Decentralization is one of Web3's three fundamental principles, along with tokenization and blockchain technology. Decentralization involves not only how decentralized applications (dApps) operate on the blockchain but also how they are governed by a community of users rather than by a board of directors or other centralized authority. Decentralized Autonomous Organizations, or DAOs, are built on this concept.
To better understand DAOs, let's dive into their meaning and some examples.
The Concept of Decentralization in Crypto
Decentralization is not exclusive to cryptocurrencies. In its broadest sense, it means distributing functions, control, and information rather than centralizing them in a single entity.
Unlike government-issued, or fiat, currencies, which government-authorized institutions issue, some cryptocurrencies are decentralized. For example, Bitcoin is designed in a way so that it doesn’t belong to any single entity. Anyone can install a miner and join the mining process. Its maximum supply is fixed and cannot be changed.
However, not all cryptocurrencies are decentralized. For example, popular stablecoins like USDT and USDC are backed by centralized companies that manage their issuance and maintain their exchange rates.
In general, decentralization in crypto applies to more than just digital assets; it’s a foundational principle of Web3. It represents a new digital ecosystem that contrasts with the centralized products built by companies like Google, Amazon, and Meta.
What's wrong with these centralized systems, according to the crypto community?
Blockchain advocates see decentralization as a solution to issues related to excessive centralization, where large tech companies own and control a significant share of digital content or dictate how we interact with it.
Here are some examples:
- Meta has a massive database and uses complex algorithms to personalize content and advertisements, leading to data privacy and manipulation concerns.
- Google controls the most popular search engine and decides what information is displayed in response to user queries, raising questions about potential censorship.
- Apple runs an official app store for iPhones and charges developers fees, allowing it to manipulate the market and censor content.
Proponents of decentralized applications believe that eliminating intermediaries responsible for decision-making creates a healthier digital economy and reduces the potential for abuse. We've discussed DApps in a separate article.
However, launching dApps on the blockchain alone doesn't solve the problem of centralization. While these applications can perform their functions autonomously and without intermediaries, they are often still managed by a team that fixes bugs, develops new features, and markets the product. So the question remains, can we decentralize this management and decision-making process? This is where DAOs come into play.
What is a DAO?
A Decentralized Autonomous Organization (DAO) is an innovative form of governance that runs on blockchain technology, with its rules and operations encoded in smart contracts. Unlike traditional organizations, a DAO is decentralized, with no centralized leadership or authority. Decisions are made collectively by the community, typically token holders.
Here are the main principles of how DAOs work:
- Decentralization: The primary feature of a DAO is the decentralization of management and decision-making.
- Autonomy: DAOs are governed by rules encoded in smart contracts. Once deployed, these rules can’t be changed, and their execution is automatic.
- Transparency and Accessibility: DAOs are usually built on public blockchains like Ethereum, meaning all decisions, transactions, and code changes are transparent and open to public scrutiny. Community members can initiate proposals and vote on them, and if accepted, they’ll be implemented.
- Tokenization: Individuals need to hold the project's tokens to participate in a DAO.
Some well-known DAOs include Uniswap DAO, Maker DAO (now known as Sky), Aave DAO, Gitcoin DAO, and others.
How Do DAOs Work?
The basic principles described above define how DAOs operate, but each project may organize its governance differently. For example, some meme coins are entirely community-driven, with most tokens held by the community, giving them full control over the project.
In larger projects, such as Layer 2 protocols, a portion of the tokens may be allocated to the community. In these cases, the community may be responsible for certain decisions, such as how to use funds in the treasury, while other decisions remain in the hands of the core team.
The concept of a "treasury" is closely tied to DAOs and decentralized governance. Many decentralized projects set aside a portion of their tokens as a treasury, which the community can use for initiatives decided through future votes.
From a technical standpoint, most DAOs have two key components: a voting system and a forum. In the voting system, token holders connect their wallets to the relevant smart contract and cast their votes by signing transactions. Popular platforms for organizing decentralized governance include Tally, Snapshot, and Polkassembly. Votes are counted automatically, with more tokens equating to more voting power (e.g., one token equals one vote).
Forums provide a space for discussing proposals before they’re put to a vote. The ability to propose votes is often reserved for the core team or for participants who hold a specified minimum number of tokens.
Qoda DAO
The Qoda DAO governs the Qoda Ecosystem, which consists of partner applications working towards a shared goal of making great financial services accessible to all. Current Qoda Ecosystem apps include:
3Balance: A portfolio management tool that facilitates rebalancing crypto portfolios using on-chain liquidity sources in three steps. Owned and operated by Steadily Consulting Inc.
Qonstant: An orderbook-style, fixed-rate lending, and borrowing exchange on Arbitrum One. Also owned and operated by Steadily Consulting Inc.
Qoda DAO Membership is automatically granted to holders of $veQODA tokens, which are acquired by staking $QODA tokens. Members can vote on proposals affecting the Qoda DAO, Qoda Ecosystem, and Qoda Ecosystem apps.
Curious to learn more about the Qoda DAO and how it works? Check out our documentation for further details.
Conclusion
A DAO, Decentralized Autonomous Organisation, is a new form of organizational management based on decentralization and the tokenized economy. By purchasing tokens, users and interested participants can become part of the project and have a say in its governance.
DAOs are inherently more transparent and open to discussion than traditional companies. This concept is still young but has been rapidly growing in recent years as a more equitable form of collaborative product management—one where the interests of users, not just owners, are taken into account.