Crypto Education - DAO Explained | Animation | Cryptomatics - YouTube

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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.

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