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Understanding DAO

what is DAO in crypto world? How is DAO formed and how does DAO work. Can you explain with example

In the world of cryptocurrencies and blockchain, DAO stands for Decentralized Autonomous Organization. Essentially, a DAO is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members, and not influenced by a central government.

A DAO is a way to structure and run an organization, where decisions are made electronically by a written computer code or through the voting of its members. In essence, it is a system of hard-coded rules that define which actions an organization will take.

How Is a DAO Formed?

The formation of a DAO involves the following steps:

  1. Writing the DAO Code: DAOs are built on blockchain technology, most commonly on the Ethereum blockchain. This means they’re based on smart contracts – self-executing contracts with the terms directly written into code. This code has the rules and structure of the DAO, and once it’s deployed, it operates on its own.

  2. Funding the DAO: After the DAO’s code has been written, it needs to be funded. Funding is usually done via a token sale, where potential stakeholders buy tokens representing a share in the DAO. The tokens are used to vote on proposals.

  3. Deploying the DAO: Once funded, the DAO can be deployed. This means the code is put into operation on the blockchain, and the DAO begins to function according to the pre-set rules.

How Does a DAO Work?

DAOs operate based on their underlying code and smart contracts. Here’s a basic overview of how they work:

  1. Proposals: Members of the DAO can submit proposals for any decision that needs to be made within the organization. This could be anything from funding a project to changing a rule within the DAO.

  2. Voting: DAO token holders then vote on these proposals. The weight of a member’s vote will typically be proportional to the number of tokens they hold.

  3. Execution: If a proposal receives enough support (as defined by the DAO’s rules), then the proposal is automatically implemented via the DAO’s smart contracts.

Example of a DAO

A classic example of a DAO is “The DAO” itself, which was created on the Ethereum blockchain. The DAO was designed as a decentralized venture capital fund, where token holders would vote on which projects to fund.

However, The DAO is also famous for a large-scale hack that occurred due to vulnerabilities in its code, resulting in millions of dollars worth of Ether (ETH) being stolen. This event led to a controversial hard fork in the Ethereum blockchain to recover the funds and demonstrated the potential risks and challenges of DAOs.

After The DAO hack, the idea of DAOs was somewhat tarnished, but the concept has been revived and is being improved upon. DAOs have since been created for various purposes, such as decentralized finance (DeFi), governance, and more.

For instance, MakerDAO is a popular DAO in the DeFi space. It’s responsible for the creation and management of DAI, a stablecoin whose value is pegged to the US dollar. MakerDAO stakeholders use their MKR tokens to vote on important decisions, like risk parameters.

Remember that while DAOs offer exciting possibilities for decentralized governance and decision-making, they also come with risks and challenges, including smart contract vulnerabilities, governance disputes, and regulatory uncertainties. As with all things in the crypto world, due diligence and careful research are crucial.

are programmers building ethereum part of The DAO?

No, the programmers building Ethereum are not inherently part of The DAO or any other specific DAO. Ethereum is a blockchain platform that supports the creation of decentralized applications (dApps) and smart contracts, including those used to create DAOs. It’s maintained by a separate group of developers.

The DAO was a specific organization that was built using Ethereum’s smart contract capabilities. It was developed by a separate group of individuals who had their own intentions and purposes for that organization.

In the case of The DAO, it was designed as a decentralized venture capital fund, which unfortunately was targeted in a significant hacking event. While the incident led to a hard fork of the Ethereum blockchain (resulting in Ethereum Classic), the Ethereum developers themselves were not directly responsible for creating or maintaining The DAO.

Similarly, each DAO is created and run by its own group of developers and stakeholders. Ethereum developers provide the infrastructure and tools needed to create these DAOs, but they don’t directly control or govern the individual organizations that people choose to create.

how is ethereum organised. What is the structure like manager, developer, product manager etc? What is the source of their salary

As a decentralized platform, Ethereum doesn’t have a traditional organizational structure like a corporation or a non-profit organization. It doesn’t have job titles like “manager,” “developer,” or “product manager.” Instead, the development and maintenance of the Ethereum platform are carried out by multiple teams across the world.

These teams are generally composed of developers and researchers, and they all contribute to different aspects of Ethereum, including its protocol, clients, user interfaces, and more. Some of the known teams include the Ethereum Foundation, ConsenSys, and several independent development teams like those behind different Ethereum clients (e.g., Geth, OpenEthereum, Nethermind).

Ethereum Foundation: The Ethereum Foundation is a non-profit organization registered in Switzerland, which plays a significant role in the Ethereum ecosystem. It’s made up of dedicated individuals who manage the funds raised from Ethereum’s initial coin offering (ICO) and use these funds to support Ethereum’s development and ecosystem growth. The Foundation supports the core development, research, and more.

ConsenSys: ConsenSys is a blockchain technology company founded by Joseph Lubin, one of the co-founders of Ethereum. It builds infrastructure, dApps, and services on the Ethereum network.

Independent Development Teams: Independent teams, funded variously by for-profit entities, venture capital, token sales, or community donations, also make significant contributions to the ecosystem.

