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DAOs: What are they and how do they influence the cryptocurrency and blockchain sector?

On Wednesday, it was announced that BitDAO, a Decentralised Autonomous Organisation (DAO) aimed at promoting the “mass adoption of open finance and decentralised tokenised economy” had raised US$230mln in a private sale involving hedge fund Pantera Capital as well as PayPal co-founder Peter Thiel.

BitDAO said it will “put its full support” behind blockchain-based decentralised finance (DeFi) technology by providing funding, research & development and liquidity to “propel the growth of the overall ecosystem”.

But what exactly is a DAO, and how do these organisations influence blockchains and their structures?

What is a DAO?

Decentralised Autonomous Organisations were created in 2016 as an offshoot of the decentralised nature of blockchains and cryptocurrencies.

DAOs are designed to act as a form of venture capital fund based on computer code and without a board of directors or managers. Instead, DAOs use automated decision making processes and crowdsourcing to make decisions, supposedly removing the chance of human error or the ability of fund managers to manipulate investors.

How do DOAs work?

To function, DAOs implement a set of rules using a self-executing computer program known as a smart contract before then entering a funding phase that allows it to create tokens that can then be spent by the organisation or used to reward certain activities to keep it functioning.

For investors, backing a DAO also gives them voting power in how the organisation functions, similar to that of company shareholders.

However, unlike a company, once a DAO is deployed it becomes fully autonomous and independent of its creators or any other individuals. Its code and rules are also publicly viewable and all transactions are recorded on the blockchain, making them transparent and unalterable.

Any decisions made by the DAO are made through votes cast by stakeholders, with majorities for decisions specified in the smart contract.

What are the advantages and drawbacks?

In short, DAOs enable people to exchange funds anywhere in the world through the tokens used by the platform, as well as offering a fully democratic and decentralised alternative to traditional venture fund structures.

However, their democratic nature serves as a double-edged sword, in that any security issues or problems with the program must be resolved by consensus vote before they can be fixed, allowing hackers to exploit any issues while voting takes place.

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