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Decentralization is one of the main goals of the cryptocurrency revolution. But as Bitcoin and most altcoins appear to be insufficiently decentralized for the taste of crypto users, a new concept emerged, Decentralized Autonomous Organization (DAO).

What Is a Decentralized Autonomous Organization (DAO)?

A Decentralized Autonomous Organization (DAO) or a Community Driven Organization operates without a central leader, with decision-making flowing from the community upwards. Governed by a set of rules enforced on the blockchain, DAOs are internet-native organizations that are collectively owned and managed by their members. They have in-built treasuries, which can only be accessed with the members' approval, and decisions are made through proposals that the group votes on during a specified period.

DAOs can serve many purposes, from freelancer networks that pool funds to pay for software subscriptions to charitable organizations where members approve donations and venture capital firms owned by a group. These organizations offer a unique form of legal structure that allows members to share a common goal and act in the entity's best interest.

Examples of DAOs include MakerDAO, which manages the stablecoin DAI. MakerDAO allows anyone to become a member and participate in decision-making through proposals and voting. 

It's important to differentiate a DAO, an internet-native organization, from The DAO, a project founded in 2016 that ultimately failed and caused a dramatic split in the Ethereum network. DAOs have since evolved and continue to shape how organizations operate in the digital world, allowing for bottom-up management approaches and collective ownership.

How DAOs Work

DAOs are governed by a set of rules established through smart contracts. These contracts are highly visible, verifiable, and publicly auditable, ensuring that any potential member can fully understand how the protocol is intended to operate.

After establishing the rules, the DAO must secure funding and decide how governance will be bestowed. Token issuance is typically used to raise funds and fill the DAO treasury. In return for their investment, token holders are given voting rights that are proportional to their holdings.

Once funding is secured, the DAO is ready for deployment. The code is pushed into production and can no longer be changed by any means other than a consensus reached through member voting. Also, DAOs are fully transparent and autonomous, meaning that anyone can view their code and audit their financial transactions. This makes DAOs highly secure and resistant to fraud. No special authority has the power to modify the rules of the DAO. It is entirely up to the community of token holders to decide on any changes to the protocol.

Benefits of DAOs

DAOs offer several advantages that make them an attractive structure for groups of individuals or entities. Here are some of the benefits:

Decentralization 

Unlike traditional hierarchical organizations, where a small group makes decisions of people, DAOs allow decisions to be made by a collective of individuals who hold tokens. This means authority is spread across numerous people, which can lead to greater transparency and fairness.

Participation

Token holders in a DAO have the power to vote on important matters and proposals, giving them a direct say in the organization's future. This can foster a sense of community and engagement among members, leading to greater motivation and loyalty.

Publicity 

Because votes in a DAO are recorded on a public blockchain, token holders are incentivized to act in the organization's and its community's best interests. This transparency can help to build trust and accountability and prevent malicious actors from taking advantage of the system.

Community 

DAOs enable people worldwide to come together to work towards a common goal, regardless of their physical location. This can help to foster a sense of belonging and purpose among members and facilitate collaboration and innovation on a global scale.

Encouraging Non-Profit Organizations (NGOs) 

DAOs offer automated efficiency, transparency, and a lack of central authority, which are essential for non-profit organizations. Different causes can be supported via crowdfunding that is based on complete trust and transparency, with minimized risks of stolen funds.

Limitations of DAOs

While DAOs offer a novel approach to decision-making, they come with their own set of limitations that must be considered. Improperly setting up or maintaining a DAO can have severe consequences. Here are some of the limitations associated with the DAO structure:

Slow decision-making

Unlike a public company where a single CEO can make a decision quickly, DAOs require every user to vote. This can be a time-consuming process, particularly when considering DAO members' different time zones and priorities.

Education

DAOs must educate a larger number of people about pending entity activity compared to traditional companies. While a CEO can easily stay on top of company developments, DAO token-holders may have varying levels of educational backgrounds, understanding of initiatives, incentives, or access to resources. Therefore, DAOs face the challenge of bringing diverse people together and teaching them how to grow, strategize, and communicate as a unified unit.

