What is a DAO, or Decentralized Autonomous Organization? DAOs are a type of network organization common in cryptocurrency. The DAO was the most famous example of this technology, which contributed to one of the most famous cryptocurrency hacks and the Ethereum Classic hard fork.
What Is a DAO?
In order to understand, what is The DAO, let’s unpack the term itself.
Decentralization describes a form of organization over which no central power or authority wields control or disproportionate influence.
Furthermore, the organization is “autonomous,” which means that it is self-governing and can act independently. these organizations are “unstoppable code” according to some people.
Who Invented It
Daniel Larimer first proposed the concept of a “Decentralized Organized Company.” In an article published on September 7, 2013, titled “Overpaying For Security,” Larimer criticized what he saw as Bitcoin‘s excessive use of hash-based security.
Larimer asked what would be possible if the excess costs of security instead went toward development, marketing and improving a cryptocurrency. And to answer that question, he proposed Decentralized Autonomous Corporation, or DACs, that aim to maximize shareholder value.
How It Works
A Decentralized Autonomous Organization manages a blockchain almost exclusively through smart contracts. These smart contracts execute pre-programmed rules that set the limits of what can and can’t happen on the network. This includes handling things like:
- Currency issuance
- Project funding projects
- General governance matters
They do this all without the need for a central or human authority.
How DAOs Are Built
There are many ways to build a decentralized autonomous organization. Some can be low-complexity, while others contain complex systems of smart contracts. Each design, however, shares a common set of goals. These goals include:
- Efficiently managing hashing processes
- Issuing new shares, paying dividends
- Limiting block size to maintain decentralization
- Keeping block production rates steady.
What Is The DAO?
The DAO, as mentioned above, is a famous example of a decentralized autonomous VC (venture capital) fund. It used smart contracts to facilitate investment in dApps without going through a centralized organization.
How It Worked
Through The DAO, investors would trade ETH for DAO tokens, which they would use to vote on which dApps the venture capital would fund. If an application received 20% of votes, The smart contract would release the funds to them.
This meant exchanging Ethereum (ETH) for DAO tokens. Their ICO in 2016 was the most successful ever. During it, The DAO raised $150 million in Ethereum.
But technological vulnerabilities in that code led to a devastating attack on the network just a month after it went live. $55 million worth of Ethereum (ETH) was stolen by hackers. 14% of the world’s existed within The DAO network at the time of the hack.
How They Did It
Converting crypto to tokens was a two-step process. If an investor converted DAT/ETH, the smart contract would first do the exchange, then update the ledger.
The hackers added a recursive function. This meant that they were able to keep withdrawing funds before the smart contract could update the transactions on the blockchain. In a few hours, they stole 30% of The DAO funds, or $55 million.
The hackers were not able to withdraw funds because the network held them for 28 days. However, the attack had a profound impact on the Ethereum community and cryptocurrency investors on the whole.
The Ethereum Hard Fork
Specifically, the Ethereum community couldn’t decide whether they should restructure the protocol to return funds or not. This dispute led to the Ethereum vs Ethereum Classic split.
3 Best DAOs
The DAO is the most famous example, but it isn’t the only one out there. The following are important cryptos that run on similar protocols.
Dash (DASH) was the first decentralized autonomous organization. The cryptocurrency, which launched in 2015, is a Bitcoin fork designed for fast transactions.
Bitshares (BTS) came next. It exists on the Microsoft Azure blockchain. Bitshares helps people who do not have access to banking to participate in financial transactions.
DigixDAO (DGD) is a token governed by this type of smart contract network. Specifically, this Singapore-based company tokenizes gold.
Though The Dao is the most famous Decentralized Autonomous Organization, Dash, Bitshares and DigixDAO are other examples of the same technology.
What does it mean to be decentralized and autonomous? By using smart contracts, these networks can operate without centralization or human agency.