Decentralized Autonomous Organizations are made possible because of smart contracts. The logic and code of DAOs are built using smart contracts.
What is a DAO?
DAO are internet-native organizations where the management is decentralized, and the decisions are autonomous thanks to its programmed logic. They are hosted on blockchain platforms which enables them to have decentralized leadership and management. Decisions about the governance and rules of a DAO are made by the decentralized community associated with the project. A DAO is designed around a mission or mandate like any other organization.
A DAO’s business or operational logic is programmed into it and updated by the community using governance mechanisms. The DAO is meant to act as a managerial layer that programmatically decides how to carry out real-world business or charitable operations.
What is a Smart Contract?
Smart contracts are one of the most powerful features of blockchain technology. A smart contract is a digital contract where the terms of agreement between users is set in code. A smart contract can also be programmed to self-execute when a set of predefined conditions are fulfilled. Smart contracts exist on decentralized and distributed blockchain networks. Thanks to the interoperable nature of blockchains users can also use smart contracts to transact across different platforms.
There are efforts underway by several organizations to create smart contracts which will hold up in a court of law. The solutions will likely be in the form of smart contract interfaces where the code in a smart contract will simultaneously create a document in plain English defining the terms of the contract.
Smart contracts can be programmed to trigger other smart contracts into action or create new events when they are executed. Smart contracts can also hold assets, NFTs and cryptocurrencies within them. These assets can be distributed upon execution when a set of conditions are met based on the code defined in the contract.
What is an Oracle?
A blockchain oracle is a trusted third party service that provides smart contracts with authenticated external sources of data from the real world through an API. Oracles connect smart contracts with events in the outside world. Smart contracts often need to be triggered by an outside event. Using oracles, a smart contract can receive data indicating the outcome of a real-world event or even an event on another digital platform.
Oracles can be created to provide a wide range of data to smart contracts. For example, an oracle could provide real world weather data, outcomes of events, outcomes of legal cases, financial statistics, economic data, interest rates, market data, performance data from a vehicle or machine and so on. An oracle could also provide data about the actions of another DAO. The important thing to remember about oracles is that most smart contracts are meant to be executed when a pre-defined condition is met, and oracles are the sources of data that can provide authenticated data about these conditions.
There has been some debate about oracles being compromised in case of larger bets, so some smart contracts can also add multiple oracles to ensure that multiple sources or oracles validate the same outcome. If our triggering event is the outcome of a basketball game, we could write a smart contract which requires 5 oracles to participate, let’s say ESPN, NBC Sports, CNN Sports, BBC Sports and Yahoo Sports. The smart contract can require all five oracles to signal the exact same outcome before the contract can be executed.
Several oracles can be set up for different events and purposes, and multiple oracles can simultaneously feed data into a DAO.
DAOs & Smart Contracts
DAOs operate using Smart Contracts. The essential building blocks of a DAOs is its smart contracts. Smart contracts define the rules of the DAO as well as how the group’s treasury will be used. The rules and logic of a DAO are programmed into the smart contracts that govern it. If a user tries to do something that’s not covered by the rules and logic in the code, it will fail.
Smart contracts can be programmed to execute some or all their logic based on a triggering event, such as the availability and price of a desired NFT. A smart contract can also be triggered when a signal from the external (real)-world is generated through sensors or human input and then sent to the DAO through an oracle. Recent developments in IoT and sensor technology has enabled more efficient and accurate data to be captured and fed to smart contracts in real-time.
Through oracles, data is fed into a DAO. It is then processed through smart contracts using the DAO’s logic and business rules, followed by which instructions are sent out to be executed. Data flows into a DAO and decisions and instructions flow out.
DAOs offer a new organizational management system that is distributed, transparent and automated. They offer collective risk and reward to their communities, based on programmatically executed rules.
Smart contracts are a powerful feature of blockchain technology. Smart contracts are digital contracts where actions, logic and terms of agreement between users is set in code.
Blockchains also ensure the real-time auditability of contracts.
Decentralized Autonomous Organizations are made possible thanks to smart contracts. DAOs can’t provide the range of functionality and flexibility that they do without smart contracts capturing and executing the code and logic that will govern all the activities and actions of a DAO.
The foundational principle of DAOs are smart contracts. On our web3 webinar this week, we explore how smart contracts shape guidelines for the workings of DAOs and how they contribute to increased transparency, better security, and more benefits. Tune in for more on DAOs and smart contracts on our We3 Webinar with Shaan Ray.
This blog is originally published here, https://medium.com/lansaar/daos-smart-contracts-72f8d04c5ec
Shaan Ray is a technology researcher and Web3 specialist who helps organizations unleash the power of emerging tech in reshaping their business goals. Under his mentorship, companies embrace transformative solutions to tap new markets and fresh customer segments. Shaan specializes in Blockchain technology, enterprise cryptocurrencies, and international business. Shaan can be reached at Linkedin, Facebook, Twitter and Instagram.