In the eco-system of decentralised finance, an essential entity has emerged of late called Decentralised Autonomous Organisation (DAO). In decentralised finance, people around the world organise to conduct the transactions without knowing each other, and by setting up their own set of rules. In other words, they are able to make the decisions autonomously.
All this is encoded on the technological backbone — blockchain.
The system has been put in place by DAOs. It all was triggered by Ethereum-based blockchain users in 2016. An organisation was created which was credible and transparent. DAO can invoke worldwide collaboration.
A DAO records the rules and transactions on a blockchain thus eliminating the necessity of an intermediary or a third party for effecting a financial transaction. In other words, smart contracts guide the entire deal. A smart contract represents the rules of the organisation and holds the organisation’s storage.
These rules are not editable. If revised, it is noticeable. If alterations are to be made, it can be done by a voting system. Alterations ultra vires the rules cease to function.
DAO is a non-human entity that conforms to a set of rules or rules derived from decentralised consensus. It avoids the bureaucratic structure we come across in large organisations.
DAO developers wanted to eliminate human error and fund manipulation. This they did by leaving the decisions to an automated system and crowdsourcing.
DAO enables money transfer globally. Investors get tokens signifying their voting rights for various projects. DAO in essence, democratises the system. Members vote for changes, instead of relying on a sole authority. DAOs are crowdfunded — here tokens are issued. DAOs are governed by communities instead of top management.
DAO is not a typical hierarchical organisation. It is a flat organisation. It aims at removing centralisation of decision making. Everyone participates in the decision making process.
In practice, this process may be a long-drawn-out one. To streamline this, some legislative back up is necessary, which lacks at the current stage.
A proposal is put forward offchain to get feedback. Then there are offchain polls to assess its value. It reaches the offchain greenlight polls. Then comes executive on-chain poll. Once it passes, it can be made a part of the protocol. On-chain functions do require tokens which are ERC2O-based. These are digital assets. Each token has a unique utility. These tokens can give voting rights on different projects or rewards for the completion of the tasks. Tokens are sold to raise initial funds through offerings.
Though it may take longer to complete the process, it is not too slow. It may take a few weeks. There are checks and balances in the whole process.
DAOs may become a part of the financial system in future. They may oversee transactions worth billions of dollars at a time.