# What Is a Decentralized Autonomous Organization (DAO)?

By [Yadhu](https://paragraph.com/@yadhu) · 2022-07-14

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A decentralized autonomous organization (DAO) is an organization that runs on a blockchain protocol fully and autonomously in accordance with rules encoded via smart contracts and its underlying consensus mechanism. By circumventing the need for human intervention or centralized coordination, DAOs enable previously unattainable levels of transparency, cost savings, and decentralized decision-making

### DAO as a Solution to the Principal-Agent Dilemma

*   A decentralized autonomous organization (DAO) is a blockchain-specific organizational model that addresses the principal-agent dilemma
    
*   Whenever a system is structured in a way in which an individual or entity (the "agent") has the ability to make decisions or take actions on behalf of another individual (the principal), there is an inherent risk in the divergent goals, priorities, or access to crucial information of the respective parties
    
*   Aiming to address this problem by reducing or bypassing the need for hierarchical human intervention or centralized coordination, DAO is often referred to as "trustless" systems
    
*   By ensuring that the incentive structures and information flow within an organization are properly aligned in a codified format, DAOs play a central role in mitigating the typical problems associated with the principal dilemma
    

### How Does DAO Work?

*   Smart contract setup
    
*   Before a DAO can be deployed, the underlying rules must be defined and encoded in a series of smart contracts
    
*   Funding
    
*   The DAO's smart contracts must entail the creation and distribution of some form of internal property
    
*   Deployment
    
*   All decisions are made via a consensus vote
    

### Applying DAO to the real world

*   There are numerous legal and operational challenges these organizations must overcome
    
*   Changing a DAO's code or smart contract structure requires a consensus vote
    
*   Malicious actors could possibly exploit a bug or design flaw before the DAO’s stakeholders manage to collectively resolve the issue
    
*   DAOs have continued to gain traction in the marketplace
    
*   At present, there are a number of promising blockchain projects that have fully incorporated decentralized governance mechanisms

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*Originally published on [Yadhu](https://paragraph.com/@yadhu/what-is-a-decentralized-autonomous-organization-dao)*