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What is DAO in Crypto Explained | How Does Decentralized Autonomous Organization Work - YouTube
Channel: Learn with Whiteboard
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Welcome to whiteboard programming, where we
simplify programming with easy-to-understand
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whiteboard videos, and today I'll be sharing
with you what is DAO in blockchain, how does
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it work, benefits of DAO, risks involved and
quite a lot more...
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So, let's get started!
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Well, to state its meaning, the term DAO stands
for “decentralized autonomous organization”
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and can be described as an open-source blockchain
protocol governed by a set of rules, THAT
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is created by its elected members, AND it
can automatically execute certain actions
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without the need for any intermediaries.
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Further, both the program rules and subsequent
actions are recorded on a transparent and
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secure blockchain ledger, which cannot be
tampered with and that's all thanks to an
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immutable timestamp and the distribution of
the information to the network participants.
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So, just to clear some basics, the platform
where the DAO runs is called a Blockchain...
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and the most common case where the DAO can
be written is Ethereum Blockchain...
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And in Ethereum, they are written in Solidity
Language.
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Just remember these 2 points are needed when
you call something a DAO.... that is, a DAO
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means 1. an organization with a group of participants
with a common goal 2. an organization which
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is governed by code that is decentralized,
open, and transparent.
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Now, if the system is well designed, the organization
will organically evolve toward achieving the
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common goal.
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But hey!
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How does a DAO work?
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And what does this stuff like MakerDAO, voting
etc meaning?
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Well, for the same, in this video, I will
share several examples that illustrate the
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type of problems that DAOs can and are particularly
equipped to solve and will address various
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misconceptions that surround DAOs as we go.
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Hopefully, by the end of this video, you will
have a clear idea of how DAOs work, at least
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in the high level.
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Example #1: DAO Now, the first example is
a DAO that is literally called DAO and it's
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confusing, I know!, which is one of the earliest
decentralized autonomous organization built
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on Ethereum.
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And to define it simply, it is a decentralized
venture capital fund.
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To fill in the pointers we discussed a minute
ago, in this case, the group of participants
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are investors who have the common goal of
maximizing the returns on their funds, and
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the governance by code works as such: The
smart contracts (which is built on top of
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the Ethereum blockchain) will take votes from
shareholders (that is, people who hold DAO
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tokens) on ... which startups to invest in
and how much to invest.
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The more tokens a shareholder locks up, the
more weight he has in the vote.
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Once the votes have been recorded, the smart
contracts will automatically allocate the
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funds based on the vote results.
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Here, participants can be sure that the vote
results are fair because every line of code
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is transparent and immutable on the blockchain.
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Now, you must be thinking, How does this differ
from a traditional venture capital fund?
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Well, traditional venture capital funds have
the principal-agent problem, wherein, by agent
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I mean board of directors and by the principal,
I mean the investors who have money in the
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fund, where the agent takes actions on behalf
of the principal but the agent’s actions
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are more incentivized by his self-interest
than that of the principal’s.
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In other words, the board of directors do
what is best for themselves as opposed to
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what is best for the investors.
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So in DAO, investors directly vote on projects
that they want based on how much stakes (or
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tokens) they hold.
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However, while DAO was a good proof-of-concept,
it failed because of vulnerabilities in its
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code, which were exploited by hackers to steal
more than $50 million worth of Ether.
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This failure showed a fatal flaw that while
the open-source nature of DAOs makes it transparent
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to the community, it also exposes DAOs to
attacks by hackers.
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In fact, the hack was so influential that
it directly led to a hard fork of Ethereum:
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Most of the Ethereum community agreed to roll
back the blockchain to a previous state to
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undo the attack, while the rest rejected the
rollback and insisted that code is law.
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And now, the former group is known as Ethereum
(ETH) today while the latter is known as Ethereum
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Classic (ETC).
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Example #2: MakerDAO While the DAO failed,
DAOs are definitely not just an abstract concept
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as of today.
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Perhaps the most well-known example of DAO
is the MakerDAO (which is sometimes also called
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as Maker project), which currently has a thriving
and rapidly growing ecosystem.
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People from the MakerDAO project have the
common goal of creating a stablecoin, DAI,
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that “can be used by anyone, anywhere, anytime”.
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The governance involves decisions on a variety
of Risk Parameters (such as what collateral
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can be used, how much debt can be issued,
and fees) that ensure the stability of DAI
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and is done via voting by Maker (MKR) holders.
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As a detailed introduction to MakerDAO is
beyond the scope of this video, I'll be employing
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a helpful analogy, that if MakerDAO is like
a company, DAI is the product, the Risk Parameters
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are features of the product, and MKR holders
are the shareholders of the companies who
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vote on how to adjust the product’s features.
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Essentially, 1 DAI is collateralized by 1
USD worth of ETH, and MKR holders vote to
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make a series of decisions to ensure that
the price always stays stable and DAI fully
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collateralized.
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It's very similar to centralized organizations,
where decisions like these are made by board
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members and executives.
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Or if a company is public, you may be able
to vote by holding stocks (or ownership in
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the company).
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Likely, in MakerDAO, anyone who owns MKRs
can vote on decisions.
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Further, do note that in MakerDAO, voting
is done via the Maker Governance Portal, which
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is a user-friendly front-end to the smart
contacts that make up the Dai Credit System
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where you can also by interacting directly
with those smart contracts.
