LNX EDU // MODULE 02

Traditional organizations, from corporations to non-profits, are built on hierarchy. Decisions are made at the top and passed down. This structure can be effective, but it also has fundamental flaws:

• Opacity: Key decisions and financial transactions often happen behind closed doors. Members or stakeholders may not know how funds are being used or why a certain strategy was chosen.
• Misaligned Incentives: The goals of the leadership may not align with the goals of the members or customers. This can lead to decisions that benefit a few at the expense of the many.
• Inefficiency & Bureaucracy: Rules are enforced by people, leading to slow processes, paperwork, and the potential for human error or bias.

DAOs emerged as an experiment to solve these problems by using blockchain technology to create organizations that are more transparent, democratic, and efficient.

A DAO is a Decentralized Autonomous Organization. It's a community-led entity with no central leadership. Its rules are encoded as computer programs called smart contracts, and it is operated and governed by its members.

Think of it like a digital cooperative. It's an organization that lives on the internet, owned and managed collectively by its members. All decisions, from how to spend funds to what projects to pursue, are made through a transparent, on-chain voting process.

DAOs are built on three fundamental components:

• Smart Contracts: These are the backbone of the DAO. They are self-executing programs that contain the organization's rules. They define how voting works, how funds can be spent, and what actions are permissible. Because they live on the blockchain, these rules are transparent and cannot be changed without a community vote.
• Governance Tokens: To become a member and have voting rights, you typically need to hold the DAO's specific cryptocurrency, or "governance token." Often, one token equals one vote. These tokens represent a share of ownership and influence in the organization.
• Treasury: This is the DAO's collective bank account, also controlled by smart contracts. No single person can access these funds. The only way to spend money from the treasury is to create a formal proposal, have it approved by a member vote, and then the smart contract will automatically execute the payment.

The Proposal Lifecycle

This flowchart shows how decisions are made in a typical DAO. Click any step for more details.