The World of DAO Tokens And Smart Contracts

Can you picture coordinating with individuals from all over the globe without knowing each other, defining your own rules, and making your own choices all encoded on a Blockchain? DAO tokens, on the other hand, are making this a reality. 

According to Wikipedia, a DAO tokens (Decentralized Autonomous Organization) is an organization represented by rules encoded as a transparent computer program, governed by the members of the organization, and uninfluenced by a central government. Because the rules are incorporated in the code, no managers are required, eliminating any bureaucracy or hierarchical barriers. 

Some of today’s internet users and future generations are eager to form social organizations in order to find a solution to the question, “How can we trade values in a trustworthy environment?” Despite the fact that blockchain enables automated trustworthy transactions and value exchanges, internet users all around the world desire to organize themselves in a “safe and effective method to collaborate with like-minded persons all over the world,” according to Ethereum. 

What Exactly Is a Smart Contract? 

A smart contract is a self-executing contract in which the conditions of the buyer-seller agreement are directly encoded into lines of code. The code and the agreements contained within it are dispersed and decentralized over a blockchain network. Transactions are trackable and irreversible, and the code controls the execution. Smart contracts are essentially programs that run when certain criteria are satisfied and are recorded on a blockchain. They are often used to automate the implementation of an agreement so that all participants are instantly confident of the outcome, without the participation of an intermediary or the waste of time. They can also automate a workflow by initiating the next operation when certain circumstances are satisfied. 

What are DAOs? 

DAO tokens are an efficient and secure method to collaborate with like-minded people all around the world. Consider them to be an internet-native business that its members jointly own and govern. They have built-in treasuries that no one can access without the group’s permission. Proposals and voting control decisions to guarantee that everyone in the company has a voice. 

There is no CEO who may sanction expenditure based on their own whims, and there is no risk of a shady CFO tampering with the accounts. Everything is out in the open, and the DAO’s spending restrictions are encoded into its code. 

A decentralized autonomous organization (DAO) is a virtual decentralized organization governed by a community of individuals with no hierarchy. It is a concept for an organization that lives as a code on a blockchain network that was developed and built in 2016 by several members of the Ethereum community. They established a decentralized organization resembling a venture capital company. 

The platform was known as “The DAO,” and anybody with the DAO tokens could join and benefit from it. They pooled cash, chose which projects to sponsor, and all activities were carried out via smart contracts, a computer software that assures all regulations are obeyed regardless of whether members wanted to or not. 

Smart contracts, like traditional contracts, are agreements between individuals. The main difference is that a smart contract is automated to ensure that both sides of the agreement are met without either party having to do anything. 

‘A Digital Community with A Joint Bank Account.’ 

DAOs can take many forms and arrangements, but “a DAO is an online community with a shared bank account,” Cooper Turley, an investor and creator of numerous prominent DAOs, tells CNBC Make It. “Essentially, a small number of people join a chat group, and then they decide to bring capital together, [usually] using an Ethereum wallet,” Turley explains. He argues that from there, people would mutually determine how to support their DAO’s objective. 

Many DAOs fall into one of two categories: those that collaborate to run open source, blockchain-based initiatives, and those that make investments. They can function similarly to limited liability corporations (LLCs), venture capital firms (VCs), or investment businesses, such as PleasrDAO. 

The specifics of any DAO, such as its kind, structure, rules, and governance, are determined by the organization and its objectives. Those who observed the first DAO hack in 2016, in which millions of dollars were successfully stolen, may associate the phrase with a bad meaning. Though there are still risks, DAOs have made great strides since.

Types of DAOs

It’s critical to recognize that DAO is a broad word that embraces a wide range of various sorts of organizations and businesses. Even if two collectives are substantially different, they are also DAOs. 

