12. Decentralised autonomous organisations (DAO)

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Welcome on board our final instalment in our Navigating Blockchain series. This series was specifically written to give you accessible and trustworthy information about the use of blockchain technology and blockchain-based business solutions.

We left the best for last. We at Yknot Blockchain Solutions say that a DAO is like a well-built boat – made to conquer the unknown. In our Navigating Blockchain infographic you will see that Decentralised Autonomous Organisations (DAOs) are represented as the sailboat at the centre. This is firstly because all the other topics play a part in DAOs. Secondly, DAOs are vessels of possiblitiy and power that can completely disrupt many traditional industries in providing more affordable and streamlined solutions to us all.

Let’s consider this scenario

Imagine a world that looks something like this [14]: A company makes use of a distributed ledger (DLT) to keep track of its inventory and applies a smart contract that triggers at each item’s reorder point based on historical customer demand. The smart contract will automatically create an invoice for the store’s relevant supplier, send it and specify the date of delivery. When the shipment arrives, the smart contract will be notified using scanners and internet of things (IoT) beacons (sensors) connected to the ledger, and execute the release of payment in cryptocurrency (tokens).

This is just a simple example of what can be possible in decentralised autonomous organisations (DAO).

What is a DAO?

All the technology around blockchains, smart contracts, and tokens has enabled us to create a new organisation form: Decentralised Autonomous Organisations (DAO) or Distributed Autonomous Corporations (DAC). DAO is a new organisation form where the management and operational rules of the organisation are typically encoded on blockchain in the form of smart contracts, and it can operate autonomously with limited central authority or management hierarchy.

DAO is effectively a business that uses an interconnected web of smart contracts to automate all its essential and non-essential processes [14]. Multi-signature authentication is applied to initialise the execution of a smart contract, making it difficult for anyone to tamper organisational workflows and processes recorded in the smart contract. Smart contracts can facilitate the sending and receiving of funds, which makes it so powerful.

Governance

DAO has the potential to overturn our traditional management model (which is hierarchical in nature) and will significantly reduce the cost of organisational communication, management, etc. The idea behind DAO is to remove a central authority or management hierarchy, and gravitate towards a structure where all management and operational rules of the organisation depend on collaboration and group decision-making, all of which are encoded on tamper-resistant blockchains.

In a DAO, the distributed consensus protocols (POW or POS) and token economy incentives are utilised to realise organisations’ self-operation, self-governance, and self-evolution. A traditional organisation follows a top-down hierarchy, where a DAO follows a bottom-up interaction and cooperation among distributed nodes on the network. Furthermore, in DAO code is law. Management is no longer based on a bureaucratic system but on community autonomy. DAO usually runs under the regulation rules and collaboration patterns defined by all stakeholders, consensus and trust within the network. Since DAO rely on smart contracts, all the participants in the DAO’s responsibility, authority, reward and penalty terms are open and transparent. Smart contracts provide the trust guarantee for DAO governance.

Another important aspect of DAO is the incentive mechanism found in the organisational structure of DAO. A token incentive is the main motivator for DAO. A token is a kind of negotiable digital asset and the proof of rights and interests. Stocks, bonds, and options in the real world can be digitised in the form of tokens.

Usefulness of a DAO

In [25], another advantage of using a DAO structure for crop insurance are demonstrated. A financial derivative can be made by contract by using a data feed of the weather data instead of any crop price index.

If a farmer in Limpopo purchases a derivative that pays out inversely based on the precipitation in Limpopo, then if there is a drought, the farmer will automatically receive money and if there is enough rain the farmer will be happy because their crops would do well. This can be expanded to natural disaster insurance.

In [26] more can be read on DAO and Telos.

Challenges facing DAOs

It is difficult to change a DAO, or the smart contracts underpinning it after it has been deployed due to the tamper-resistant nature of blockchain. There is also the possibility that attackers can take advantage of any exploits or loopholes found in the structure of the code of the DAO. Although we must not forget that attackers also target conventional organisations. Nonetheless, the crucial thing is that the developers of your DAO should be trustworthy, and know how to set up the correct smart contracts and to verify and test them thoroughly. Both Telos and EOS networks have mechanisms in place to minimise this risk.

If we think about a DAO as a sailing vessel, Yknot Blockchain Solutions would be the skilled builders of the boat. We have advanced experience and expertise in designing DAO solutions.

** You can visit our website. for more informative articles on blockchain technology and blockchain-based business solutions.

References:

[14] J. Liebkind, “DAOs, Blockchain, and the Potential of Ownerless Business”, Investopedia, 2019. [Online]. Available: https://www.investopedia.com/news/daos-and-potential-ownerless-business/. [Accessed: 06- Jul- 2021].

[25] “Ethereum Whitepaper DAO,” ethereum.org. [Online]. Available: https://ethereum.org/en/whitepaper/#decentralized-autonomous-organizations. [Accessed: 06-Jul-2021].

[26] Telos Feed, “Room for Improvement. A comparison between EOS and Telos.,” Medium, 12-Jun-2019. [Online]. Available: https://medium.com/@Telosfeed_en/room-for-improvement-a-comparison-between-eos-and-telos-312c2a35414e. [Accessed: 06-Jul-2021].

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Yknot Blockchain Solutions

Yknot Blockchain Solutions

This article was written by Yknot Blockchain Solutions for educational purposes. We know the ropes when it comes to building blockchain-based solutions on the Telos network. Contact us to get all hands on deck for your next expedition.

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