An autonomous decentralized organization, or DAO, deals with a problem of governance known as the principal-agent dilemma. This is when the agent of an organization has the ability to make decisions on behalf of another person in the organization.
An example could be a manager who acts on behalf of shareholders or a congressman who acts on behalf of their constituency.
In these instances, moral hazard takes place when one person takes on more risk than they would normally because other people will bear the cost of the risks. Basically, when this happens, a person acts in their own interest instead of the people they are supposed to represent because the risk is spread out but the benefit is centralized.
This is where DAOs come into play. So keep on reading and we will go further into what autonomous decentralized organizations are.
Traditional Organizations VS. DAOs
With a traditional organization, all agents of the organization have employment contracts. These contracts regulate the agents’ relationships with the company and with each other. Their obligations and rights are regulated by legal contracts and enforced by the law.
If something were to go wrong then the contract would state who could get sued.
On the other hand, an autonomous decentralized organization involves a group of people interacting with each other based on an open-source protocol that is self-enforced.
When a network is kept safe and helpful tasks are performed, people are rewarded with tokens. Smart contracts and blockchains reduce transaction costs and add more transparency. This means that the actions that are taken align with the interests of all stakeholders.
People who are part of a DAO aren’t bound together by a legal authority. And they don’t enter into legal contracts. Instead, they work based on incentives that are tied to tokens.
Only the protocol regulates the behavior of the participants in the network. The protocol rules are set by a governance as a service system.
A DAO provides an operating system for institutions and individuals that don’t trust or know each other. These people might even live in different countries and speak different languages.
All agreements are in the form of open-source code. The code is enforced by a majority consensus agreed upon by all of the participants in the network.
There is no hierarchical structure with an autonomous decentralized organization. After it is deployed, it is independent of the creator and can only be censored by a majority of users.
The Importance of Knowing an Autonomous Decentralized Organization Is
Hopefully, after reading the above article, you now have a better idea of what an autonomous decentralized organization is. As we can see, while these kinds of protocols might be complicated, they can also ensure that all participants act ethically.
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