Not all decentralized platforms choose the method of governance via DAO, but a fair number of DeFi projects put democracy at the forefront. A blockchain-based DAO is a fully decentralized autonomous organization dedicated to the overall governance of the entire network through anonymous voting.
DAO’s native cryptocurrency is used to validate the right to vote and determine its voting weight. These are tokens issued by the platform and used for various purposes, including the formation of smart contracts, payment of commissions within the system and other practical uses.
Some platforms issue several types of cryptocurrencies at once. For example, in DAO Maker, cryptocurrency is represented in the forms of $MKR and $DAI. These two tokens have completely different functions:
- The $DAI token is used as a financial asset provided to borrowers of the MakerDAO platform. The $DAI corresponds to one U.S. dollar and is destroyed immediately upon return.
- The $MKR token allows holders to receive discounts within the platform, provide liquidity for transactions, and vote in a decentralized autonomous entity
Benefits of using DAOs in cryptocurrency transactions
Why does the DeFi ecosystem work at all? The main priority of developers in this area is to create a financial environment in which no machinations behind the scenes can be carried out. This is one of the reasons for financial crises and recessions, because central banks and treasuries of countries are trying to regulate economic processes by constantly changing the total amount of fiat currency in circulation.
Inability to determine the exact amount of banknotes, the work of counterfeiters and other problems create difficult to control inflationary and deflationary processes, as well as deprive the participants of the economy of the ability to fully control their financial well-being.
The philosophy of decentralized finance is based on the desire of ordinary participants of economic processes to escape from the control of centralized systems.
What is a DAO used for?
Blockchain-based DAO has several important features:
- The blockchain network cannot be changed after a new block is added, and therefore information about the cryptocurrency remains unchanged and fully accessible to any independent auditor.
- Any interactions with the network itself occur only through smart contracts – mini-applications that are programmed to perform a strictly defined set of actions when the conditions necessary for their fulfillment coincide.
- Only direct participants in decentralized autonomous organizations. A DAO is a community of users who collectively make decisions about the future of the platform through democratic voting.
This is the decentralized management, carried out by automatic programs, the functionality of which is determined by the majority in the DAO. This approach to management provides full transparency of all processes and does not allow people and organizations from outside to influence how the DeFi platform works.
The security of the entire network is ensured by distributed autonomous organizations, where each active user managing a blockchain network node has the entire array of data to reconcile with the main network.
