Blockchains allow seamless and transparent distribution of tokens and these tokens can represent pretty much anything. It can be something of a financial value, identity, or right to vote that can be tokenized on the blockchain.
Recall that to update the state of a blockchain, users send signed transactions, and based on the validity of these transactions the updates are applied to the blockchain. When an update requires multiple users to approve it, we use multi-signature transactions and wallets.
Now let’s combine these two concepts and imagine an organization’s entire governance based on a blockchain, where users have the right to vote by sending transactions. We can design an organization by programming the decision-making logic in the smart contracts. This logic can then be used to govern the finances, strategy, and other important aspects of an organization in a fully transparent and decentralized manner.
Users can have voting rights based on the tokens they own. The voting can be done using any of the popular approaches — a majority, supermajority, delegation, etc. The decisions made using this process can be applied automatically by distributing funds in specific account, or approving strategy and in many other ways.
These organizations that could function autonomously based on the business logic or governance rules programmed in blockchains are called Decentralized Autonomous Organizations (DAOs).
It is also worth pointing out that while the governance process of DAOs is more inclusive and transparent, it is still a challenge to apply the decisions made by a DAO in the outside world in a legal and enforceable manner.
Episode 32 - Decentralized Autonomous Organizations (DAOs)