As for where the money comes from to pay these developers and researchers, it depends on the specific team or individual.

  • Members of the Ethereum Foundation are funded by the foundation itself, which, as mentioned above, uses funds raised from the initial Ethereum sale.
  • Developers at companies like ConsenSys are employees of those companies and are paid accordingly.
  • Independent developers might work on a volunteer basis, be funded by community donations, or be funded through other means.

It’s worth noting that Ethereum also has a mechanism known as “Ethereum Improvement Proposals” (EIPs) which is a way for developers to propose changes to the Ethereum protocol. EIPs can be proposed by anyone and are implemented only if they get enough support from the community. This is a part of Ethereum’s decentralized ethos, where no single party has full control over the platform’s development.

Finally, the Ethereum 2.0 upgrade, currently in progress as of my knowledge cutoff in September 2021, involves even more developers, researchers, and teams, all collaborating to make Ethereum more scalable, secure, and sustainable.

can you explain more about the first hard fork of the Ethereum blockchain? What’s the reason and why a hard fork is done and who is the one makes the decision of hard fork

The first major hard fork of the Ethereum blockchain, often referred to as “The DAO hard fork,” occurred in 2016 in response to a security vulnerability in The DAO (Decentralized Autonomous Organization). The DAO was a type of investor-directed venture capital fund on the Ethereum blockchain, and a hacker exploited a flaw in its code to steal about a third of its funds, which were worth around $50 million at the time.

The Ethereum community was faced with a tough decision: let the hacker get away with the stolen Ether, which was against the principles of the community, or intervene by altering the blockchain to return the stolen funds, which would contradict the principle of immutability that is foundational to many blockchains.

After much debate, the majority of the Ethereum community decided to perform a hard fork, which is a type of upgrade that isn’t compatible with older versions. The purpose of this hard fork was to return the stolen Ether to a new smart contract, where the original owners could claim them. This hard fork essentially rewound the blockchain to the point before the hack, effectively erasing the theft.

However, a portion of the community disagreed with this intervention. They believed in the principle of immutability and thought the blockchain shouldn’t be altered, regardless of the circumstances. They continued to use the unforked version of the Ethereum blockchain, which became known as Ethereum Classic.

The decision to hard fork was ultimately made by the Ethereum community as a whole. Ethereum operates under a decentralized governance model, where decisions are made based on the consensus of its users. In the case of the DAO hard fork, the community used a carbon vote, where the stakeholders could vote on whether to perform the hard fork. The majority of the stakeholders voted in favor of the hard fork, leading to its implementation.

While this was a controversial event in Ethereum’s history, it was also a demonstration of the flexibility of the Ethereum blockchain and its community’s willingness to intervene when necessary, even in the face of difficult ethical decisions. It also showed the potential risks associated with smart contracts and DAOs, and led to important lessons and improvements in these areas.

what is the relationship between ethereum foundation and the DAO

The Ethereum Foundation and The DAO (Decentralized Autonomous Organization) are distinct entities with separate goals and operations, but they are interconnected in several ways. Here’s how they relate:

Ethereum Foundation: The Ethereum Foundation is a non-profit organization that leads the development of the Ethereum platform. The Foundation’s mission is to promote and support Ethereum and its research, development, and education to bring decentralized protocols and tools to the world that empower developers to produce next-generation decentralized applications (dapps).

The DAO: The DAO was a specific organization built using Ethereum’s smart contract capabilities. The aim was to operate like a venture capital fund for the crypto and decentralized space. The members of the DAO could make proposals regarding the allocation of DAO funds, and decisions were made through a consensus voting process.

The Ethereum Foundation itself had no direct control over The DAO, which was an independent organization run entirely by its members and governed by its smart contract code.

However, when The DAO was attacked due to a vulnerability in its code, and approximately $50 million worth of Ether (ETH) was taken, the Ethereum Foundation was involved in the discussions about how to respond. As a leading entity in the Ethereum community, the Foundation helped to facilitate community decision-making during this crisis.

The hard fork decision (a change to the Ethereum protocol returning the stolen funds to a new smart contract) was eventually implemented, with the majority of the Ethereum community agreeing to it. This split the Ethereum blockchain into two: Ethereum (ETH), which adopted the hard fork changes, and Ethereum Classic (ETC), which continued on the original chain without implementing the hard fork.

The Foundation continues to support the development of the Ethereum blockchain (ETH), whereas Ethereum Classic is supported by its own set of developers and community. Despite the controversy and fallout from The DAO, the event has significantly shaped Ethereum’s history and has led to many discussions about security, governance, and the principles of decentralization.

In Ethereum classic, the hacker still owns the hacked tokens? Can the tokens be transferred? Everyone will have two versions of ETH tokens and can spend twice on two chains?

Yes, in the Ethereum Classic (ETC) chain, the hacker still owns the Ether (ETH) they stole from The DAO because Ethereum Classic represents the version of the blockchain that did not revert the transactions of the hack.

As for the transfer of these tokens, since they are on the Ethereum Classic chain, they can be transferred or sold just like any other ETC. However, it’s important to note that the tokens on the Ethereum Classic chain are ETC, not ETH. The value and liquidity of ETC are separate from ETH. As of my knowledge cutoff in September 2021, ETH is generally more valuable and widely used than ETC.

