Decentralized Autonomous Organizations (DAOs) are digital organizations that function using blockchain technology. They do not have a single central authority. Instead, they have multiple authorities who interact and work together in crucial decision-making situations. DAOs are specifically designed to operate as self-governing, decentralized, and transparent entities. As a result, they facilitate more democratic and decentralized governance. 


How does a Decentralized Autonomous Organization work?

The best quality of a DAO is its governance structure. It functions under various rules and processes defining how a decision has to be taken within the organization.  In traditional centralized organizations, a group of people, such as the executive team or the board of Directors will make decisions. 


On the contrary, DAO works like a voting system. Here, all the members of an organization will have the right to take part in the decision-making process. Thus, it enables democratic decision-making, ensuring that the organization runs smoothly based on the best interests of its members. 


DAO governance is implemented using smart contracts that automate voting and ensure equal rights for all network members. By utilizing smart contract development company, DAOs can develop the best self-executing agreements. This will eradicate the risk of fraud or manipulation and cut off the need for intermediaries. 


Moreover, the working of DAOs will vary depending on their needs and goals. Some DAOs use simple delegate systems where every member has equal decision-making right. Others may use a weighted voting system where the voting power will differ based on an individual member’s contribution to the organization. 


Key Benefits Of DAO

  • DAOs are transparent and automatic
  • They allow democratic decision-making
  • Highly resistant to fraud and manipulation
  • They enhance trust between the members
  • They eliminate the need for intermediaries


Potential legal Issues

DAOs involve several legal challenges, and the highlighting ones are given below. 

  • Cybersecurity

DAOs are weak in sustaining cyber attacks and hacking, compromising the safety of organization members’ funds. 


  • Jurisdiction 

As DAOs operate on an international level, it makes it hard to decide the jurisdiction on which basis they have to be managed. Also, it disturbs in development of smart contracts and dispute-solving. 

  • Fair and Transparent 

Even though DAOs are democratic, there are chances that someone can manipulate the voting, resulting in unfair decisions. It impacts transparency too. 

  • Rights

DAOs simply work under strict rules and regulations, using smart contracts. However, these rules might not always be linear with the typical member rights legal concepts. 

  • Dispute Settlement

DAOs are decentralized, making them a difficult area to expect proper dispute resolution. Due to this, members and investors will be unable to have access to traditional legal cures for solving an issue. 

  • Smart Contract Liability

Smart contracts have a crucial role in a DAO. So, if there are any bugs or unexpected errors in the contract, it may lead to unavoidable consequences. You will require the help of a blockchain smart contract development company to create an error-free contract. 


DAOs may have the legal issues we have listed in this blog. However, the constant growth of this technology will help build new frameworks that can possibly solve these issues in an effective way.