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What is a DAO? Can it replace Bank in Future?

22 Jul 2022 By : Pankaj Gupta
What is a DAO? Can it replace Bank in Future?

DAO, or Decentralized Autonomous Organization, is another promising byproduct of blockchain technology, with its concept revolutionizing the banking sector as we know it. 

Banks today have started using blockchain technology for their internal operation, but many like JP Morgan have also started with blockchain-based transactional and other services. 

So, what is DAO?

DAO or Decentralized Autonomous Organization is a decision-making entity of an institution that is not centralized, meaning a single person does not make decisions. DAO is operated by a community organized around a specific set of rules enforced by the blockchain.

The internet native organizations, which the members collectively own, also have a built-in treasury accessible only after members' votes. Decisions are proposed on the blockchain, and the DAO members must vote before the set time limit. 

Unlike a centralized organization, DAO is free from time-consuming hierarchical management and has several other functions that help shape the network and the ecosystem it builds. 

Primary features of DAO:

DAOs are trustless

Instead of trusting the directors and the executives of an institution like in centralized organizations, community members trust the code that enforces regulation in a DAO-based organization. 

Visible framework

DAOs are about transparency; they are evident, transparent, verifiable, and publicly auditable.

Solving the Principal-Agent problem

The Principal Agent problem or PA has always been one of the issues that almost every institution faces. A PA problem arises when an agent's interests aren't aligned with the stakeholder's. In this context, imagine an agent being the company's CEO with different visions or management styles than the stakeholders prefer.

Multiple use cases

DAOs are not an application of the blockchain tech; they are a concept or set of protocols that make it easier for users to adopt and trust the blockchain tech. Many DAO-based businesses offer services in different genres of blockchain like DeFi and NFTs.   

Intricate voting mechanism

A DAO is as good as its voting mechanism; usually, anyone on the network can put a proposal which will be then voted in or out by the members. If someone wants to become a DAO member, they need to offer a tribute of some value to the treasury.

Types of DAOs

Protocol Dao

Protocol Dao is one of the most common types of DAO-based networks you can find. They, as the name implies, focus on enforcing and governing a set of network protocols, ensuring that they remain of value and decentralized. In addition, protocol or common DAO utilizes smart contracts for offering DeFi services like borrowing, lending other protocols, and exchanges. 

Protocol DAOs are generally used by AMMs and DeFi like Maker Dao, Uniswap finance, and Yearn finance.

Collector DAO

Collector DAO is another crucial type of DAO; as the name implies, one of the main jobs of such DAOs is to collect. With the growing popularity of NFTs and Web3, these DAOs make it possible to buy NFTs in fractions. 

Remember the CryptoPunk #2890, which was sold for a whopping $761k; it was bought by 30 people making a DAO. Protocols like Flamingo help and regulate such DAOs.

Philanthropy DAOs

Philanthropy DAOs are not very popular, yet an essential part of the community. As the name implies, these DAOs are focused on a shared goal of delivering an impact via the Web3 landscape.

Big Green DAOs are the world's first philanthropy DAOs; it is associated with the Big Green initiative that is committed to growing food to improve the nutritional value and understanding the climatic impact on food. 

Investment DAO

DAOs offer a wide range of applications that can help the community. This includes investment opportunities that are shared by the whole community. DAOs act as a traditional fund where the DAO members make the investment decisions of all the agents in the community; the only difference is traditional investment funds are centralized. 

Grants DAO

Grants DAO, just like investment DAOs, are a good way to earn money. The community members can combine their capital with the grant pool and vote on fund allocation and distribution decisions. Many new and coming projects(predominantly DeFi) are funded with such DAOs. Grant DAOs are generally a small part of a big institution, and excess funds are used for lending.

For example, the Aave protocol has its own grant DAO, namely Aave Grants DAO. It is a sophisticated community-driven program pooling fund that has the power to drive new ideas in the Aave protocol ecosystem.

What does a DAO in place of a bank look like?

DAOs can help address and solve some critical issues traditional banks face. DAOs can revolutionize the banking sector by streamlining the internal workflows by moving to blockchain-based architecture. A centralized financial institution takes a lot of time and bureaucracy for any new system or tech, however small, to be implemented.DAO does not waste time or indulge in much bureaucracy streamlining the internal process.

 A small group of people controls banks, and the affairs of the banks are hidden from the general public, opening the chance of corruption, fraud, and mismanagement. DAO-based financial institutions promote decentralization, transparency, and security. DAO, instead of a bank under regulation, offers more efficient and secure services without the need for the expensive infrastructure that the bank has to provide.

DAO, instead of a financial institution, is still very far from reality; banks are considered to be a pillar of a country, and replacing them could take some decades. But, DAO inside banks and financial institutions is a possibility in the near future.