DAO stand for decentralized autonomous organization. But what are those organizations doing and who is running them in the end?
An Organization on the Blockchain
A DAO works like a company. Except that it does not have personnel, no manager and nobody is the owner. Instead, its foundation is often built on a smart contract that makes sure that every aspect of the organization is a binding agreement.
Once the smart contract is written and set in motion, the DAO works on its own and without any interference of a third party. That being said, its purpose is part of the smart contracts design and a programmer can easily identify how the DAO is build and how it is serving its purpose.
Already existing examples
The Dash DAO is an organization which is led by all masternode owners. Together they control funds and the development of the cryptocurrency Dash. Developers and businesses can propose developments or services and the masternode owner vote for or against such a proposal. This way the Dash DAO even allocates funds to chosen projects.
Another example is Maker DAO. Maker is a smart contract on the Ethereum blockchain and it controls the stablecoin DAI. While a stablecoin is usually backed by Euros or US-Dollars, DAI is backed by a pool of crypto collaterals.
In this case the DAO controls the balance between the stablecoin DAI, the underlying assets and market mechanisms that guarantee its value.
Limitations of a DAO
While a DAO can exist peacefully and effectively on a blockchain, it is still facing some issues. This is due to the fact that the DAO often acts similar as a company, but there is no regulatory framework covering its functions.
Therefore, a DAO usually has a hard time hiring lawyers and get represented in court. It is also completely unclear how a DAO could ever sign a contract (aside from smart contracts). A contract requires a person or legal entity signing it. A DAO usually has none of that.
Another issue is the IT security. Since a DAO is often fully dependent on a smart contract, it is going to fail or gets hacked, if the smart contract isn’t designed well enough. Such a security flaw can lead to a disastrous outcome and the loss of millions of Dollars.
Luckily, nowadays most DAOs get audited multiple times before they are finally going live.