In decentralized finance, cryptocurrencies are a tool for building a more accessible and equitable digital economy. As the DeFi space continues to grow and new blockchain projects are created, using DAOs to structure digital communities will become essential for democratizing token governance and organizing stakeholders.
A new survey by FTX showed that despite recent growth, most people do not know what a DAO is or how it works. DAOs are more than investment clubs, venture funds, or other digital communities. As our world moves deeper into digitalization, DAOs can help us conduct better business, organize communities more efficiently and equitably, and create a more reliable and secure democratic process. Here are some basics about DAOs and how this technology can benefit investors.
DAO Basics
What is a DAO in the crypto world, and how does it benefit traders? DAOs are built on three main components: decentralized decision-making, transparent governance, and token-based membership.
Decentralized Decision Making
While traditional online communities such as social media platforms or forums are governed by a central entity such as a board of directors, DAOs are governed by lines of code. DAOs are built on blockchain networks which allow for the encryption of the communities rules on smart contracts, which will automatically enforce the rules of the community when specific conditions are met. This mechanism means that no individual human or group is in a hierarchical position over others within the community. This system creates a more equitable community structure where everyone’s ideas and opinions can be heard. The encrypted code is infallible and virtually impossible to tamper with, which mitigates any risk of corruption.
Transparent Governance
While the smart contracts in the DAO can execute many of the standard rules of the community, there will inevitably be decisions that the community has to make together. When moments like this occur, all members of the DAO will receive a vote to help determine the course of action for the community. Every decision made by the group, every vote taken, and every rule executed by the code is all recorded on a transparent ledger on the blockchain network. This means that there is always total transparency about how the community is being governed and the decisions being made by the group. This democratic system offers stakeholders more significant control over their investments and the future of the token and DAO.
Token-Based Membership
Finally, DAOs are created on a token-based membership system. This means that to become a member of the DAO, you must first invest in the cryptocurrency that backs the blockchain of the DAO. Because membership is contingent on having a stake in the community, and only those with tokens get a vote within the DAO, the system is built to promote collaboration and mutual success rather than individual ambition. You will benefit from the entire group’s success as a community member within the DAO.
Though there are several challenges facing DAOs today, new Dao projects like the FTX DAO have been specifically designed to overcome these challenges and create a new and improved way to organize online. DAOs give more power to stakeholders and create a sustainable, equitable, and reliable organizational structure. DAOs will continue to grow in popularity as the DeFi world develops and more people begin looking for better ways to participate in the digital economy.
