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LearnAcademyBlockchain fundamentalsLesson 5: Understanding DAOs

Lesson 5: Understanding DAOs

After completing this lesson, you will be able to:
Explain what a DAO is.
Understand what kinds of decisions DAOs make.
Know how DAOs select members.
Explain the relationship between smart contracts and DAOs.
Understand how DAOs are funded.

Welcome to the fifth lesson in Kriptomat Academy’s Blockchain Fundamentals course. In this lesson, we’ll learn about decentralized autonomous organizations: “DAOs.”

The acronym “DAO” stands for “decentralized autonomous organization”

  • “Decentralized” means that the organization has no leader and that members may be distributed all over the world.
  • “Autonomous” means that the organization’s rules are implemented as smart contracts so the organization is self-supporting. It can run without a supporting foundation or maintenance crew.
  • “Organization” means that some people are members and some are not.

The rules governing a DAO, the issues it is concerned with, and the members all come from the blockchain that hosts the DAO.

  • The DAO’s rules are implemented as smart contracts that are stored on the blockchain.
  • Most DAOs are set in place by the team that launches the blockchain and its associated cryptocurrency, but DAOs can be added to any blockchain that supports smart contracts.
  • Just as cryptocurrency allows people to conduct business without trusted intermediaries, DAOs allow crypto users to coordinate their efforts toward a shared goal without trusting a treasurer to manage funds or a leader to set goals. 

Many DAOs are set up by blockchain founders to allow the user community to govern the blockchain.

  • For example, a DAO might vote on which features to be added to an update of the blockchain code.
  • A DAO might prioritize bug reports to specify which get attention first.
  • A DAO might spend crypto collected as user fees to fix bugs, reward founders, or pay dividends to DAO members.

DAOs that govern blockchains or blockchain-based projects are said to be responsible for technical governance

  • For example, Maker, the blockchain behind the Dai stablecoin, is governed by a DAO that has its own cryptocurrency, MKR.
  • Holders of MKR tokens may propose and vote on development of the Maker protocol.
  • The Maker project is owned and managed by community members.

Members of a DAO typically have voting authority proportional to the number of governance tokens they own.

  • The more governance tokens you own, the greater the number of votes you have on community proposals.
  • Rewards and incentives allow active community members to earn more governance tokens and therefore have a greater voice in planning and decision-making.
  • The DAO raises funds for community projects by creating and selling governance tokens. 

DAO members make the kinds of decisions that were once made by project founders.

  • For example, a blockchain-based financial application might have a DAO that determines the interest rates for users who borrow and lend crypto.
  • The difference between those rates – the application’s profits – could flow to the DAO for performing ongoing development and maintenance of the app’s smart contracts, or for launching new projects – whichever the DAO decides.
  • DAO members could vote to have the profits flow into a shared liquidity pool or be distributed to members of the DAO.

Blockchain-based DAOs don’t need to be devoted to project governance. They can be launched for just about any purpose.

  • The Flamingo DAO, for example, is devoted to the emerging marketplace for NFTs.
  • DAO members determine which NFTs to purchase and whether the NFT holdings should be lent, held, displayed, or used as collateral for further purchases.
  • The DAO has smart contracts for collecting members’ initial contributions to the Flamingo project, voting, delegating voting to third parties, funding investments, distributing proceeds, and leaving the DAO, a procedure it calls “rage quitting.”
  • Other DAOs could be set up to meet the needs of decentralized financial applications, NFT marketplaces, media artists and creators, and other projects.

DAOs can be focused on investing, collecting, socialization, philanthropy, grants, media, and other fields

  • KlimaDAO is an organization whose members combat climate change and earn rewards with KLIMA, a digital currency backed by carbon assets.
  • On the Decentraland metaverse platform, a DAO makes rules governing wearable objects, for example, and for holding property sales and auctions.
  • A DAO called Friends With Benefits is an elite online community that allows investors to socialize on Discord, have occasional face-to-face meetings, and fund promising start-up businesses.
  • The Indaod DAO purchases and manages vacation rental properties. Members receive passive income in proportion to the number of tokens they own and are able to vote on future acquisitions, prices, and policies.

So – what have we learned?

  • Decentralized autonomous organizations allow community members to own and manage projects without placing trust in treasurers or managers.
  • The rules for DAOs are implemented as smart contracts and stored on the blockchain.
  • DAOs have been created for dozens of different purposes and communities.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

What is a DAO?

The natural order of the universe, as revealed through meditation.
An organization that functions through self-governance implemented with smart contracts on a blockchain.
A digital action order that specifies maintenance activities or expansion to be performed on decentralized applications.
A distributed automatic order that purchases the same amount of a cryptocurrency each week or month to implement dollar cost averaging.

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What do governance DAOs do?

Allow citizens to contribute to government decision-making on issues like voting rights and taxes.
Restrict the ways a cryptocurrency can be sold, traded, or used within particular countries.
Allow community members to make and vote on proposals to guide the future of a blockchain project.
Screen and approve prospective users of a metaverse platform.

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How do you join a DAO?

Purchase and hold DAO tokens.
You must be voted in by the existing members.
Membership is set and closed on the day the DAO is first added to the blockchain.
Go through an account creation process that includes identity verification and wait to be notified that membership has been granted.

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What is the relationship between smart contracts and DAOs?

Only DAOs can approve the addition of smart contracts to the blockchain.
Any one blockchain can have either smart contracts or DAOs. For technical reasons, no blockchain can support both.
Every smart contract is a DAO, but only some DAOs are smart contracts.
Smart contracts record and enforce the rules of the DAO.

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How are DAOs funded?

User fees and sales of the DAO token.
Rebates from credit card transaction fees.
Contributions from like-minded individuals and not-for-profit NGOs.
A tax on NFT sales.

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