With the arrival of Ethereum in 2015, a new form of communication between peers without knowing each other, decentralized organized organizations (DAO); a new way of participating in financial decision making, stability and innovations of the protocol in which investors and users participate.
Ethereum opened the doors for DAOs due to the creation of the smart contracts that founded the network. In this way, this new form of consensus began to shape certain projects. These decentralized organizations they are designed to function without centralized leadership and are based on a set of pragmatic rules that govern their operation. DAOs are democratically governed by their members through voting and decisions made through the implementation of smart contracts on the blockchain..
To be part of the DAO, you must have governance tokens of the protocol, DAOs raise funds through an initial coin offering (ICO), where governance tokens are sold to investors in the community. These investors can participate in the decision-making of the organization and can receive rewards in the form of governance tokens for their active participation in the organization.
Governance tokens are also an important tool for DAO funding. Governance tokens are the way used to vote and make decisions in the organization. Governance token holders have the right to vote in decision-making and can propose changes to the organization.
While DAOs are an important part of decentralized protocols, the truth is that they do not have absolute control over the issues of the protocol. Decision making in a DAO is a democratic and transparent process. All DAO members have the right to vote and the result of each vote is recorded on the blockchain. to ensure the transparency and integrity of the voting process. The issues put to the vote can vary widely, from changes in the governance structure to the approval of new project proposals.
DAOs in action
DAOs face centralization, because the voting power resides in the number of tokens that the investor owns. In this sense, we have seen how Uniswap and Ethereum, for example, converge at this point. Both protocols have a group of investors who own almost 50% of the governance tokens, and the on-chain data shows this..
The big management difference between DAOs and other traditional organizations is that they are precisely more transparent, and since the data is available for everyone to see, it is clear who has the power to tip the balance in a vote..
At the moment, the drop in the USDC stablecoin has set off alarm bells in decentralized protocols, because it has momentarily lost parity with the dollar. The Silicon Valley bank shutdown has wreaked havoc on some decentralized protocols, as the Circle platform had about $3.3 million in that bank supporting the circulation of cryptocurrency.
He The most recent example to cite about the operation of a DAO, is the result of the emergency vote carried out by the MakerDAO protocol, in which they have decided to minimize the exposure of the protocol to USDC. This is the most recent example of what the governance of a decentralized protocol implies, in which investors take control of the situation and act accordingly.
On occasions like this, the proposal was not born from an investor, but was born from the Governance Facilitators and the Central Protocol Engineering Unit; they have been the ones who took the actions to determine the action plan.
Similar situation occurred when Paxos stopped issuing BUSD, the AAVE protocol had a vote to decide in consensus what would happen to BUSD holdings.
Each DAO has its own internal organization, proposal and voting mechanismsbut the important thing is that the active participation of this type of instances promotes a new way of managing finances together.
Among the consensus methods used by DAOs may be, Proof of participation (Proof of Stake): This consensus method is used by several cryptocurrencies, including Ethereum. Instead of solving a mathematical problem, network nodes must prove their ownership of a certain amount of cryptocurrency. The more a node owns, the more influence it has on network decisions.
Another method used is the Delegation of vote (Delegated Proof of Stake); this consensus method is used by some cryptocurrencies, including EOS. Token holders elect representatives who act on their behalf to make decisions on the network.
then there is the method Proof of authority (Proof of Authority); is a type of consensus is used by some private blockchain networks. A group of trusted nodes are the only ones that can make decisions in the network, which increases efficiency but decreases decentralization.
Then we have one more guy, Proof of Work: This is the consensus method used by Bitcoin and other mining-based cryptocurrencies. Network nodes compete to solve a complex mathematical problem and the first to solve it is rewarded with new coins.
This list is not universal, there are other consensus methods that are used in decentralized protocols that will not be mentioned on this occasion, but they are equally effective and widely used.
Therefore, while DAOs can be a useful tool for improving governance in decentralized protocols, it is important to remember that they are not a magic solution. To achieve true decentralization and democratization in decision-making, it is necessary to create robust systems and processes. that promote transparency, active participation and diversity of points of view in the community.
Besides, it is important to ensure that DAOs are designed and managed in a fair and equitable manner, to avoid centralization problems and arbitrary decision making. Ultimately, DAOs are just a tool and must be used responsibly and consciously to achieve better governance in decentralized protocols.
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