What is a decentralized autonomous organization, and how does a DAO work?
A decentralized autonomous organization (DAO) is an entity with no central leadership. Decisions get made from the bottom-up, governed by a community organized around a specific set of rules enforced on a blockchain.
DAOs are internet-native organizations collectively owned and managed by their members. They have built-in treasuries that are only accessible with the approval of their members. Decisions are made via proposals the group votes on during a specified period.
How does a DAO work?
As mentioned above, a DAO is an organization where decisions get made from the bottom-up; a collective of members owns the organization. There are various ways to participate in a DAO, usually through the ownership of a token.
DAOs operate using smart contracts, which are essentially chunks of code that automatically execute whenever a set of criteria are met. Smart contracts are deployed on numerous blockchains nowadays, though Ethereum was the first to use them.
These smart contracts establish the DAO’s rules. Those with a stake in a DAO then get voting rights and may influence how the organization operates by deciding on or creating new governance proposals.
This model prevents DAOs from being spammed with proposals: A proposal will only pass once the majority of stakeholders approve it. How that majority is determined varies from DAO to DAO and is specified in the smart contracts.
DAOs are fully autonomous and transparent. As they are built on open-source blockchains, anyone can view their code. Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.