Concerning your question about having two versions of tokens, yes, after the hard fork, anyone who owned Ether at the time of the fork would then have owned both ETH (on the new, forked chain) and ETC (on the original, unforked chain). However, these are separate and distinct tokens on separate and distinct chains. A transaction made with ETH does not affect your ETC balance, and vice versa.

Therefore, while you could technically “spend twice,” you would be spending two different types of tokens (ETH and ETC) on two different networks. You couldn’t, for instance, double-spend by buying something with ETH and then using the “same” ETC to buy something else because merchants and exchanges will distinguish between the two types of tokens and their respective chains.

how does the DAO do ICO. Did they created a token?

Yes, The DAO did create a token for their Initial Coin Offering (ICO). The process of an ICO often involves creating a new token that represents some form of value or utility within the system that’s being created.

The DAO’s token was also called DAO, and it represented voting and ownership rights in the organization. The DAO ICO was launched in May 2016 and it was, at the time, the largest crowdfunding campaign in history, raising about $150 million worth of Ether (ETH), Ethereum’s native cryptocurrency.

Here’s a brief outline of how The DAO’s ICO worked:

  1. Token Creation: The DAO’s creators wrote a set of smart contracts on the Ethereum blockchain. These contracts defined the rules of the organization and created the DAO token.

  2. ICO Launch: During the ICO, people could send Ether to the smart contract address. In return, they received DAO tokens, with the amount of DAO tokens received proportional to the amount of Ether contributed.

  3. ICO Close: Once the ICO ended, no more DAO tokens could be created. The only way to acquire DAO tokens after this point was to purchase them from existing owners.

  4. Control and Voting Rights: DAO token holders had the right to vote on proposals made within the DAO. This voting power was proportional to the number of DAO tokens a person held. In essence, the DAO tokens were governance tokens for The DAO.

After the hack of The DAO and the subsequent hard fork of the Ethereum blockchain, the original DAO tokens became virtually obsolete on the forked Ethereum (ETH) chain because the Ethereum community decided to refund the Ether that had been invested in The DAO back to the investors. However, DAO tokens still exist on the Ethereum Classic (ETC) chain, which did not implement the hard fork.

on the forked ETH, after refunding, where does the money go? directly to the DAO investors? The DAO no longer exists after the hard fork?

Yes, after the hard fork of the Ethereum blockchain, the funds that were originally sent to The DAO during its ICO were returned to the investors. This was done through a process known as a “withdrawal contract.”

Here’s how it worked:

  1. Withdrawal Contract: A new smart contract was created on the forked Ethereum blockchain. This contract held all the Ether (ETH) that was originally invested in The DAO.

  2. Claiming Funds: Investors could interact with this contract to claim their original ETH investment. To do this, they would need to use the original Ethereum address with which they bought their DAO tokens.

  3. Return of Funds: Upon receiving a valid claim, the withdrawal contract would send the claimed ETH back to the investor’s address. The number of ETH each investor could claim was proportional to the number of DAO tokens they originally bought.

After the hard fork and the return of the funds, The DAO as it was originally conceived ceased to exist on the Ethereum (ETH) chain. The smart contracts that made up The DAO are still on the blockchain, but they don’t hold any funds and don’t serve any functional purpose. However, The DAO and its tokens still exist on the Ethereum Classic (ETC) chain, which continued on the original, unforked version of the blockchain.

The events surrounding The DAO had significant effects on the Ethereum community and the broader crypto space, leading to many lessons learned and changes in how smart contracts and decentralized organizations are designed and governed. Despite the end of The DAO, the concept of Decentralized Autonomous Organizations (DAOs) has persisted and evolved, and many new DAOs have been created on Ethereum and other blockchains.

are the tokens hacked by the hacker in forked ETH still owned by hacker or taken away from him? What if he already moved the token away like transferring to exchanged and sold to other people

On the forked Ethereum chain (ETH), the tokens that the hacker stole were effectively taken away from them. The purpose of the hard fork was to return the stolen funds to a smart contract (called the “Withdrawal Contract”) that the original investors could use to claim back their Ether. The original transactions in which the hacker drained The DAO were essentially erased on this new chain. Therefore, on the Ethereum (ETH) chain, the hacker does not have access to the stolen funds.

However, if the hacker had already moved the stolen Ether to exchanges and sold them to other people before the hard fork occurred, that would create a complicated situation. In practice, the hacker wouldn’t have had much time to do this, because the hard fork was implemented quite quickly after the attack was discovered.

Moreover, exchanges could have potentially frozen any accounts associated with the stolen funds, given the public nature of the blockchain and the high-profile nature of the attack. This would have prevented the hacker from selling the stolen Ether.

On the Ethereum Classic (ETC) chain—the original chain that didn’t implement the hard fork—the hacker still has the Ether they stole, because the transactions of the hack were not reverted on this chain. However, the value of this Ether is tied to the value of Ethereum Classic, which is generally lower and less widely accepted than Ethereum (ETH).