The acronym DAO stands for Decentralized Autonomous Organization. In general, a DAO is a system of hard-coded rules that define which actions a decentralized organization will take. However, the term DAO may also refer specifically to an organization called “The DAO,” which was conceptualized on the Ethereum blockchain, back in 2016.
Simply put, a DAO refers to a particular kind of organization that, unlike conventional companies, is based on open source code and is operated entirely by its community. Therefore, the underlying structure and working mechanisms of a DAO are not based on any kind of hierarchical management (which are quite common in traditional businesses).
In other words, a DAO has no single entity in charge, nor any directory board and, as the name suggests, there is no centralization of power. DAOs are conducted by computer-encoded rules (smart contracts) and are governed by the collective work of its contributors and community members.
While the idea of decentralized organizations (DO) is not new, using smart contracts to automate some of their working mechanisms and functionalities is what makes DAO a useful and interesting concept. Such an innovative structure allows for a whole new model of business, where various types of activities can be executed in a completely decentralized and automated manner.
A few noteworthy use cases where the DAO model may be useful include automated fundraising campaigns (such as ICOs), the issuance of digital tokens and tokenization of assets, as well as decision-making and proposal voting systems. In addition, the DAO model enables the creation of more efficient systems by reducing the need for human inputs, which in turn reduces the overall operational costs and the risks related to human behavior.
Just like the way in which Bitcoin created a peer-to-peer digital economic system, eliminating the need for banks and other trusted third parties, DAOs have the potential to revolutionize a wide range of industries through the use of decentralized governance models powered by smart contracts.