What Was the Decentralized Autonomous Organization (DAO)?

The decentralized autonomous organization (DAO) was one of the most revolutionary concepts that we had ever seen on the blockchain. Namely, it aimed to eliminate the need for a central governing authority and allow users to freely operate by using smart contracts—precisely where the decentralized part of the abbreviation comes from.

The rules for the financial transactions done were hardcoded into the blockchain itself. This way, there was no need for a central authority to keep transactions fair and legit, as the system did most of the hard work itself. Furthermore, the decentralized space allowed better access and more control for the investors and reduced their costs.

Summary of Important Points

  • The goal of the developers behind the DAO was to create an organization in which the decision-making processes and transactions are automated.
  • The DAO was launched in April 2016, and just a month after its release, several concerns were raised regarding the potential security vulnerabilities in its system.
  • In the summer of 2016, the vulnerabilities in the DAO system were exploited, and attackers got away with 3.6 million ETH.
  • By September 2016, a few of the most popular digital assets and exchange currencies got rid of the DAO token, crashing the high hopes for the organization’s success.

The Aim of the DAO

As an organization, the DAO was fully automated and decentralized by design and method of working. Its purpose was to act as a venture capital fund that is not controlled by any kind of management structure. In order to remain fully decentralized, the DAO was not affiliated with anyone and was using the Ethereum network. This means that anyone with a crypto wallet was able to exchange digital currencies (i.e., cryptocurrencies) or collect NFTs without requiring special permissions.

In this context, the main goal behind the creation of the DAO was to have an autonomous system to entirely eliminate the human factor in all of the major decision-making processes. This effectively countered any manipulation of funds and even unintentional human error. Moreover, the organization gave its users the ability to anonymously make transactions all around the world. These investors were also given tokens that allowed them to vote on potential future projects.

Why Did the DAO Dissolve?

It did not take too long for critics to raise concerns regarding the security vulnerabilities in the DAO’s system. Namely, they warned all potential investors to wait for the weaknesses in the DAO infrastructure to be addressed before they voted for any future project in May 2016—which was barely a month after its release. Surely enough, another month later, the vulnerabilities in the DAO were exploited by hackers, who stole over 3 million ETH from it. According to the renowned IEEE Spectrum magazine, the attackers were able to gain access by exploiting errors in the code and attack vectors.

A concept such as the DAO was brand new; so, in the meantime, regulations and corporate laws made things even more complicated. Many investors were worried about liability regarding the incident as the organization was not entirely clear about selling securities. Even before the attack occurred, there were many discussions about converting crypto to fiat cash in the real world. It would have a massive impact on the value of Ethereum if contractors and investors decided to exchange it for real money.

Shortly after the incident in September 2016, several leading digital exchange currencies decided to remove the DAO token. This meant that the revolutionary concept of DAO met its unfortunate end without achieving the goals it was meant to. Investors were debating and trying to find a solution, so the hard forking of Ethereum was proposed. Some of the users disagreed with the fork and supported an old version of the network called Ethereum classic. After the hard fork of Ethereum, the DAO was rolled back to before the incident, and the stolen assets were relocated to smart contracts, which allowed investors to withdraw them.

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