Decentralized Autonomous Organization is an entity with no central authority. The decisions are made throughout the blockchain and it is governed by a set of rules which are enforced on the blockchain. DAOs are internet-native organizations collectively owned and managed by their members. There is no hierarchical authority in DAO and it can have many purposes.
It can vary from collecting rare NFTs to predicting stock market moves. It usually exists to raise money for a specific purpose, as well. DAO is different from traditional businesses in two different ways, First, DAOs are exclusively on the Internet and users interact with each other online. Secondly, they are under authorization of rules and targets that are enforced by the blockchain. These rules are a permanent record of digital information that is not run or managed by any central authority, and acts as a ledger of digital transactions online.
How does DAO work?
DAOs operate applying smart contracts, which are essentially chunks of code that automatically execute whenever a set of conditions are met. DAO’s rules are established on smart contracts. Once you have a stake you have voting rights and might affect the organization’s decisions or creating new proposals.
This model prevents DAOs from being spammed with proposals: A proposal will only pass once the majority of stakeholders confirm it. DAOs are completely autonomous and transparent. Since they are built on open-source blockchains, any user can view their code. Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.
Why do we need DAOs?
Establishing an organization with someone that includes funding and money needs a lot of confidence in the people you’re working with. However, it’s difficult to trust someone you’ve only ever interacted with on the internet. With DAOs there’s no need to trust anyone else in the group, just the DAO’s code, which is completely transparent and verifiable by anyone.