What are DAO and Dapps?

What are DAO and Dapps?

Imagine a vending machine that not only takes your money and gives you a snack in return, but also uses that money to automatically order goods to replenish your stock. This machine also orders cleaning services and pays your rent alone.

Imagine a hotel whose check-in of rooms and payment of daily rates can be done directly through a lock, without the need for human involvement in the process. These are some of the most innovative possibilities for using blockchain technology: Autonomous Decentralized Organizations (DAO) and decentralized applications (Dapps).

DAO

Before we talk about DAO, it is important to highlight the difference between DAO as a type of organization and the infamous “The DAO”, which is basically the name of one of the best known among these organizations. The project was one of the first attempts to create a DAO and failed spectacularly due to an error in its initial code. Therefore, in this article we will use “DAO” when talking about organizations in general and “The DAO” when talking about the organization that failed in 2016.

The first fully functional DAO in history was Bitcoin, as the cryptocurrency has a pre-programmed set of rules, works autonomously and is coordinated through a distributed consensus protocol. However, DAOs with the use of smart contracts and the ability to execute more complex contracts emerged on the Ethereum platform, which brought the creation of DAO’s closer to the general public and shaped their current appearance.

First, a DAO needs a set of rules under which it will operate. These rules are codified as a smart contract, which is basically a computer program, which exists autonomously on the Internet, but, at the same time, needs people to perform the tasks that it cannot do alone. Once this is done, the protocol enters a series of other phases, with financing (in which tokens and their price are launched) and definition of the rights granted to each investor.

During these phases, the DAO starts to operate completely autonomously. After it starts operating, all decisions on where and how to spend the funds are made through consensus. Anyone who has purchased tokens in a DAO can make proposals regarding their future. To prevent the network from being bombarded by proposals, DAO may require a minimum payment fee for the proposal to be voted on, preventing odd proposals from being sent.

Dapps

In addition to DAOs, other stand-alone tools that can be created with blockchain are decentralized applications, known by the acronym Dapps. Dapps are basically unstoppable apps that work on Ethereum’s blockchain thanks to smart contracts.

The main difference between Dapps and common applications is that they are completely autonomous, do not need an intermediary to function and are basically immune to censorship and blocking, governmental or corporate. In other words, they establish a direct connection between a user and a service. Thanks to this, users can have total control of the information and data they share.

According to the Ethereum whitepaper, Dapps can be used to include a wide range of services that benefit from its features mentioned above. These services include voting and governance systems, for example. Other types of areas in which Dapps can be useful are: insurance companies, charities, property records, etc. All are areas that can benefit from the immutability of information, decentralization and transparency provided by blockchain.

The DAO case

The so-called The DAO was a specific type of DAO that gained a lot of repercussions in the community. It was created by the same team behind a German startup called Slock.it. The startup uses smart contracts to allow people to share their properties, in a decentralized version of Airbnb.

The DAO was launched in May 2016 and was financed through a sale of tokens bearing the same name. In some ways, the project managed to become the most successful crowdfunding campaign in history so far, having raised more than $ 150 million.

Due to these factors, and because it is the first great example of a DAO with complex functions, there was a great expectation regarding the project’s success, seen by many as the beginning of a new era for blockchain technology. However, The DAO’s code had serious flaws, and because it was open and available to everyone, someone found a way to exploit the flaws.

On June 17, a month after its launch, an anonymous hacker or group of hackers began to withdraw money from The DAO for an “alternative DAO”, which copied the structure of the original The DAO. Before the flaw was identified and the theft of funds was stopped, the hacker managed to steal more than $ 50 million in Ether – a third of the amount raised by the project.

The DAO has changed the face of blockchain technology, but not in a good way. The attack seriously weakened Ethereum’s reputation as a hosting platform and the DAO concept itself. In addition, the code was eventually corrected through human intervention, which went against DAO’s philosophy as an autonomous organization and governed by the motto “the code is the law.”

As a result, there was a dispute within Ethereum between those who advocated correction and those who criticized it. For this reason, Ethereum suffered a hardfork that divided it into two networks: Ethereum (ETH), the network that contained the fault correction, and Ethereum Classic (ETC), the original network. Over time, ETH surpassed ETC in terms of use and market value, becoming the second largest blockchain on the market after Bitcoin.

However, it is important to understand that all of this could have been avoided by additional testing of the code. Perhaps this hack was an important event in the history of the development of DAO’s, which showed the potential weaknesses of these organizations and, without a doubt, such weaknesses will be taken into account by future DAO’s.