A Decentralization Autonomous Organization is an accurate representation of the democratic structure. “By the community, for the community, to the community.” The definitions of democracy and DAOs are not much different. Experts believe that this is the future of how organizations work today.

What is DAO?

Decentralized Autonomous Organization is the full form of the word DAO. As mentioned above, it shows the true representation of democratic governance. The decentralized ecosystem becomes possible because of Distributed Ledger Technology, i.e., Blockchain. 

Decentralized Autonomous Organizations or DAOs are a form of an entity made by the community where all the participants holding the governance token can participate in the managerial decisions. 

Smart Contracts are the base of DAOs, created on a public blockchain network. All the rules of the organization, such as fund utilization, voting power, and expected future upgrades encoded in a smart contract. Once the smart contracts are deployed on a Blockchain network, it becomes temper proof, and changes can only be made when the majority of the community members agree to it. 

Transparency plays a crucial role in this new organizational structure. As smart contracts are created on a public ledger, anyone can see and audit the codes written to govern the organization. 

What is The DAO?

A lot of people get confused between DAO and The DAO. I understand this is the term that can confuse those who are new to the industry. The DAO was the first ever DAO created on the blockchain network in April 2016 with an aim to pool the fund and invest at an appropriate investment instrument to get the highest possible ROI

Within three weeks of the token sale, The DAO collected around 12.7 million Ether ($150 million at that time). The amount was huge, and an autonomous organization was managing such a big fund for the first time in history. 

However, the party didn’t last long. As smart contracts are transparent and anyone can view them on the public ledger, hackers exploited the opportunity. Due to some loophole in the smart contract, they were able to hack The DAO. Around $60 million worth of ETH was robbed. People’s funds were lost!

Because the amount was so big to be ignored, the Ethereum community gathered together and created a hard fork that divided the original Ethereum Blockchain into two parts. One continued as Ethereum Classic, and the other is the Ethereum Blockchain that most developers use today. 

The fork happened due to different opinions. A few community members believed reversing the transactions is against the fundamental nature of blockchain technology, immutability. On the other hand majority of the people wanted their funds back. 

Afterward, DAO wind lost for a few years. However, in 2020, it again caught some fire, and people started building multiple Decentralized Autonomous Organizations, and now some of them are doing exceptionally well.

Top 5 DAOs as per Market Capitalization

Though there are large numbers of DAOs available in the market working in different domains such as Supply Chain Management, Grants, and Defi, etc. However, I have tried covering the 5 famous DAOs that are creating an impact in Web 3.0

Uniswap

Uniswap is the largest Decentralized Cryptocurrency Exchange. It enables you to trade more than 1000 ERC-20 tokens on the platform with more than 1200 trading pairs. Unlike Centralized Cryptocurrency Exchanges, the price of cryptocurrencies is not determined by an order book method. Instead, it works on the Automated Market Maker(AMM). Just after the launch, the platform became a DAO (Decentralized Autonomous Organization). All the governing decisions are taken by the community members who hold its native governance token, UNI.

Ape Coin

ApeCoin DAO is a kind of entity formed to make crucial decisions for the Bored Ape Yacht Club (BAYC) such as Fund allocation, collaborations, and crucial future plans. The DAO has a governance token called ApeCoin, holders of which participate in the decision as community members. 

LIDO DAO

LIDO DAO is a platform that enables people to stake crypto coins operating on a Proof-of-stake consensus mechanism while maintaining liquidity. This means you can stake your Ethereum and still use it on any decentralized protocol. Further, you will get the appreciated value within 24 hours itself. 

Let’s understand it in a more detailed manner. Assuming you staked 5 Ethereum on the platform. In lieu, you will get 5 sETH (staked Ether) that you can use on any decentralized protocol. Every 24 hours, the value of your stETH will increase based on the Staking rewards you get. Assuming the staking reward is 0.001 ETH, your 5 sETH will become 5.001 stETH.

Further, you can utilize these stETH on any other platform as well. You won’t need to wait for the lock-in period to get over. To become a validator, you usually need to stake Ethereum in a multiple of 32. However, Lido allows you to stake even if you have less than the required Ether.

AAVE

AAVE is a decentralized platform that enables people to lend and borrow cryptocurrency on the platform. Users on the platform deposit cryptocurrencies in the pool, which is further lent to the other borrowers. Borrowers, in lieu, pay the predefined interests. 

However, to borrow cryptocurrencies from the platform, you need to have collateral in other cryptocurrencies, which generally outpass the value of the borrowed cryptocurrencies.

Users who deposit their cryptocurrencies on the platform earn interest, and all of it happens in a decentralized manner without the need for any central authority or intermediary. 

AAVE is the governance token for the AAVE Protocol. Therefore, all AAVE token holders can participate in the crucial decisions of the projects. Further, AAVE token holders can also get discounts on interest rates/fees. 

Bit DAO

Bit DAO is a decentralized autonomous organization designed to provide grants to the upcoming decentralized protocols with the potential to make the change in the Web 3.0 space.

Its vision is to create open finance and a decentralized tokenized economy. The DAO is governed and managed by its community, i.e., Bit Token Holders. Bit Token is the governance token of Bit DAO. Bit holders ultimately decide to accept or reject the proposal related to the DAO.

Pros and Cons of DAOs

Every coin has two sides, and DAOs are no different. Decentralized Autonomous Organization is a relatively new concept. It comes with its pros and cons. Fast decision-making and decentralized and transparent ecosystems are some of the benefits of DAOs. On the other hand, the lack of a regulatory framework around the same can be a limitation for the mass adoption of this new form of organization. Let’s dig a little deep into the benefits and limitations of a Decentralized Autonomous Organization.

Benefits

• Decentralization: DAOs are decentralized, which means that there is no central authority controlling them. This can lead to increased transparency and fairness, as decision-making power is distributed among all organization members.

• Trustless system: DAOs are built on blockchain technology, which ensures that all transactions are recorded and cannot be altered. This makes them a trustless system, as members do not need to trust each other to participate in the organization.

• Efficiency: DAOs can operate 24/7 and automate many functions that would otherwise require human intervention, which can lead to increased efficiency and lower costs.

• Community-driven: DAOs are often community-driven, which means that members have a say in the direction of the organization and can propose and vote on changes.

Limitations

• Lack of legal recognition: DAOs are not yet recognized by many governments, which can create legal and regulatory challenges.

• Technical complexity: DAOs are built on blockchain technology, which can be complex and challenging to understand for many people. This can limit the number of people who are able to participate in the organization.

• Lack of centralized decision-making: While decentralization can be a benefit, it can also lead to slower decision-making and difficulty in coordinating large-scale projects.

• Vulnerability to hacking: While blockchain technology is secure, DAOs are not immune to hacking. If a hacker gains control of the majority of the tokens in a DAO, they can potentially manipulate the rules to their advantage.

Conclusion

DAOs are referred to as Decentralized Autonomous Organizations, which are built on Smart Contract. People often get confused with the term The DAO and DAO. The DAO was the first ever DAO that got mass adoption in a very short span of time. However, due to the vulnerability of the smart contract, around $150 million worth of Ether was lost, which gave birth to the hard fork, and two separate blockchain was created. Ethereum Classic and Ethereum.

Overall, DAOs have many potential benefits, but there are also limitations and challenges to consider. As the technology and legal landscape continue to evolve, it will be interesting to see how DAOs develop and become integrated into different industries and organizations.