Whether in production or for making monetary transactions, the proceedings are usually carried out by machines or codes without much human interference. The lack of human error is very appealing and beneficial for our fast-paced society that demands proper and prompt action.
We have mentioned how automation has densely affected our lives in many fields. However, a few years back, no one would have imagined that automation would also revolutionize how companies function. This is when a Decentralised Autonomous Organization came into the picture. What did DAO do to bring about a massive change in the world of trading and stocks? Read on to find out.
DAO, or Decentralised Autonomous Organization, as the name suggests, is an organization that is decentralized or free from any managerial hierarchy. The lack of such a managerial hierarchy means that this company is made to function independently with full autonomy from any external control.
How does DAO work?
Since DAO is an autonomous organization, it is free from government control. This organization is run by a pre-written open source code maintained and updated by the shareholders. To become a shareholder, one needs to purchase a few tokens, which may be regarded as a form of shares. The shareholder or the token holders are entitled to add to this unstoppable code and maybe even profit from the same. Smart contracts and consensus protocols are the pillars on which the DAO stands.
First, rules are established according to which the DAO will function. This may be similar to the Memorandum of Association and Articles of Association of mainstream corporates. What are these rules, you may ask? A pre-existing code is taken from the internet, which is semi-autonomous but needs external assistance to perform functions that it cannot do.
Once such a code has been formed, the DAO is fully functional and works purely autonomously. This means the code functions independently of any external control, including the creators. These rules are recorded in Blockchain. Since these codes are open source, they can be viewed by anyone and thus provide great transparency and a feeling of dependability to the present and potential investors.
The second step involves funding. In mainstream companies, IPO (Initial Public Offerings) invites shareholders to buy shares. Shares are rightly applied for and allotted to the respective shareholders. In DAOs, however, the process isn’t so complicated. Anyone with a stable internet connection and an updated knowledge of technology may buy tokens and become a rightful stakeholder in the DAO. In either case, the shareholders or stakeholders may be considered the company's owners. These are the individuals whose decisions may substantially impact the organization's functioning.
By buying tokens, the shareholder/stakeholder earns themselves the right to vote, contributing to making key and important decisions for the organization.
Once the funding is done, now the agenda is how to expend these funds effectively and to benefit the organization. In a scenario that includes a mainstream company, this responsibility is usually given to the financial manager, who effectively controls the optimum expenditure of the resources. Since a DAO lacks the presence of a managerial team, key investment decisions are usually taken by the shareholders themselves by a consensus. A consensus is when the majority of the stakeholders agree to the proposal offered by someone.
A minimal fee may be charged while proposing to discourage the submission of unworthy and faulty proposals.
In a company, usually, a meeting is carried out to assess proposals. A proposal is selected only when a specified percentage of the quorum present in the meeting votes for the proposal. This percentage is specified in its memorandum. Similarly, in the case of a DAO, a percentage of stakeholders should vote for the presented proposal for it to be accepted. This percentage is present in the code based on which the DAO functions.
The lack of intermediaries provides a lot of freedom and flexibility to the functionalities of the DAO. But a question of safety does arise, and rightly so.
Nothing in this world can be said to be purely flawless. So it is in the case of coding. The written codes may be susceptible to glitches and loopholes that unauthorized third parties can take advantage of.
The idea of such huge amounts of cash being mishandled due to a tiny glitch is enough to discourage people from investing in DAOs. However, the hope of earning substantial profits with minimal human interference balances out this mindset and is slowly encouraging more people to invest in such companies.
A brief past of DAO:
The DAO was one single organization that was established in May 2016. It allowed investors to invest in a decentralized version of Airbnb. This was initially an extremely successful project raising a massive turnover of about 150 million dollars. However, it soon plummeted rapidly to its death due to a bug in the code on which it operated.
It gave a third party unauthorized access to the code, and they illegally transferred about 50 million dollars to a fake DAO that possessed a code that matched that of the original company. Since the code is very difficult to modify once it has been formed, the investors watched as the money kept continuously draining out before the bug could be fixed. Hence, it can be said that the DAO fell prey to inefficient coding and improper testing.
This event was a great hurdle that almost shattered the world of cryptocurrency. People who were skeptical of DAOs now had proof of their distrust. It was a long time before DAOs regained their reputation among the masses.
Bitcoin was the first-ever successful DAO. The reasons for its success were a well-written code, a well-distributed consensus protocol, and functional autonomy.
Advantages of DAO:
This modern-day organization has a plethora of advantages, a few of which can be seen listed below:
- No government or managerial intervention: The most appealing feature of DAO is that it steers clear of any intervention from the government or managerial staff. This increases the flexibility of the functioning of the firm. In some countries, the governments are very skeptical of this kind of organization and try to prevent the citizens from investing here as the government has no control over the proceedings in this organization. Sometimes this is done for the well-being of the country’s citizens, sometimes from the fear of losing control.
- No place for human error: Once the code is formed, it is also automated i.e. it functions independently without any human help. The risk of any potential human error is thus avoided because of such automation. Human error causes massive time wastage and financial loss. Avoiding human risk would massively increase the efficiency and productivity of the organization.
- Fee for submission of proposal: Since an investor charges a fee while submitting a proposal, investors need to be very sure of the utility of their proposal. This saves time when assessing all the proposals and also decreases the chances of any confusion arising due to the same.
- Easy access: Unlike mainstream companies, one doesn’t need to wait around for months to become a stakeholder. Anyone with a stable internet connection can easily invest in DAOs. With the young generation keen on investment opportunities and their increasing need for smooth and convenient investing, DAOs provide great opportunities for them.
- A pre-written code and optimum transparency: DAOs function on a pre-written open-source code that can be viewed by all potential and present investors. Since all the investors are aware of the code and have assessed the risks and rewards of investing, there is no space for miscommunication or misunderstanding.
We all know how things are never always perfect. Like everything else in this world, DAOs also have flaws. Some of these flaws may be listed below:
- Cryptocurrency is a recent invention: Humans usually have been known to be interested in things that have been tried and tested for years. They like the element of certainty in all their decisions. Cryptocurrency is one of the newer inventions and, sadly, hasn’t entirely gained people’s trust. With the increasing insecurity on the internet, more and more people are getting skeptical of such investments. The reason for cryptocurrency’s unpopularity may also be due to the rumors spread by self-proclaimed financial ‘gurus’ and people who aren’t densely educated in this sphere of knowledge.
- Functions based on codes: Even though professionals usually do coding, the risk of error is not nil. Millions of worth of stocks are traded just on the functioning of this code. Any bug or error could result in huge losses. This is a high-risk situation for a common man, and very few people are willing to take this risk.
- No legal framework: No legal framework governs the functioning of DAOs. The proceedings of a DAO are not legally bounding and hence cause distrust among the population.
I believe DAOs have come a long way but still have a long way to go. Worldwide acceptance is one of the greatest challenges DAOs have to face. This is because, in some countries, like India, where the government might propose that dealing with cryptocurrency could result in 10 years of jail time and a huge penal fee, It may take a while for DAOs to gain popularity among the masses; but will cryptocurrency indeed become the future of investing? Time will tell.