How DAOs work?

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How DAOs work?

6 min read

DAOs, also known as Decentralized Autonomous Organizations, are internet-native, community-led organizations functioning on the blockchain. Unlike traditional companies, DAOs have no CEOs, no central authority, nor hierarchy. They are decentralized, autonomous, and community-driven, thus allowing members to govern the DAO from the bottom-up.

Launching a DAO requires three main components: creating smart contracts, funding, and deploying the DAO. Usually, a group of developers creates a smart contract that essentially defines the rules of the DAO. These hard-coded rules automate decisions when certain criteria are met, and can only be modified through the governance system. After creating smart contracts, DAOs need to receive funding to fill their treasuries and establish governance, and this is usually achieved through issuing tokens. Lastly, the DAO must be deployed on the blockchain, and the future of the DAO lies in the hands of stakeholders and members who have voting rights through token ownership. Because DAOs function on open-source blockchains, any user can see any DAO’s code, allowing them to function on full transparency. Additionally, blockchain technology allows for investors or contributors from any country to be involved in a DAO, offering opportunities without censorship or regulation.

Members can be given voting rights via a governance token. Depending on the type of DAO, members have the ability to vote on proposals, create proposals, influence how the DAO operates, and more. Members can create governance proposals such as hiring contributors and/or investing in projects, and these proposals can be approved and implemented if the majority of the stakeholders agree on going through with it.

For example, in Grant DAOs like Aave Protocol, members can donate funds and vote on where these funds are distributed, such as supporting innovative DeFi (Decentralized Finance) projects. In Entertainment DAOs, community members can vote on creative decisions such as designing 3D NFT Flufs in Flufworld. (Read more about the different types of DAOs here).

Before getting involved in DAOs, it’s crucial to understand that all DAOs operate on different missions, and there are a variety of ways to get involved depending on the DAO. Check out our DAO Personality Quiz, and we’ll match you with some DAOs that align with your goals and interests. DAOs have shown phenomenal growth in recent years, with over $10.5+ billion invested in different treasuries; therefore, it’s crucial that we understand their ecosystem and how they function.

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