAOs) certainly applies to conversations about DeFi, but it doesn’t necessarily fit into the DeFi box – its potential applications are too large to be downgraded to decentralized funding in alone.
Devolved (or distributed) autonomous organizations are more of a model for governance than a specific use case in the blockchain-powered financial product sector. DAOs are now in specific forms, many of which are DeFi products. But in the future, the DAO concept can be applied in many different sectors of society.
What is a Devolved Autonomous Organization (DAO)?
As we tend to do when it comes time to explain blockchain-related concepts, we get to the heart of the term “decentralized autonomous organization”, or DAO, by decomposing it into simple English terms. Per Oxford Languages, to devolve something is “transfer (managing an activity or organization) to several offices or local authorities rather than one single one. ”What is devolved, therefore, is defined by the collective control of power over a system.
A task or system that is autonomous, according Merriam-Webster, is “carried out or maintained without external control” while “existing or [being] can exist independently ”. An organization is some kind of administrative or functional structure. Thus, a decentralized autonomous organization is one with non-centralized distributed control that can exist independently without external intervention in having an organized structure. Decisions in these systems are made, in theory at least, by its participants.
DAOs adhere to these principles, but make specific reference to systems built on blockchain technology. Networks of computers, known as nodes, implement protocols embedded in smart self-operating contracts to make the system function as intended.
How Do DAOs Work?
The blockchain component of DAOs accounts for the “decentralized” aspect of these autonomous organizations. A blockchain contains nodes that decentralize all transactions. Instead of one computer handling tasks such as security checks, financial transactions, and other vital processes, blockchains rely on a network of independent yet connected nodes. In this way, all aspects of blockchain are dispersed, and thus decentralized. This decentralized system of goals also facilitates democratic governance by stakeholders.
Smart contracts provide autonomy to DAO. These contracts are programmed algorithmic protocols that operate when pre-determined conditions arise. For example, say a buyer inputs a purchase request in a blockchain system. A vendor then inputs a sales request and each node in the system checks the validity of the transaction. A smart contract then releases the money to the purchasing party, crediting the seller’s account to reflect the transaction. Because of smart contract powers, human intervention is not required once they have been offered. Thus, the whole system remains autonomous.
Smart contracts can also govern voting processes that determine how a DAO is run. When such smart autonomous contracts are incorporated into a decentralized, blockchain-powered platform with a specific organizational purpose, you have DAO.
What is the purpose of DAO?
The specific purpose of a DAO depends on the DAO you are referring to. Because this series is meant to explain the world of devolved finance, we will focus on DAOs as they apply to the DeFi sector. The organization may exist to help consumers transfer cryptocurrencies across various blockchains, or to serve some of the most popular DeFi use cases like crypto lending or product farming.
Any cryptocurrency, if it has a decentralized organizational structure, is arguably a DAO. Cryptocurrency transactions are generally operated by smart contracts, are intrinsically tied to blockchain technology, and operate within some sort of organizational structure. This seems to check all the boxes of what makes DAO a DAO. However, when someone who knows their crypto refers to DAO today, they are probably referring to something more specific, and generally something that is built on the Ethereum blockchain.
Ironically, devolved autonomous organizations insist that human participation has any value, and in this way they do not absolutely autonomous. Generally, these organizations also require a native ticket to reward consumers when they participate in the DAO. The more human participants in a DAO, the more legitimate its purpose, the more valuable its ticket is, and the more participants will be rewarded for their share through ownership of that DAO’s increasingly valuable native tickets.
Once DAO is funded, launched, and operational, decisions about its material function (where money generated by the network, for example) becomes a democratic process among stakeholders. This encapsulates the decentralized nature of a DAO, or at least a functioning DAO as it claims. At this point, a DAO can go on fulfilling its purpose, whatever that purpose is.
What is the Current State of DAOs?
For the time being, these devolved institutions are largely used to carry out financial transactions. They allow consumers to borrow crypto, lend crypto for interest (and in some cases, additional tokens), buy and sell crypto. Use cases continue to emerge, but these are the most established DAO purposes to date. In the future, DAOs may administer elections, execute real estate transactions, or govern some other sector of society. For the time being, they exist largely a decentralized, cryptocurrency-related finance secretary.
Some of the most successful DAOs on paper to date, and the most notorious as a result, include Maker, MetaCartel, and Aragon. Maker is especially notable in the DeFi space for providing cryptocurrency lending services that have proven to be extremely popular. The concept of DAOs, still relatively young, will only continue to experience a greater number of players entering the markets and, hopefully, more competition, better and better options for consumers prone to crypto.
How Do Regulators View DAOs?
There always seems to be one issue in conversations about regulation and crypto-related projects, powered by blockchain: fraud. If fraud is a significant issue within a sector, the regulators can get their heads in the picture sooner rather than later. But DAOs seem to be improving on working out kinks and providing self-governance over time.
One of the first widely hyped forums into DAOs, the original name “The DAO”, structurally baseless and hack-proof. The damage: 3.6 million ETH tickets. If “The DAO” had been the last impression left by DAOs, then regulators could be prone to turn in and protect investors from the kind of mismanagement that would result in a 3.6 million Ether escape thanks to security protocols fragile.
But, that’s not the last impression. While time will tell the extent to which regulators are involved in the DeFi space in general and particular DAOs in particular, it seems for the time being that DAOs in the devolved finance sector are doing quality work protecting their assets investors and generally reliable.