Hello and welcome to a new Cryptomatics episode! Our CryptoRobin channel will keep you
updated when it comes to the latest news and projects in the crypto space, and if you
are interested in being the first to find out when we publish a new video, you’ll
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and turn on notifications. Today, I will explain what DAO is, how it
works, what the principal-agent dilemma is, and how DAOs solve it, plus what
it takes to get a DAO membership. What Is DAO? A decentralized autonomous organization (DAO)
is a blockchain-based system that lets people coordinate and governs themselves while
being mediated by a series of self-executing rules deployed on a public blockchain
with decentralized governance, meaning independent from central control. Decentralized refers to the fact that there isn’t
any need for central government intervention. Autonomous is about the
amplification of smart contracts and encoded transactions on the blockchain. Probably the most important feature
of DAO is the smart contract.
The contract is the one that establishes
the rules of the organization, and it is also responsible for
holding the group’s treasury. After the contract has gone live on Ethereum,
its rules can only be changed following a vote. If someone tries to do something
that doesn’t follow the rules or logic of the code, it will simply fail. Since the treasury is also
defined by the smart contract, this means that the money can not be spent
without having the approval of the group. This translates into DAO not needing a central
authority as it relies on the group to make a collective decision while payments are
authorized automatically when votes pass. All of this is possible thanks to the fact that smart contracts are tamper-proof once
they are live on the Ethereum network. The DAO rules prohibit edits to the code
without being caught as everything is public.
Maybe the most important advantage of DAO is
that it solves the principal-agent dilemma. When a system has a structure that may allow
an entity (the “agent”) to make decisions or take actions in the name of another entity
(the “principal”), there is intrinsic risk in the divergent goals, priorities, or access to
important information of the respective parties. This represents the principal-agent dilemma, and
it refers to the fact that the agent could act in its own self-interest, despite the fact
that the agent was picked to make decisions on behalf of the interests of the principal. Since DAO doesn’t allow changes
to be made without a vote, such an issue can not exist – save for extreme
cases of hacking, which are extremely rare. There are two ways to get a DAO membership. Membership is able to determine how voting
works and other important parts of the DAO. The first one is the token-based membership. This one is usually completely permissionless. These tokens can be traded
on a decentralized exchange. Others can be earned through providing
liquidity or other types of proof of work. Basically, holding a token
offers the right to vote. This option is usually utilized in governing broad
decentralized protocols or even tokens themselves.
MakerDAO would be a good example of this. Its token, MRK, can be found on different
decentralized exchanges, which means that anybody can influence the future of
the protocol by acquiring the token. The second one is the share-based membership. This one is more permissioned
but remains quite open. A prospective member has the
option of submitting a proposal in order to join the DAO, usually
offering some tokens as tribute.
Shares mean direct voting power and ownership. This type is more common in closer-knit, human-centric organizations, such
as investment clubs or charities. It can also govern protocols and tokens. A good example would be MolochDAO which
is focused on funding Ethereum projects. It asks for a proposal for membership so
that the group can evaluate if said person has the needed capital and expertise in order
to make the right decisions for the protocol.
DAO permits entities to govern
themselves by relying on the power of voting without any outside interference. It serves as proof that centralized
governance is not always needed. DAOs solve the principal-agent
dilemma by their very nature, and getting a DAO membership can be fairly easy. I hope you enjoyed today’s video, and
if you have other questions about DAO, don't hesitate to tell us in the comment section. So much for today, don't forget to
subscribe to the Cryptomatics channel, if you want to stay up to date with the
latest concepts in the crypto sector.
