A DAO is an entity or organization that aims to run a transparent business enterprise in which decision-making processes are enforced digitally using the power of blockchain. With the emergence of smart contracts, the concept of DAO has become more prevalent in the cryptocurrency space.
Some examples of DAOs are Bitcoin, DigixDAO, and MakerDAO.
Why do we need a DAO? What makes a DAO so different in the traditional sense?
While people are becoming accustomed to news of corporate collapses and scandals due to corruption and misconduct by management, a new way of running businesses with the aim to align the vested interest between users, customers, and stakeholders is gaining traction in the real world.
This means that the centralization of control within a top-down management structure (i.e. intermediaries like CEO and senior management) that we see in a typical company today could be removed, thanks to blockchain and smart contracts.
So how can a DAO be implemented?
In order for a DAO to be successful, it needs to be transparent, decentralized, self-enforcing (smart contracts), and incentivized.
Let’s take a look at Cyber Republic, which is making concrete steps to become a true DAO. CR is made up of a robust and diverse community with skill-specific groups such as developers, organizers, and business persons.
Everyone is free to join the community so long as they are interested in the Elastos ecosystem. There is no centralized legal entity, no CEO, or control hierarchy in CR.
The Elastos Foundation has prepared a fund of 16.5 million ELA for the development of Elastos ecosystem through CR. This will be used to compensate for contributions made by community members. The fund could be seen as the capital of a traditional company, however, the exciting part is that as a community member of a DAO, you have the decision-making power that is typically held by executives in traditional companies.
Cyber Republic’s goal is to give the community to control over how the fund is being used. The only way that an ELA token can be spent from the fund is through the CRC system, which currently involves CR Suggestions, CR Proposals, and CR’s Interim Council.
Although the CR Council picks which Suggestion becomes a Proposal based on certain guidelines, community members have a chance to reject the Proposal over three days should they find the Proposal does not align with the interests of the overall Elastos ecosystem.
In the future, anyone with an account on CR will have it tied to a wallet with a reputation system added to ensure a high quality of submission for CR Suggestions. This could further improve the efficiency and effectiveness of the CR workflow–in contrast to layers of hierarchical control and complex bureaucracy typically seen in traditional company structure.
The CR Interim Council is presently governed by three representatives from the Elastos Foundation. Once the interim period ends, a total of twelve CR Council members will be elected by the community via voting.
Eventually, every community member will have the power to amend the CR constitution, elect, re-elect, or even impeach a council member by a simple voting process (with minimal transaction fee) to be executed on the blockchain, showing once more a great contrast to the complicated and expensive process to remove CEOs in traditional large companies.
To become a sustainable DAO, there need to be embedded economic incentives for the community members who participate in the voting processes as well as for the miners and delegates who runs the blockchain.
In the case of Elastos, a hybrid PoW and DPoS consensus model is adopted and the 4% annual inflation is allocated as follows: 35% to reward PoW miners, 35% to reward DPoS delegates, and 30% to CR for ecosystem development.
In this way, miners and DPoS delegates are incentivized to ensure the Elastos network is decentralized and there is no single point of failure. Contractors such as organizers and developers are incentivized to create Suggestions which can help increase the value of the Elastos network.
Community members are incentivized to upvote Suggestions, follow-up with Proposals, and vote for CR Council elections, all of which help build the value of ELA tokens. In turn, this encourages stakeholders to keep coming forward with new great ideas, rewarding them for proper implementation and ditching those who do not deliver.
With regard to trust issues that exist between any two parties (e.g. between community members and contractors or community voting processes), this is where smart contracts come in as a basis for cooperation. A smart contract is a self-executing contract as it contains computer codes that execute automatically under certain conditions.
In the case of CR, all transactions involving the movement of funds will be completely transparent to the public and are recorded and maintained on the Elastos blockchain.
This, in theory, supports the claim that the DAO is incorruptible!