NFT and DeFi is two of the most lucrative investments today in the crypto market. In a press release published in November, the DeFi market TVL (total value locked) reached an astounding figure of $236 billion and recorded an all-time high. Also, in a report by Reuters in July, NFT sales soared to $2.5 billion in the first half of 2021 alone. As expected, NFT sales volume reached a staggering $25 billion at the end of 2021. 

With the huge popularity of these crypto products, another DeFi product is also on the rise. The decentralized autonomous organization or DAO, an entity with no central leadership and is governed by a community with a specific set of rules enforced on a blockchain. But what are DAOs and how do they work? In this article, we will give you an introduction to DAO and what is its role in the crypto world.

DAO: A New DeFi Product on the Rise

Billionaire Mark Cuban referred to DAOs as “the ultimate combination of capitalism and progressivism.” To simply put it, DAO is an internet community with a shared bank account as stated by Cooper Turley in a report by CNBC. DAOs have no hierarchical management and may serve a large number of purposes. To be a member, one has to join by buying a DAO’s cryptocurrency. As a token holder, a member acquires the power to vote on proposals or updates corresponding to the number of tokens they hold. 

DAOs were initially created to imitate a company’s structure where rules and regulations are built using open-source code and implemented with the use of smart contracts. Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. In DAOs, these are generally decided by the DAO stakeholders. 

Basically, DAO has no hierarchy. It incentivizes a distributed network of users to achieve its goal using its internal capital to help ensure the organization’s smooth operation. As soon as rules are set, established, and programmed in smart contracts, a DAO executes a funding phase for anyone who wants to participate. As soon as the funding phase gets completed, a DAO becomes live and operational and key decisions on the organization are made by users using a consensus proposal. Voters are then rewarded with tokens for participating in the voting process.

After a brief overview of DAO and how it works, let’s take a look at the history of the first DAOs launched in the crypto space.

The DAO History

TheDAO also known as the “Genesis DAO” was the first-ever DAO launched in April 2016 in the Ethereum network via a crowdfunding campaign through a token sale. It was one of the largest crowdfunding campaigns in history after investors poured in a whopping  $168 million from 70 addresses. But in June 2016, the platform has fallen victim to hacking resulting in the transfer of one-third of its funds – 3.6 million ETH or valued at $70M at that time. A split in the Ethereum network was executed in order to virtually restore all funds to their original contracts. But the hard fork was met with high criticism by a large number of Ethereum users as it’s a violation of the basic principles of blockchain technology. In September 2016, the crypto exchange Poloniex delisted the DAO token. In December 2016, another leading crypto exchange, Kraken followed suit and this has resulted in TheDAO’s shutdown. In July 2017, it came under the scrutiny of the US SEC whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for ‘Ether,’ a virtual currency” according to Wikipedia. Later on, SEC declared that the DAO tokens sold on the Ethereum blockchain were securities and violated the U.S. securities laws.

But the strong emergence of DAOs was not hindered by the failure of the “TheDAO”, the first DAO created. Today, we have a long list of successful DAOs like Uniswap, Maker, Aave, and Curve. DAOs were also engaged in buying rare collectibles from a sole album to a rare copy of the constitution. 

PleasrDAO in a report by CNBC in October bought the sole existing copy of the album “Once Upon a Time in Shaolin” by the Wu-Tang Clan in the amount of $4 million. In November, ConstitutionDAO made an attempt to buy a rare print of the U.S. Constitution during the on Sotheby’s auction. It was able to raise around 10,000 ether ETH (ethereum) or $46 million. Unfortunately, it lost on its bid but despite this, PEOPLE, the native token of ConstitutionDAO surged even after it has announced its shutdown.

But investing in DAO just like any other DeFi projects and NFTs has its risk. How to mitigate these risks? It is always important to do your research before investing in any project. Security breaches are also common because of the absence of central authority. But if countermeasures were in place, DAOs will definitely be the next big thing in crypto.