A Decentralized Autonomous Organization (DAO) is a piece of software running on the blockchain that provides users with a built-in model for collectively managing their code.


Unlike organizations run by boards, committees, and executives, DAOs are not run by a limited group of people, but rather by a network of computers running shared software that enforce a set of rules written in code. To become a member of a DAO, a user first needs to join the DAO by purchasing its cryptocurrency. Users who hold the asset then have the power to vote on proposals and updates, usually in proportion to the amount they hold.


The first successful example of a DAO was BitShares, a virtual e-commerce platform that connects merchants and customers without a centralized authority. At the time, Bitshares was labeled a Decentralized Autonomous Company (DAC), a term coined by its founder Dan Larimer.

How does DAO work?

DAOs are designed to mimic the structure of a company by enforcing the rules and regulations established in its open source code through the use of smart contracts. Smart contracts are protocols that perform specific tasks when certain conditions are met. These rules are usually determined by the stakeholders of the DAO.



Unlike traditional organizations there is no hierarchy in a DAO. Instead, in order to align the interests of the institution with those of its members, the DAO encourages the users of the distributed network to achieve their goals.One of the main features of a DAO is the internal capital used to encourage participants and ensure the smooth running of the institution.

Governance

Once the initial set of rules has been finalized and codified in a smart contract, the DAO typically enters a funding phase in which anyone wishing to enter can do so. At the end of the funding phase, the DAO is considered efficient and operational, and all key decisions around the organization are made by users reaching consensus on proposals.


By holding cryptocurrency and pinning it to a voting contract, users gain the ability to vote on the proposal with a voting weight proportional to the amount of cryptocurrency locked up. The proposal is then validated according to predetermined network consensus rules, and voters are rewarded with additional cryptocurrency for their participation.