Here are a few well-known DAO examples: 

  • The PleasrDAO amasses a variety of NFTs and invests in other assets. 
  • The HerStory DAO gathers and finances initiatives created by Black women and non-binary artists. 
  • The Komorebi Collective DAO provides funding to female and non-binary crypto entrepreneurs. 
  • The Friends with Benefits DAO is a private social club that requires a fee to join. 
  • The MetaCartel Venture DAO is a for-profit corporation that invests in early-stage decentralized apps.

How DAOs Work 

To comprehend DAO tokens, you must first understand the technology that powers them. The majority of DAOs rely on blockchain technology and smart contracts, which are code collections that operate on the blockchain. 

A blockchain is a digital ledger that is decentralized. While blockchains are most generally recognized for publicly documenting transactions of various cryptocurrencies, such as bitcoin, and other digital assets, such as NFTs, they may also be utilized in a variety of other ways. The blockchain can serve as a backbone for DAOs, preserving the structure and regulations of each on-chain. 

There is usually a hierarchy in conventional organizations. The structure is determined and changed by a formal board of directors, executives, or higher management who determine the structure and have the power to make changes.

DAOs, on the other hand, are decentralized, meaning they are not administered by a single person or entity. Each DAO’s rules and governance are embedded in smart contracts on the blockchain and cannot be modified until approved by the DAO’s members. 

Members of each DAO can vote on choices jointly, usually on an equal footing, rather than a chosen few having the bulk of say. 

PleasrDAO members, for example, opted to buy the Wu-Tang Clan CD as a group. They then produced an NFT to symbolize a deed of ownership to the record. PleasrDAO members co-own the NFT deed, and hence share ownership of the album.

In bigger DAOs, teams may develop to address various parts of the organization, led by elected leaders. As a result, not every member is required to vote on every detail. 

Turley believes that transparency is the most crucial feature of DAOs. Every DAO decision is pitched, discussed, voted on, and published publicly. 

The DAO’s Fall Holds Long-Term Consequences 

On June 17, 2016, a hacker discovered a software flaw that allowed him to drain cash from DAO; 3.6 million ETH, the equivalent of $70 million at the time, were taken in the first few hours of the assault. The hacker withdrew the assault after causing the targeted harm.

In this hack, the attacker was able to repeatedly “ask” the smart contract (DAO) to return the Ether before the smart contract could update its balance. Two major problems allowed this to happen: when the DAO smart contract was written, the developers did not account for the possibility of a recursive call, and the smart contract first transmitted the ETH cash and then adjusted the internal token balance. 

It’s critical to realize that this flaw did not originate with Ethereum, but rather with this specific application developed on Ethereum. The recursive call attack was one of the weaknesses in the programming built for DAO. Another way to look at this scenario is to compare. Ethereum to the Internet and any Ethereum-based application to a website — If a site is down, it does not signify that the Internet is down; it only indicates that one website is down. The hacker ceased emptying The DAO for unclear reasons, despite the fact that he could have done so indefinitely. The Ethereum community and team rapidly took charge of the issue and proposed a number of solutions to address the attack. 

However, the cash were deposited in an account with a 28-day holding period, preventing the hacker from completing his escape. To recoup the stolen assets, Ethereum hard split and transferred the hijacked monies to an account accessible only to the original owners. Token holders were granted the same exchange rate as the first sale, 1 ETH for 100 DAO tokens. 

Though The DAO project has now ended, its legacy lives on. Current blockchain development teams were always looking to The DAO for instruction – for what not to do. 

First and foremost, The DAO provides an important lesson about the significance of developing safe blockchain systems. The DAO’s attack was not caused by a flaw in the Ethereum blockchain; rather, it was caused by a software flaw exploited by a skilled hacker. The hack may have been avoided if the code had been written appropriately.

Second, the SEC’s decision on The DAO has urged blockchain businesses to devise methods to circumvent security registration and government oversight. The SAFT approach is one strategy used by businesses to do this. If coins on a blockchain platform have real utilitarian value. 

Who knows what lessons would still need to be taught if the DAO did not exist?

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