What is DAO & what are its Disadvantages?

DAO is a short form of Decentralized Autonomous Organization that does not have hierarchical management or central leadership. In this article, we are going to discuss what is DAO, why it is needed, and what are its disadvantages.


What is DAO (Decentralized Autonomous Organization)


What is DAO?


In the simplest form, it is an organization that is managed and owned by its community or members and there is no CEO. Its built-in treasuries are only accessible with the consent of its members.

All the decisions in DAO are first proposed and then its group members have the ability to vote and pass the proposal.

This is the best example of a project which is driven and owned by its members.


Why DAO is Required?


Now, let’s talk about why decentralized autonomous organizations or DAOs are required.

If you know how a normal centralized organization works, then there will be no problem in understanding why DAOs are required.

As we know, in a centralized organization, there is management that decides what policies need to be implemented, where to invest money, who can vote, and whatnot. Apart from that, all things are not transparent and small investors or even employees don’t know what’s going on.

Whereas in DAO, everything is transparent, decisions will only be made when members have voted and all the things are transparent.

Now, let’s come to the point that why DAO is required?

With a traditional organization, you need to trust the owners or board members to invest in the company, but what if you can see everything with 100% transprenecy that how a company will work and you have the voice in case of any issue.

On the internet, you cannot trust anyone blindly, so we have DAO, where you can check the source code of the DOA and verify it. This not only solves the trust problem, but you also get a chance to approve any changes that happen in the DAO.


How do DAOs work?


Smart Contract is the most important thing in a DAO. It is a pillar that defines all the rules of a decentralized autonomous organization and holds the group’s treasury.

Once the contract is live on a blockchain, no one can modify the rules except by vote.

If any member tries to change anything which is not defined in the rules, that attempt will fail. Also, as the treasury is defined by the smart contract, no one can spend the money without the communities approval. This means that DAOs don’t need a central authority.

Instead, the group makes decisions collectively and payments are authorized automatically when votes pass.

This is possible because smart contracts are tamper-proof once they go live on the blockchain.


Some Well Known DAOs


Dash: This is one of the oldest DAO projects which was started on its own blockchain in May 2015. Current price of DASH is $141 (2nd Jan 2022).

The DAO: This DAO project is one of the largest crowdfunding campaigns in history. This project is no longer in function after its hack.

Augur: It is on the Ethereum blockchain and focuses on the betting & prediction market. Augur is developed by Forecast Foundation in July 2018.

Steem: It is a very popular blockchain-based social media website and is on Ethereum blockchain.


Disadvantages of DAO


DAO comes with lots of advantages, but it also has some disadvantages which we are listing below:

1. Members participation in DAOs can be problematic.

2. Security is one of the main disadvantages of DAO. A smart contract is the backbone of DAO, so it is very hard to modify its code after finding the vulnerability. Even writing completely new code and then getting an agreement approved is difficult and time-consuming.

3. Regulation & legalization is another disadvantage of DAO (decentralized autonomous organizations). As DAOs can be distributed across multiple regions, there is no legal framework for them.

This was a brief introduction to DAO or decentralized autonomous organizations in simple words. If you have any questions or concerns, please let us know through comments.

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Happy Investing!

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