Imagine a vending machine that not only takes your money and gives you a snack in return, but also uses that money to automatically order products to replenish your stock. This machine also requests cleaning services and pays your rent alone.
Imagine a hotel whose check-in of rooms and payment of daily rates can be done directly through a lock, without the need for human participation in the process. These are some of the most innovative possibilities to use blockchain technology: autonomous decentralized organizations (DAO) and decentralized applications (Dapps).
Before talking about DAO, it is important to highlight the difference between DAO as a type of organization and the infamous «The DAO», which is basically the name of one of the best known among these organizations. The project was one of the first attempts to create a DAO and failed spectacularly due to an error in its initial code. Therefore, in this article we will use "DAO" when we talk about organizations in general and "The DAO" when we talk about the organization that failed in 2016.
The first fully functional DAO in history was Bitcoin, as the cryptocurrency has a set of preprogrammed rules, it works autonomously and is coordinated through a distributed consensus protocol. However, DAOs with the use of smart contracts and the ability to execute more complex contracts emerged on the Ethereum platform, which brought the creation of DAO to the general public and shaped its current appearance.
First, a DAO needs a set of rules under which it will operate. These rules are coded as a smart contract, which is basically a computer program, which exists autonomously on the Internet, but at the same time, you need people to perform the tasks you cannot do alone. Once this is done, the protocol enters a series of other phases, with financing (in which the tokens are released and their price) and the definition of the rights granted to each investor.
During these phases, the DAO begins to operate completely autonomously. Once it starts working, all decisions about where and how to spend the funds are taken by consensus. Anyone who has bought tokens in a DAO can make proposals about their future. To prevent the network from being bombarded by proposals, DAO may require a minimum payment rate to vote on the proposal, preventing odd proposals from being sent.
In addition to DAOs, other independent tools that can be created with blockchain are decentralized applications, known by the acronym Dapps. Dapps are basically unstoppable applications that work in the Ethereum blockchain thanks to smart contracts.
The main difference between Dapps and common applications is that they are completely autonomous, do not need an intermediary to function and are basically immune to censorship and blockade, governmental or corporate. In other words, they establish a direct connection between a user and a service. Thanks to this, users can have full control of the information and data they share.
According to Ethereum's technical document, Dapps can be used to include a wide range of services that benefit from the features mentioned above. These services include voting and governance systems, for example. Other types of areas in which Dapps may be useful are: insurance companies, charities, property registries, etc. All are areas that can benefit from the immutability of information, decentralization and transparency provided by blockchain.
The DAO case
The so-called DAO was a specific type of DAO that had many repercussions in the community. It was created by the same team behind a German startup called Slock.it. The startup uses smart contracts to allow people to share their properties, in a decentralized version of Airbnb.
The DAO was launched in May 2016 and was financed by selling tokens with the same name. Somehow, the project managed to become the most successful crowdfunding campaign in history so far, having raised more than $ 150 million.
Due to these factors, and being the first great example of a DAO with complex functions, there was great expectation regarding the success of the project, seen by many as the beginning of a new era for blockchain technology. However, the DAO code had serious failures, and because it was open and available to everyone, someone found a way to exploit the failures.
On June 17, a month after its launch, an anonymous hacker or a group of hackers began withdrawing money from The DAO for an "alternative DAO," which copied the original DAO structure. Before the failure was identified and the theft of funds stopped, the hacker managed to steal more than $ 50 million in Ether, a third of the amount raised by the project.
DAO has changed the face of blockchain technology, but not in a good way. The attack seriously weakened Ethereum's reputation as a hosting platform and the DAO concept itself. In addition, the code was finally corrected through human intervention, which went against the philosophy of DAO as an autonomous organization and was governed by the slogan "the code is the law."
However, it is important to understand that all this could have been avoided by additional code testing. Perhaps this trick was an important event in the history of the development of DAO, which showed the potential weaknesses of these organizations and, no doubt, those weaknesses will be taken into account by future DAOs.