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A decentralized autonomous organization is a concept for a blockchain-specific entity built and collectively owned by its members. For governance, such entities will rely on the decision-making protocols embedded in smart contracts as opposed to conventional organizations that use central leadership systems.
Since smart contracts are impersonal, the organization can be governed by a more horizontal structure without an entrenched hierarchy. Members of the DAO can decide to have built-in treasuries that come with restricted access to approved members who fit pre-specified conditions.
Without a centralized governing body, members of a DAO can make proposals and collectively decide on what proposals to implement through a voting system. Smart contracts can help throughout the voting process and automatically implement changes based on the votes.
What makes DAOs different?
At its core, a DAO is built to address the perpetual principal-agent dilemma.
This problem is a common challenge that occurs when an agent (a centralized entity or an individual) is caught in a situation where they have to make decisions that satisfy the divergent goals, priorities and needs of the group (principal) without compromising their own interests.
While this dilemma is prevalent among public and private entities across the globe, DAOs aim to eliminate this challenge by replacing hierarchical centralized forms of decision-making with a trustless system built on autonomous smart contracts.
Smart contracts can be programmed such that the incentives of all the members of the group are aligned in a codified format built into the blockchain.
With a properly executed DAO, all the stakeholders of the organization will be able to participate in the governance and decision-making of the group.