Cryptoeconomy: Decentralized Autonomous Organizations

Decentralized Autonomous Organizations (DAOs) create a set of rules that govern a network in a decentralized manner while providing incentives for participants to share consensus.

Cryptoeconomy: Decentralized Autonomous Organizations

Abstract: A Decentralized Autonomous Organization (DAO) creates a set of rules that govern a network in a decentralized manner while providing incentives for participants who share consensus.

Explanation of DAO
The important advantage of decentralized finance is its permissionless and decentralized nature, which means that no centralized structure will control any part of the blockchain operations.

These features are not only beneficial for finance-related matters, but are equally applicable to issues in governance. DAO is an example of blockchain decentralization to handle other types of activities, other examples include but are not limited to decentralized risk financing, operation of IoT devices, and other activities that require autonomous execution.

What is a DAO
A Decentralized Autonomous Organization (DAO) creates a set of rules that govern a network in a decentralized manner while providing incentives for participants who share consensus. Because individuals cannot have more power than most people, DAOs are decentralized. Most importantly, decision making is not centralized, but automated using a number of rules that incorporate complex mathematics and game theory. These rules are created to benefit the network and the participants in a fair way. The centralized model of government is undermined by multiple bureaucratic hierarchies, hierarchies, and agent-participant problems, so in general, DAOs aim to improve this model.

DAO use cases exist in the fact that contracts are enforced in code or smart contracts, forming a set of rules that all participants agree to and that all members must abide by. This eliminates the error of human intervention in decisions that are critical to the lifetime of the agreement.DAO solves the agent-principal dilemma – a situation that allows an agent to make certain decisions or actions on behalf of another individual. This dilemma can arise when an agent acts in his or her personal interest, and the agent may disregard the interests of the principal, who is unaware that he or she is being taken advantage of. The cause of such problems is the information asymmetry between the agent and the participants, which facilitates the empowerment of the agent.

How does a DAO work?

DAOs are built to simulate the structure of a company. In this case, rules and regulations are created from open source code and enforced by smart contracts. The rules here are decided collectively by the holders of the pass. Unlike traditional systems, there is no hierarchy here; however, to ensure the strength of the network, DAOs typically have incentive schemes for a group of users who participate in the governance structure. Typically, after writing the code, the DAO will enter a financing phase, which is later used to incentivize network participants. By owning and locking up a certain number of passes (cryptocurrencies) during the funding phase, participants are assigned voting rights equal to the number they hold.

Decentralize Autonomously Corporation (DAC)
DAO is the main factor behind the rise of the Decentralized Autonomous Corporation (DAC), a type of company that uses the DAO method to make corporate decisions in a more democratic, trust-free, decentralized and autonomous manner. One of the first uses of the DAC type in the blockchain was Bitshares, an e-commerce company founded by Dan Larimer. Dan Larimer first introduced the concept of a “decentralized organizational enterprise” in an article published on September 7, 2013. Incidentally, this idea was implemented in Bitshares in 2014 and in EOSIO in 2018.

In DAC, all finance-related transactions are fed into the blockchain public ledger, making it immutable, irreversible, decentralized, autonomous, and free of human interference.

Bitcoin is the first cryptocurrency to use a DAO structure to protect its network. The Bitcoin mechanism rewards participants for participating in its organization and is also known as a proof-of-work mechanism. Transactions are successful when miners reach consensus to work together to solve tricky mathematical puzzles; in return for their efforts, they are rewarded with BTC. The system is run by a set of rules that reward legitimate work and punish violators.

Ether “The DAO”
The Ethernet network operates as a decentralized venture fund based on open source code. This network does not have the typical management structure or the board of directors associated with traditional commercial institutions. But this comes at a considerable cost. For example, the first hard fork of the Ether blockchain was the result of a hacker exploiting a vulnerability in the code. This split Ether into two blockchains, Ether and Ether Classic, and deprecated Ether funding.

Weaknesses of DAO

Legitimacy: The legal status of DAOs is still uncertain because the law does not yet recognize them. Participation in this type of venture requires acceptance of the risks associated with it. The fact that loss claims cannot be legally pursued has led to their classification as a high-risk investment option. This provides an opportunity for legal misunderstandings with local regulations.

Hacking: Unless the hash rate is high (as with Bitcoin, which requires significant capital and power), a low hash rate combined with a motivated attack may result in a 51% probability of being attacked.

While DAO enhances the credit-less, decentralized, and autonomous nature of blockchain, there are still some flaws in its centralized governance. Many argue that it is inconsistent with the true spirit of decentralization due to the 51% probability of an attack – in which malicious participants can allocate a large portion of the hash rate to disrupt transactions. As blockchains continue to innovate, we can expect a more technologically advanced DAO system to address these issues. This system should continue to expand the infinite opportunities for crypto. Let’s look forward to it!

Posted by:CoinYuppie,Reprinted with attribution to:
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