Stakely Blog
March 16, 2022

What is a DAO and how do they work?

March 16, 2022

A Decentralized Autonomous Organization (DAO) is an organization governed by automated rules that are set and executed by smart contracts, and whose control resides in its members, not in a centralized organization. These members, once verified and authorized by the same smart contracts that govern the DAO after acquiring the token that gives them voting power, can take part in the decisions that will decide the direction of the project

Blockchain technology allows the creation of different types of autonomous and decentralized applications, usually dedicated to spaces such as DeFi, GameFi, Web3 or NFT, among others. Also, it allows communities to organize themselves to make decisions involving the management of the project, the assignment of resources or the deployment of launches and new versions; this is what we know as DAO. To ensure and meet the standards of decentralization, projects create their own DAO applications or incorporate an existing one that fits their project vision.

How does a DAO work?

It is known that DAOs share many of the features that are present in most decentralized applications built on blockchain. However, DAO’s highlights are related to their utility. Here are some of their principal highlights:

  • They are decentralized: potential members don’t depend on a central organization to join, they only need to buy its cryptocurrency and hold it in their decentralized wallet. If they meet the requirements written and detailed in the code to join (such as being a cryptocurrency holder or owning a specific NFT), they will be able to participate in the decision-making and governance of the project.

  • They use their own system: their decentralized applications are composed of all the necessary tools that allow them to organize themselves, regardless of the number of participants. At the same time, they have several spaces where they can interact, where they can submit their proposals and make their votes.

  • They are autonomous: DAOs are made up of smart contracts that allow them to govern themselves in an autonomous and automated way regarding the processing of proposals, votes and results. They don’t need human resources for this, but on an algorithm capable of processing them automatically.

  • They enable community governance: although the processes that designate the voter, execute the processing of proposals and carry out the vote counting are carried out automatically, they cannot be activated without the existence of the community. The human factor is still very important, as the community is the only one who knows the upcoming or future needs of the project. It is the community that is in charge of submitting proposals and choosing them by exercising its right to vote. In this way, it ensures the maintenance of the project under the command of the DAO. Community is the cornerstone of the DAO and cannot yet be replaced by an algorithm hosted in smart contracts.

  • They manage community funds: the DAO is in charge of its own administration, so it must make good use of the resources that are allocated to this function. Likewise, it normally manages part or all of the resources of the projects for which they have been created. For both cases, it is necessary to create a community vault or managed treasury, which is managed with a multisign wallet for the protection and disposal of funds.

Which are the main problems faced by a DAO?

Like all decentralized applications, DAOs also face a number of issues. The major problem lies in the manipulation of proposals made by individuals with high voting power and the viability of proposals made by members.

  • Voting capacity: there is the possibility that a member may have a considerable amount of tokens, so he will have a much greater voting capacity, and his vote may be decisive in the final decision. A clear example of this problem has been seen recently in the controversial event of Juno Network's proposal 16.

  • Viability of the proposals submitted: in some scenarios, the community is not always right and the proposals voted on may have a negative influence on the direction of the project, and as such to the detriment of the DAO. This is why every member should be informed in detail whenever a proposal is proposed and the implications that its approval might entail. It is best to conduct information campaigns within the community each time a proposal is launched.

Examples of DAO platforms and applications

Snapshot is a platform that allows communities to create their DAOs. To create the DAO, it is required to be an ENS (Ethereum Name Service) holder. On the other hand, it supports EVM, so all communities managing ERC-20 or ERC-721 tokens can create their DAO through web wallets3 that support them. It has several plugins that can be used for DAOs to manage proposals and voting.

Grape Protocol is a platform that offers services and tools to Solana projects that wish to set up their DAOs in Discord. In this way, projects that make use of Grape Protocol can verify their holders by connecting their Discord server with their platform. Once verified, the holders automatically receive a role and can submit and vote on DAO proposals.

DAOs are an important figure in the organization of communities in the crypto ecosystem. They allow projects to let the community choose which direction to take, pushing decentralization one step further. At the same time, the decentralized platforms that make them possible are as important as their members, as they bring them all the necessary tools for their operation, ensuring the compliance of community wills.

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How does a DAO work?
Which are the main problems faced by a DAO?
Examples of DAO platforms and applications

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