One of the biggest benefits of cryptocurrency solutions is that it is decentralized. This means that there is not a single node, network or point of failure that can be targeted by hackers. Instead, transactions are spread across a network of computers and nodes, which provides a higher level of privacy and security when compared to centralized solutions.
A decentralized autonomous organization (DAO) is an application governed by a coded set of rules that automatically initiates cryptocurrency transactions when specified conditions are met. Instead of being governed by a central government or organization owners, a DAO provides users with a clear and transparent set of rules and regulations.
How Does a DAO work?
If you’ve ever sent a cryptocurrency transaction before, you’re already familiar with the basic structure of how a DAO operates. DAOs use blockchain technology to record transactions made on the network on a digital ledger, which is then hardened by trusted timestamping across a distributed ledger. This allows the system to operate without the risks and financial costs associated with a central point of failure.
DAOs are applications with rules coded into the structure of the network to automatically initiate smart contracts when predefined conditions are met. The goal of a DAO is to allow users on the network to participate in transactions while also maintaining control over their identity and personal data by avoiding the need for a trusted third party to complete a network transaction.
DAOs and Security
The primary security concern of DAOs is the lack of a method to quickly and easily change the code that governs the organization. As soon as a DAO is up and running, it’s difficult to alter the DAO’s code and implement bug fixes that would take only a small amount of time when completed on a centralized coding system. Because the code is visible to all users but cannot be easily edited, bugs can potentially be exploited without a quick way for developers to patch them. Correcting code in a DAO requires a complete rewrite of the code and an agreement to migrate all funds on the network, which means that holes in the DAO’s security are more exploitable when compared to a centralized system.
The most notable example of the security flaws present in DAOs was the hack of a now-defunct DAO referred to as “The DAO.” Makers of The DAO believed that, by developing an autonomous and decentralized application, they could reduce human error in contract execution. After launch, researchers pointed out numerous problems with The DAO’s code, which, like all DAOs, was visible to all users. Hackers exploited these security flaws in June of 2016, gaining access to 3.6 million Ether tokens worth about $50 million at the time. Following the hack, the Ethereum blockchain was forked to act as a bailout for The DAO. In September of 2016, major exchanges de-listed The DAO’s token, marking the effective end of the project.
Benefits of DAOs
Despite potential security concerns, DAOs offer a number of benefits to consumers and users, including:
- Transparency. Users on a DAO can clearly see the code that governs the network as well as any transactions that take place on the blockchain. This provides users with a high level of transparency when compared to a centralized network.
- More efficient organization. Instead of using a central trusted third party to execute operations on the network, DAOs use predefined code and conditions to automatically carry out these contracts. This eliminates many of the costs and security risks that come with relying on a third party.
- An autonomous structure. DAOs offer investors a unique opportunity to submit proposals and ideas for improving the organization. Thanks to the autonomous structure of the DAO, any investor can submit a proposal, regardless of their stake in the network. Submitting proposals also costs money, which improves the quality of proposals submitted by ensuring that users making the submission have a stake in their submission.
Risks of the Decentralized Autonomous Organizations
The DAO exposed many risks associated with the structure of these organizations. Some of the largest risks include:
- Security risks. A DAO’s code is clearly visible and difficult to edit once the system is in operation. This makes it easier for hackers to exploit bugs and loopholes in the code, which was one of the factors that contributed to The DAO’s massive hack in 2016.
- Lack of governmental precedence. As a developing technology, there is no government precedence concerning DAO operation, and the legal status of this type of tech is still unclear. This presents future risks to developers hoping to implement a DAO.
If you’ve ever bought and sold cryptocurrencies like Bitcoin or Ethereum, you’ll find it very easy to become an investor in a DAO. Each DAO issues its own coin that you can freely buy and sell on major exchanges in the same method that you’d use to buy and sell other types of cryptocurrencies. After opening an account with a broker, you can become a “shareholder” in a DAO’s network by investing in its coin offering through these brokerage exchanges.
Let’s take a look at a few examples of current DAO tokens and where you can invest in DAOs.
Here are a few examples of currently operating DAOs that you can invest in through brokerage exchanges.
- Dash (DASH). Dash (whose name comes from the phrase “digital cash”) is an open source blockchain that focuses on providing users with a faster and more affordable way to send money. Dash was developed as a fork of Litecoin and aims to improve on the basic technology behind Bitcoin by providing users with more security and lower fees on the network.
- Maker (MKR). Maker is the governance token of the MakerDAO decentralized organization built on the Ethereum network. The Maker system was one of the first DAOs dedicated to the decentralized finance sphere, which aims to eliminate third party constraints within the financial industry.
- Augur (REP). Augur is a decentralized prediction market built on the Ethereum network. It allows users to bet on the outcome of sporting events, election results and more by purchasing shares that support or refute a specific event outcome.
Where You Can Buy DAO Tokens
You can buy and sell DAO tokens using cryptocurrency brokerage accounts. If you already have a crypto broker account, you might already have access to some of the most popular DAO tokens. If you don’t already have a brokerage account, you can open one using some of our favorite brokers below.
Future of DAOs
1 area of future investor interest in the use of DAO technology is in the world of decentralized finance (DeFi). Decentralized exchange platforms like Compound, yearn.finance and Uniswap rely on DAO technology to act as governance for their networks. In the future, it’s possible that additional yield farming and decentralized exchanges will implement DAO technology to help govern new and exciting DeFi technology and solutions.
Is DAO a Dapp?
A decentralized application (DApp) runs using a network of peer-to-peer connections. DApps function without the use of a single central computer that initiates and fulfills transactions. DAOs are a very ambitious form of DApp that includes its own set of rules that dictate the organization and how it operates.
Getting Started Investing in DAOs
Though the high-level technology behind DAOs can seem complicated, investing in DAO tokens is almost identical to investing in any other type of cryptocurrency. After opening your account, you’ll place a buy order through your broker, who will then complete your order and deposit your tokens or coins into your brokerage account. You can then transfer these investments to a private wallet for safer long-term storage.
Frequently Asked Questions
What are some examples of DAOs?
What are some examples of DAOs?
When most people think of DAOs, their first thought goes to the now defunct The DAO network that was effectively terminated in 2016 after a hack. However, there are many examples of functioning DAOs as well. Some examples of DAOs that are currently in operation include MakerDAO, Dash and Augur.
What is DAO in banking?
What is DAO in banking?
Investor interest in DAOs and DAO technology has led to the creation of a number of decentralized finance solutions based on DAOs. Some examples of how DAOs are used in the financial sphere include yield farming operations and decentralized exchanges like Uniswap.
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