If you’re invested in cryptocurrency, you are probably familiar with the concepts and goals behind decentralized finance. Decentralized autonomous organizations (DAOs) are a great tool within the DeFi space because they allow digital communities of stakeholders to organize and work together in a democratic, decentralized, and equitable fashion.
Though DAOs can provide many benefits to their members, a recent survey by FTX revealed that most people do not know about DAOs, and only 10% of traders surveyed took full advantage of multiple DAOs. As the crypto and DeFi worlds grow and innovate, DAOs will continue to gain traction and provide more significant benefits to their members. However, DAOs are currently still in their early adopter phases, offering new opportunities for traders.
Components
DAO crypto communities are built with three key components to benefit stakeholders: decentralized decision-making, transparent governance, and token-based membership. Here’s a breakdown of those components:
Decentralized Decision Making
While traditional digital organizations are structured with a central authority like a board of executives, DAOs are decentralized and governed by a set of code. This code is encrypted with the standard rules of the community, such as dispute resolution and financial management.
These automated rules will be executed using smart contracts whenever specific conditions are met within the network. This infallible code will ensure that no single person or group of people holds hierarchy over the rest of the community. All members of the DAO will receive a vote for decisions not made by the code, which allows stakeholders to have greater control over their investments and influence over the community’s decisions.
Transparent Governance
As mentioned, each member of the DAO receives a vote for all decisions made in the community. A transparent governance system supports this democratization further. Because DAOs are built on blockchain networks, every decision made, rule executed, vote cast or transaction completed is recorded on a ledger within the network.
This ledger is always accessible and virtually impossible to tamper with. This system mitigates the risk of corruption or unfair governance within the community, increasing trust and protecting stakeholders.
Token-Based Membership
An essential characteristic of DAOs is that you must hold a stake in the community to become a member. Each DAO is on a blockchain network backed by a specific cryptocurrency. By making membership contingent on holding a stake, all community members will share a vested interest in the overall success of the DAO, promoting collaboration.
Further, by tying the token and the community together, these structures ensure the mutual success of both entities. As the DAO grows, so will investment and use of that native token, and vice versa. DAOs also ensure that all community members will benefit from the success of the DAO as a whole.
Challenges
The first DAO was built on the Ethereum blockchain in 2016; however, due to a code flaw, hackers were able to steal around $60 million from the community. Since then, DAO projects have invested heavily in developing more significant security measures to protect their members.
Scalability is another challenge facing DAO projects. Because DAOs are hosted on blockchain networks, they can only grow as long as the blockchain network can support the community. DAOs need solid and fast networks to support their large communities.
Another challenge DAOs are working to overcome are legalities. Due to the decentralized nature of DAOs, they find themselves in a gray area regarding specific regional and international laws and regulations. Despite these challenges, however, there are many robust and rapidly growing DAOs today.
Join a DAO Today
DAOs can provide many benefits to their members, but they are also an excellent tool for decentralized organizations online. Greater democratization of crypto projects will allow stakeholders more control over their investments and a say in the future of the space. These digital communities will undoubtedly shape the future of DeFi. You can learn more about DAOs at FTX and join your crypto community today.
