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Decentralized autonomous organizations (DAOs) are a new take on business models inspired by the democratizing nature of cryptocurrencies.
Unlike traditional companies, DAOs lack a central governing body. Instead, they function through a collective decision-making process.
Every member, or tokenholder, has a say in the management and decisions of the organization. All activities, including voting, are recorded on a blockchain as a transparent and public ledger.
DAOs operate on a set of rules encoded in smart contracts. These coded agreements outline the consequences of various outcomes or decisions.
While there are many different kinds of structures, a common one is to have the power of each member’s vote depending on the number of tokens they hold.
This aligns the member’s interests with the good of the DAO, as reckless decisions could devalue their own holdings.
DAOs also have treasuries, pools of tokens that can be exchanged for fiat currencies or invested in assets based on collective decisions.
Despite the potential advantages like decentralization, participation, transparency, and community building, DAOs face significant challenges.
The decision-making process can be slow due to the need for member consensus.
Additionally, members must be educated about various activities, which can be difficult given the diversity of backgrounds and knowledge levels.
DAOs also risk inefficiency due to the time required for coordination and communication. Security is a primary concern, as breaches can lead to significant losses.
“The DAO”, one of the first DAOs, built on Ethereum, exemplifies the potential and pitfalls of this model.
It raised over $150 million in a crowdfunding campaign in 2016 but was disbanded and the Ethereum blockchain was forked (cloned and split), then restored to a previous state, after hackers exploited vulnerabilities in its system, stealing $50 million worth of tokens.
The fork resulted in the Ethereum network splitting into two versions of the blockchains: Ethereum with the theft reversed, and Ethereum Classic which continued on the original chain and still exists to this day.
These two blockchains are effectively separate systems now and have been since this event occurred. Every major fork typically creates a separate version of the network’s ongoing history, thus what is considered true.
This incident raised concerns about the legal and security aspects of DAOs.
It also raised questions about how “decentralized” blockchains like Ethereum were when at the time, a relatively small group of people made the decision to fork the network and decide what was “true”.
There is still a persistent chorus of people who believe that Ethereum Classic is the true Ethereum.
They believe, that if there was a flaw in the DAO contract that allowed the hack to happen, then it shouldn’t have caused the entire blockchain to be effectively reversed.
Oddly, when Ethereum moved off Proof-of-Work (PoW) mining to Proof-of-Stake (PoS) validator processing in September 2022, Vitalik Buterin, the prominent co-founder of Ethereum, endorsed this original version, Ethereum Classic that continued to operate and be maintained, even after all these years.
Yet, the concept of DAOs remains attractive for those seeking a decentralized, collective approach to decision-making and management. Read more here.
Harnessing The Power Of Group Voting For Decisions
As seen in DAOs, where all actions are publicly viewable on the ledger, the idea of transparency aligns with the Zucoins’ approach.
Security is a significant concern for DAOs, as seen in the unfortunate hacking incident with The DAO and numerous others since.
Zucoins, learning from this, has prioritized the long-term safety of its system.
Unlike Bitcoin and Ethereum’s blockchain, the Splitchain network’s architecture is not vulnerable to a 51% attack, due to their different settlement mechanism, with the goal of offering a safer environment for transactions.
Weirdly, the concept of consensus group voting could reappear through Splitchain’s proposed Smart Assets component, as a feature of the network.
Splitchain will have the capacity to form similar abilities as DAOs, using their ground-up rethink when it comes to Smart Assets—an alternative to traditional blockchains’ smart contracts, sub-tokens and NFTs, aiming to make the process far simpler.
Users could assemble Smart Assets that utilize a voting component, by themselves for various uses, all the while keeping it off the fundamental operation of the network, improving infrastructure safety.
As we always hammer on about here, for good reason—the unique two-factor authentication (2FA) feature for transactions further strengthens each transaction’s security, helping users to transact with more confidence.
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All the best,
Peter & Rob
Disclaimer: Of course, this is not advice, financial or otherwise. It’s also important to consider the risks and challenges associated with any potential benefits.