DAO stands for Decentralized Autonomous Organisation. Now that might not really answer any questions, so let’s break it down.

Decentralized means no single entity, like a government or a bank, controls the organisation. Instead, it is owned and governed by its members; a proper democracy.

The rules of the organisation are encoded in a computer program that’s embedded in the blockchain it runs on. It serves as an open-source venture capital fund without a typical management structure. These rules can be changed/updated depending on the majority vote taken by the members through a poll system. Any member can start a poll and can vote on other active polls as well!

This might seem a bit bizarre at first, but eliminating the need of a third-party for transactions and actions really solves a lot of problems.

Almost all the decision-making power in traditional organisations is held by the top members of management. Having this power allows only a small fraction of members to make changes and decisions to the organisation, which ultimately affects shareholders, employees and citizens.

Democratic governance is essential in order to avoid errors and manipulation of funds. That’s where DAOs come in.

DAOs provide an operating system for people who don’t know each other and live in different corners of the world. They might not even speak the same language, but their trust in the embedded code is what makes all this possible.

The decisions in a DAO are not based on the traditional top-down structure, but from the bottom-up. In most DAOs, you can become part of the community if you own their token.

This is all made possible because of smart contracts.

“Smart contracts” refer to computer code that executes all or parts of an agreement and stores them on a blockchain-based platform.

Following the establishment of the original set of rules and their coding into smart contracts, DAOs generally enter a funding phase in which anyone interested can take part.

Once the DAO is funded and the smart contracts are in place, it is then deployed on the blockchain. After deployment, the original writers of the smart contract no longer have control over the DAO, only the holders of the token do! The stakeholders collectively take a decision as to how the DAO will function from here.

On 30th April 2016, Ethereum protocol engineer Christoph Jentzsch released open source computer code that aimed to provide a new decentralized business model — The DAO. A crowdfunding campaign (via token sale) was held for 28 days and the collective had raised over $150 million from about 11,000 investors.

Two weeks into the campaign, the largest investor held less than 4% of all DAO tokens, while the top 100 holders held about 46%. A week after the campaign was completed, the DAO tokens were listed for sale on crypto exchanges.

Some vulnerabilities in The DAO’s code had surfaced after a few veteran developers raised concerns about security. After word spread across The DAO and Ethereum community, they decided to hold off on any further investments to protect themselves from being exploited.

However, while the developers worked on a fix to solve this major issue, attackers found the loop-hole they were looking for and managed to siphon about 3.6 million ETH, worth approximately $50 million at the time.

More on the response to the attack in the next post.

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