Despite recent growth of over 9%, a new survey by FTX discovered that most people do not know what a DAO is. The study also uncovered that most of this growth comes from personal recommendations. Though DAOs are still widely unknown, they provide tremendous benefits to stakeholders in the decentralized finance space. Here’s a quick breakdown of DAOs and how they are designed to benefit their members.

What is a DAO?

DAO crypto communities are a new and improved way to organize digital communities of stakeholders. DAOs attempt to create a decentralized community that promotes collaboration between token holders. These online communities attempt to create a democratic, equitable, and accessible community where all blockchain stakeholders get a say in the governance of that network. DAOs are built with three key characteristics:

Decentralized Decision-Making: While traditional online communities are governed by a centralized entity like a corporation, DAOs are completely decentralized and governed by infallible lines of code. This code is encrypted with the community’s structural and procedural rules, which will be automatically executed via smart contracts when specific conditions are met within the network. By having lines of code enforce the rules of the community rather than human beings, DAOs mitigate any risk of corruption and promote trust between members. There is no hierarchical structure within a DAO, so all members are treated equally and have a fair chance to make their opinions and ideas heard by the group.

Transparent Governance: Transparent governance is essential for establishing trust within the DAO and mitigating any risk of corruption. Because DAOs are built on blockchain networks, there will always be an accessible record of every decision made, rule executed, transaction completed, and vote cast within the community. This record is available for anyone to see online, providing an infallible and exact record of the network’s history.

Token-Based Membership: Finally, a critical component of any DAO is that membership is contingent upon having a stake within the community. Each member of the DAO must hold a stake in the underlying cryptocurrency of the native blockchain network. This ensures that all members have a vested interest in the long-term success of the community, the token, and the blockchain itself. By tying the success of the DAO with that of the token, these organizational structures create a system that will support itself as the community grows and the token gains more users. Not only will token holders get the opportunity to join the DAO and benefit from its resources, but holders of specific tokens will also receive incentives and other benefits by simply holding that token. For example, if you hold FTT, you can join the FTX DAO and receive regular token airdrops and other perks from the FTX team.

Challenges Facing DAOs

DAO creation faces several challenges today; the three main concerns are security, scalability, and legalities.

Security: The first DAO was created on the Ethereum blockchain in 2016. This DAO gained popularity quickly; however, due to an error in the code, hackers were able to steal nearly $60 million from the community. Since then, security has been a high priority for all new DAO projects. Protecting the interests of stakeholders, as well as the liquidity of your community, is essential for a successful DAO.

Scalability: A DAO can only grow as much as its blockchain will allow. If your blockchain isn’t strong or fast enough to support a large community, your DAO members will experience lag and a generally slow and unreliable network. DAOs need to be able to scale efficiently to support many members.

Legalities: Due to the decentralized nature of DAOs, they exist in a legal gray area regarding specific regional and international regulations. As DAOs continue to grow in popularity, these unknowns will be gradually met and overcome.

Join a DAO Today

DAOs provide many benefits to their members, creating a new way to organize digital communities. Stakeholders will gain greater control over their investments and influence the future of their blockchain networks. These organizations will continue to grow and be a source of innovation within the DeFi space. You can learn more about DAOs at FTX.