A Decentralized Autonomous Organization (DAO) is one of the most complex forms of smart contracts.
It is a system of algorithms designed to provide transparency in decision making in the process of collective collaboration. It seeks to eliminate human error or manipulation of investor funds.
In it the charter of the decentralized organization is written within the code of this type of contract, using complex tokenized governance rules.
This innovative concept was initially postulated by Werner Dilger, a renowned German professor of computer science, who in 1997 developed his paper “Decentralized autonomous smart home organization according to the immune system principle”. However at the time, his idea proved impractical until the advent of the blockchain.
The Bitcoin blockchain can be considered as a primitive DAO, as it needs its autonomous corporation between developers, miners and community to create the infrastructure for operation.
In 2014, Vitalik Buterin, co-founder of Ethereum, explained the meaning of the DAO concept, defining it as, “an entity that lives on the Internet and exists autonomously, but also relies heavily on hiring people to perform certain tasks that cannot be done in an automated fashion.”
The DAO was the first-ever blockchain DAO, and consisted of a decentralized, transparent, line-of-code-based investment fund launched in 2016 on the Ethereum blockchain.
In The DAO, anyone could propose a project and seek funding from the community. If a consensus of more than 20% was reached, the requested funds would be transferred in ETH to the applicant’s address. More than 11,000 investors purchased tokens that gave them the right to vote on projects. More than $150 million had been raised in ETH.
In June 2016, due to vulnerabilities in its code, The DAO was hacked, resulting in the theft of 3.6 million ETH.
It was proposed to restore the stolen funds, and as not everyone agreed with this decision, a hard fork took place, Ethereum and Ethereum Classic, from which the ETC token was created.
This IT problem did not stop the growth of the DAO concept.
The use cases of DAOs are very diverse and range from the management of a company, an organization, to a state or nation.
Its essence is based on open source and transparency, where operations are executed self-sufficiently, without external intervention or hierarchical structure.
A DAO is nothing more or less than a democracy running on Blockchain, unlike most countries, which have representative republican system, with hierarchical order.
It is a new type of sharing economy, where the users of a service are at the same time its owners.
In the good functioning of a DAO it is necessary to develop:
- Tokens: that can be used as a reward mechanism for some activities. The funds are reserved at the creation of the organization or increased during its development.
- Autonomy: once implemented, it is independent of its creators and cannot be influenced by external forces.
- Consensus: if funds need to be drawn from or moved to the DAO, it is necessary for the majority of participants to agree on the decision.
- Developement: A DAO cannot build a product, write code or develop hardware. That requires a contractor who is elected through a vote.
- Proposal: Proposals are the primary form of decision making in a DAO. To avoid overloading the network with them (spam), some require a monetary deposit.
- Voting: they choose proposals and so people can exchange economic value in the world, be it an investment, raising money or loans, all without intermediaries and trusting the code.
There are many scenarios to illustrate how a DAO could be used. One example could be a neighborhood association, in which each family pays annual dues that are used to pay for different breakdowns and improvements in the community. Using a smart contract, all the neighbors could deposit the funds and acquire participation tokens, where they would not be in the hands of a single person, but in the hands of everyone and no one at the same time. The smart contract would have them blocked pending a democratic decision, remaining visible in a transparent way but without anyone being able to embezzle them.
Can you imagine a country managed by a DAO?
Catalyst is a DAO. An experimental system implemented on the network to vote in a non-binding, but financially incentivized way.
Proposals submitted by the community to develop applications on the blockchain, are voted on by ADA holders, and the winners receive funding for those projects. This money comes from Cardano’s treasury, which is supported by 20% of the rewards collected in each epoch.
Thirty-one proposals have already been funded with $750,000 in FUND2 and 3.
For FUND4, in progress at the date of publication of this article, in the category of Local Community Centers, “ALDEA, the Latin America DAO” is presented, motivated to provide a platform or framework in Spanish, for the Cardano Community to discuss, prioritize and resolve Latin American issues.
ALDEA will manage a Treasury based on the IOHK paper: “A Treasury System for Cryptocurrencies: Enabling Better Collaborative Intelligence”, through their own governance tokens in the same way they currently do with ADA.
As for the entire Cardano ecosystem, stake pools will play a key role in ALDEA growing its Treasury. They will provide a percentage of their ADA rewards in each epoch in which they produce blocks, in exchange for governance tokens. ALDEA will help promote a more even distribution of delegators among the pools, and as the pools grow, so does their share, the treasury, and the entire community as a result.
Delegators in member pools will receive governance tokens in addition to the ADA rewards they receive from the stake pool they delegate to.
ALDEA will provide a place for all Hubs in the Latin American community to come together and collaborate on creating proposals for the community.