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To vote here, you need to lock up tokens.
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The more tokens you lock up, the more voting
power you have.
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Vote results are determined by the amount
of MKR that votes for each proposal.
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For example, if proposal A has in total 700
MKR voting for it and proposal B has 300 MKR,
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proposal A would win with a 70% majority vote.
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On the same note, There are two types of voting
in MakerDao: 1.
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governance polls and 2. executive votes.
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Through governance polling, MKR holders will
be able to seek soft consensus on the basic
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principles of the ecosystem, the first example
of which was the Foundation Proposal that
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established the five core principles of MakerDAO.
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And, through the executive voting process,
MKR holders vote directly on changes to the
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Dai Credit system.
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For example, if some shareholders decide that
they want to increase the collateral required
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to borrow DAI to ensure the stablecoin’s
stability, they simply put forward a proposal,
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and if the proposal passed the vote, the smart
contracts will automatically increase the
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collateral requirement.
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The whole process is automated and no corruption
is possible as the rules of governance are
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transparent and immutable on the blockchain,
open to anyone who wants to examine them.
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Example #3: Voting As can be seen from the
two previous examples, contrary to the common
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misconception, DAOs do not eliminate the need
for human input, it is simply a more transparent,
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corruption-resistant, and decentralized way
to ensure the integrity of a system that exists
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to serve the participants’ interests in
the first place.
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In both DAO and MakerDAO, the participants
themselves must decide on what to vote for,
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and the autonomous system simply ensures that
their intentions are implemented with certainty
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— it is in some sense, a corruption-resistant
democracy, which brings us to the third example
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which only exists in the conceptual phase
right now.
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Imagine a democratic nation where all the
laws are recorded immutably and openly on
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the blockchain.
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A DAO can be used to automate the process
of lawmaking.
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When a proposal is made, the citizens can
directly vote from their cellphones through
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a front-end that connects to the smart contracts.
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Once the vote concludes, the laws are automatically
changed based on vote results, recorded on
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the smart contracts.
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There are no elected officials that can act
contrary to what the people want; instead,
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the power lies entirely in the hands of the
people.
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So, regardless of whether you think this is
a good idea or not, DAO can hence enable the
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most direct and honest form of democracy we
can discover today.
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Now that you know what are DAOs and how they
work, let's look into some other aspects of
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it.. starting with DAOs and security, The
primary security concern of DAOs is the lack
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of a method to quickly and easily change the
code that governs the organization.
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As soon as a DAO is up and running, it’s
difficult to alter the DAO’s code and implement
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bug fixes that would take only a small amount
of time when completed on a centralized coding
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system.
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And as the code is visible to all users but
cannot be easily edited, bugs can potentially
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be exploited without a quick way for developers
to patch them.
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That's the reason why correcting code in a
DAO requires a complete rewrite of the code
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and an agreement to migrate all funds on the
network, which means that holes in the DAO’s
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security are more exploitable when compared
to a centralized system.
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Further, to sum up the risks of DAOs, we can
say that ... First, A DAO’s code is clearly
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visible and difficult to edit once the system
is in operation.
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This makes it easier for hackers to exploit
bugs and loopholes in the code, which was
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one of the factors that contributed to The
DAO’s massive hack in 2016.
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2.
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Lack of governmental precedence.
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Now, As a developing technology, there is
no government precedence concerning DAO operation,
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and the legal status of this type of tech
is still unclear.
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This presents future risks to developers hoping
to implement a DAO.
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Next, let's discuss about Benefits of DAOs
... so, despite potential security concerns,
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DAOs offer a number of benefits to consumers
and users, including 1.
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Transparency.
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Users on a DAO can clearly see the code that
governs the network as well as any transactions
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that take place on the blockchain.
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This provides users with a high level of transparency
when compared to a centralized network.
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2.
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More efficient organization.
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Instead of using a central trusted third party
to execute operations on the network, DAOs
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use predefined code and conditions to automatically
carry out these contracts.
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This eliminates many of the costs and security
risks that come with relying on a third party.
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3.
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An autonomous structure.
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DAOs offer investors a unique opportunity
to submit proposals and ideas for improving
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the organization.
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Thanks to the autonomous structure of the
DAO, any investor can submit a proposal, regardless
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of their stake in the network.
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Submitting proposals also costs money, which
improves the quality of proposals submitted
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by ensuring that users making the submission
have a stake in their submission.
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Next, you must be wondering how can you invest
in a DAO or how to become a DAO Shareholder?
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Well, If you’ve ever bought and sold cryptocurrencies
like Bitcoin or Ethereum, you’ll find it
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very easy to become an investor in a DAO.
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Each DAO issues its own coin that you can
freely buy and sell on major exchanges in
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the same method that you’d use to buy and
sell other types of cryptocurrencies.
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After opening an account with a broker, you
can become a “shareholder” in a DAO’s
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network by investing in its coin offering
through any brokerage exchanges like Crypto.com,
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Coinbase, or Gemini.
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A few examples of currently operating DAOs
include DASH (DASH), MakerDAO (MKR), and Augur
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(REP) Lastly, to conclude, DAOs envision a
collective organization which is owned and
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managed by its members with all of them having
a voice.
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Many analysts and industry insiders affirm
that this type of organization can be the
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next trend, and even potentially replace some
BIG traditional companies.
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With that, I hope this video was helpful to
you and served value, if you love my content,
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feel free to smash that like button and if
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