What is DAO and how does it work?

Decentralized Autonomous Organizations (DAOs) are social organizations represented by rules encoded as a transparent computer program, managed by the members of the organization, and not affected by a central government. Think of DAOs as an online community of like-minded people who are sharing a common bank account. These individuals can set up a group which will establish a mission and make a collective decision on how to fund it. There are three main pillars that explain how DAOs work. First pillar, smart contracts are used to define rules that are voted on by the community.

Decentralized autonomous organizations (DAOs) run on smart contracts and have no central authority. Rules for operating a DAO are laid out in these smart contracts. In order to amend these rules, the DAO's core community members must vote on them. Creating a sustainable and autonomous DAOs relies on the use of smart contracts, which govern the DAO's operations, governance system, and incentive structures.

Subsequently, the purchase of DAO tokens can be used to help fund the DAO's expansion. In order to get funding, the smart contract rules must first be deployed on the blockchain. The smart contracts make and distribute internal property like native tokens (which can be used to vote on or reward specific protocols or transactions). The DAO's native tokens, cryptocurrencies associated with specific projects, can be bought by people or groups who are engaged with that DAO’s constitution (set of smart contracts defining relationships dynamics within the organization). As soon as a DAO has sufficient funding, token holders may vote by consensus to make most DAO's decisions.

To promote homogenous growth of the entire network, the DAO's stakeholders work together sharing common goals. Additionally, members can be incentivized for taking on various tasks within their DAOs, like token distribution and treasury management, by earning governance tokens.

What are the benefits of a DAO?

DAO's transparency for what needs to be transparent, secrecy for what needs to be kept secret and decentralized structure empowers its users to take full responsibility for the protocol's upkeep. Smart contracts enable DAOs to be almost fully automated, allowing for the automatic execution of clauses. DAOs remove middlemen and effectively reduce third-party transaction costs so that the organization is greatly benefited for its existence on the blockchain, leveraging, quite often, in higher profit margins than traditional businesses.

Moreover, each token holder has the ability to make decisions for the organization. The amount of voting power a member has is based on the number of governance tokens they bear, but it does not grant them any additional rights or benefits. If a DAO consistently succeeds in delivering what it has originally proposed, the ownership tokens naturally appreciate giving direct value to token-holders who possess them.

This strategy promotes a healthy environment where a balanced percentage of the overall DAO direct and indirect economy is applied in rewarding contributions in the decision making process. Engagement is maximized by inviting token holders to participate in the organization's governance and often results in wider spread longer term investing mindsets in the community.

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