Inefficiency 

Due to the need to educate voters, communicate initiatives, explain strategies, and onboard new members, DAOs can become inefficient. This can lead to spending more time discussing change rather than implementing it. DAOs can become bogged down in trivial, administrative tasks because of the coordination required among a large number of individuals.

Security 

The security of digital platforms for blockchain resources is a common issue, and DAOs are no exception. Implementing a DAO requires significant technical expertise; without it, votes may be miscast or decisions made invalid. Users may lose trust in the entity if they cannot rely on its structure. Even using multi-sig or cold wallets, DAOs can be vulnerable to exploitation, with treasury reserves being stolen or vaults emptied.

Examples of Crypto DAO Projects

MakerDAO 

MakerDAO is a decentralized autonomous organization (DAO) built on the Ethereum blockchain network that offers a unique lending and borrowing experience using cryptocurrencies. The platform is controlled by smart contracts, providing users with a secure and transparent process.

To help mitigate the volatility of cryptocurrencies, MakerDAO uses a stablecoin called DAI to determine lending rates and repayable amounts. Users can deposit Ethereum into a Maker smart contract, which creates a Collateralized Debt Position (CDP) and allows them to borrow a predetermined amount of crypto at a fixed interest rate.

What sets MakerDAO apart from other DeFi protocols is its innovative approach to providing financial tools for its users and developers. The Maker Protocol, also known as the Multi-Collateral Dai System, was created to unlock the possibilities of DeFi and serve as a base layer infrastructure for future decentralized finance protocols.

Aave

Aave (AAVE) is a decentralized lending protocol that enables borrowers and lenders to interact with one another without the need for a centralized intermediary. Originally hosted on the Ethereum blockchain, Aave has grown in popularity and now integrates with multiple other networks.

As a DAO project, Aave allows AAVE token holders to participate in governance decisions, including the use of Treasury Funds and potential upgrades to the system. Also, AAVE can be used as collateral within the ecosystem, reducing fees and increasing accessibility.

Aave's popularity stems from its innovative approach to decentralized lending, providing users with a more transparent, secure, and efficient experience than traditional lending systems. 

Volt Inu

Volt Inu is a promising DeFi project that was launched in December 2021 with a focus on providing a one-stop shop for DeFi products. Unlike traditional finance, Volt Inu aims to return profits to the native token, supporting its deflationary purpose.

Volt Inu has also launched a multichain DEX called Voltichange. It supports automated, free, and permissionless listings for every existing and future crypto project. The platform has a 0.5% trading fee that is used to make every crypto traded on the exchange deflationary. Volt Inu strives to make cryptocurrencies deflationary by burning their supply. This approach sets it apart from other DeFi projects and makes it an exciting prospect for crypto investors.

Recently, Volt Inu made waves in the crypto world with its first-ever on-chain proposal. After the vote, this proposal resulted in a massive $74.5 million VOLT burn and a confirmed listing on the Polygon blockchain.

As a DAO or community-driven project, VOLT aims to redefine decentralized finance and bring profits back to its native token. 

How to Get Involved in DAO Projects

Decentralized Autonomous Organizations (DAOs) can offer exciting opportunities for individuals to get involved in the development and governance of various projects in the crypto space. However, it's important to understand the core function of each DAO before getting directly involved.

Some DAOs focus on technical governance, where token holders can vote on proposals related to the protocol's upgrades and bug fixes. For example, Uniswap token holders can vote on distributing a portion of the protocol fees among themselves. In contrast, Compound token holders can vote on distributing protocol fees toward bug fixes and upgrades. 

On the other hand, some DAOs focus more on treasury pooling and allocation, like SharkDAO, which facilitates the pooling of individual token holders' funds to acquire rare NFTs. This approach allows individuals to leverage the power of a collective pool of assets.

DAOs offer transparency in their governance, with voting records and proposal details readily available for public scrutiny. DAOs also regularly call upon the community to build out interesting ideas through grant-funded projects, providing opportunities for entrepreneurial minds to submit proposals to lead the future development of a protocol.

Participation levels in DAOs can vary, with options to swap into governance tokens and pay attention to snapshot votes, join the DAO's Discord and work on compensated projects, or invest in DAOs of interest through networking at conferences. It's up to the individual to decide how involved they want to be.

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