The rules of a DAO are encoded in smart contracts. These contracts establish the business logic for participation in the network by setting forth the terms of participation, what entities can do, what value is created, how that value is distributed, and how it is measured.
How DAO Works
A DAO is formed on the basis of smart contracts, providing the rules and standards of operation within the DAO in the form of a set of protocols or code, and allowing the creation of new entities and transactional forms in the DAO.
A DAO occurs in three major steps:
- Smart contract: To still the conflicts in the future, a smart contract is used. The contract is made of codes, which distinguishes a DAO from a legacy model. This is a computer code that describes all the rules of the system.
- Funding: After a smart contract is created, the DAO needs a way to receive funding and a way to enact governance. The most common way to accomplish this is through an Initial Coin Offering (ICO), where tokens are sold to raise funds. These tokens give holders voting rights.
- Deployment: Once the funding has been raised, it is time to create the DAO infrastructure. This can be a community of entities that exchange value or a combination of software and human actors.
The Need for DAOs
Most of the DAOs currently forming are being created as an alternative to traditional business structures that take too much of a cut for providing services. These DAOs offer benefits including:
- User control: DAOs give users complete control over business processes. If a user is unhappy, they can leave.
- Governance: DAOs have no central point of control. Users are able to be a part of the DAO while at the same time maintaining freedom from others who may make decisions they disagree with.
- Decentralized nature: DAOs are decentralized and operate on a global scale. This allows for multiple jurisdictions, assets, and users to operate within them.
Blockchain has been seen as a revolutionary technology capable of making transactions faster, safer, and cheaper. The fact that blockchain has created an almost impenetrable security infrastructure has allowed innumerable possibilities to evolve.
The inherent transparency in blockchain allows for all transactions to be traceable and valid, ensuring the security of the network. Blockchain technology has been praised for its immutability, which is the core value that enables trust between users and the ecosystem.
Time for a DAO?
With its potential to bring a new order in several industries, DAOs are expected to usher in a new era of business automation. The DAO is an example of a decentralized autonomous organization that is operated through computer code or a digital currency.
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