What Is DAO?: A Brief Introduction to a New Era of Technology

The DAO is a big deal in the crypto world right now because it's the future of job contracts, housing leases, business deals, and maybe even your career.

So, In this tutorial, you will further grasp what DAO is and how it's more than just a Blockchain-based organization. This tutorial will help you understand ‘what DAO is’ and how it works with Smart Contracts and Dapps. Also, it gives you a glimpse of the history of the infamous DAO Attack.

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What Is the DAO?

DAO

  • The DAO was an organization of developers that came together to automate decisions and make cryptocurrency transactions easier.
  • A decentralized autonomous organization (DAO) is a decentralized blockchain-based cooperative administered by code and owned by its members.
  • It eliminates the need for documents and people in governing, creating a structure with decentralized control.
  • DAOs are based on blockchains (often Ethereum), and their transactions are visible on the blockchain protocol.

History of the DAO

  • The DAO was a decentralized autonomous organization (DAO) founded in 2016 to serve as a venture capital fund governed by investors.
  • The DAO raised $150 million in ether (ETH) and was one of the first high-profile enterprises established, just one year old.

Comparison Between the DAO and a Traditional Organization

The DAO

A Traditional Organization

The majority of the time, it's flat and entirely democratic

The majority of the time, it's hierarchical

The members must approve any changes through a vote

Changes can be sought from a single party, or voting can be offered, depending on the arrangement

Without a trustworthy middleman, votes are tabulated, and the result is applied automatically

If voting is permitted, votes are counted internally, and it must manually handle the results of the vote

The given services are handled automatically and decentralized

Manipulation-prone human handling or centrally controlled automation is required

Every action is entirely transparent and open to the public

The vast bulk of activity is private and not accessible to the general public

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How Does it Work?

 DAO functions as follows:

  • A group writes the smart contracts (programs) that will administer the organization of people.
  • There is an initial funding period during which people contribute funds to the DAO by purchasing ownership tokens–this is a crowd sale or an initial coin offering (ICO) to provide it with the resources it requires.
  • When the financing period ends, the DAO becomes operational.
  • People can then make ideas to the DAO on spending the money, and members who have purchased shares can vote on whether to approve these proposals.

It's vital to note that these tokens are not equity shares; rather, they're contributions that grant people voting rights but not ownership. A DAO is often not owned by anyone and is simply software that runs on the Ethereum network.

Types of DAO Membership

DAO membership is organized in several ways. The membership can influence the voting system and other critical aspects of the DAO.

Token-Based Membership

  • It is typically permissionless, depending on the token used. 
  • These governance tokens are usually traded on a decentralized exchange without requiring permission. 
  • Others require liquidity or other forms of 'proof-of-work.' You can vote regardless of whether you have the token or not.
  • MKR, MakerDAO's coin, is available on several decentralized markets. As a result, everyone can stake a stake in the Maker protocol's future.

Share-Based Membership

  • DAOs that are based on shares are more permissioned, but they are still relatively open. 
  • Any potential member can propose to join the DAO in compensation for tokens or work. 
  • Shares are used to indicate direct voting power and ownership. At any time, members can withdraw their due part of the treasury.
  • MolochDAO is dedicated to Ethereum project funding. They require a membership proposal so that the organization can determine if you have the appropriate experience and capital to make educated grantee decisions.

The DAO Attack

By May 2016, the DAO had collected a significant portion of all ether tokens ever released (up to 14%, according to reporting by The Economist).

  • Later, in June 2016, hackers used these flaws to attack the DAO. The hackers got their hands on 3.6 million ETH, which was valued at around $50 million at the time.
  • The bankruptcy of the DAO would not only result in financial losses for investors, but it would also have serious consequences for the embryonic Ethereum network.
  • This sparked a heated debate among DAO investors, with some advocating alternative solutions to the hack and others demanding that the DAO be permanently disbanded.

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The DAO Hack’s Reaction

  • Initially, Vitalik Buterin, the founder of Ethereum, advocated a soft fork of the Ethereum network. 
  • This included a code piece that would effectively blacklist the attacker and prohibit them from moving the stolen cash.
  • Soon after, A problem was detected in its code, putting it vulnerable to assault. After great debate, a second alternative, a hard fork, was suggested and implemented.
  • The hard fork effectively reset the Ethereum network's history and moved DAO's ether to a different smart contract, allowing investors to withdraw their assets.
  • As a result of the hard fork, two competing — and now distinct — Ethereum blockchains emerged.
  • Those who opposed the hard fork, which wiped back the Blockchain's history, backed the soft-fork version, now known as Ethereum Classic (ETC).
  • The Ethereum blockchain is the Blockchain that implemented the hard fork, changing the Blockchain's history.

Future of the DAO

The DAO breach and related Ethereum hard fork shook the Ethereum community and raised serious concerns about the developing platform. 

In hindsight, Vitalik Buterin, Ethereum developers, and the global community made decisions that ensured the Ethereum Blockchain's survival in its early days. Since the DAO attack, Ethereum has increased in importance as a foundation of Blockchain, cryptocurrency, and decentralized finance. And this occurrence heralds the start of a new age for Ethereum's public Blockchain.

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Conclusion

In this tutorial, you saw ‘what is DAO’, its concepts, how DAO works, and what future it holds for itself. You also came across DAO's importance as a crucial part of the crypto market and how it's different from traditional organizations. Whether you're an aspiring enthusiast to break into this exciting industry, an experienced Blockchain developer, or just to know more about Blockchain and its underlying concepts like DAO, Defi, or smart Contracts, enrolling in Simplilearn's Blockchain Certification Training program will help you with all levels of experience to explore, understand and learn more about, Blockchain, cryptocurrency, and its technology.

Do you have any questions for us? Please feel free to drop them in the comments section of this tutorial; our experts will get back to you as soon as possible.

About the Author

SimplilearnSimplilearn

Simplilearn is one of the world’s leading providers of online training for Digital Marketing, Cloud Computing, Project Management, Data Science, IT, Software Development, and many other emerging technologies.

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