A Decentralized Autonomous Organization is an organization that is created based on a set of rules encoded as a computer program.
The rules and codes are transparent and to be controlled by the members of the organization without any influence from a central body.
Let’s say there’s a vending machine that’s not only capable of accepting payment and dispensing snacks but can also place an order for more snacks automatically.
The vending machine can also pay its rent and order cleaning services by itself when required. Active users of the machine all have a say in how the machine operates.
The users determine which snacks the machine should order and also how often it should order cleaning services. There is no manager or board of directors, as all these processes were encoded into the vending machine when it was created.
In short: a DAO is about establishing a fully functional, automated organisation without hierarchical management.
Since DAOs don’t have managers delegating work about what and how things should be done, something else must take the role of it’s managing functions to fully function on it’s own.
A functioning DAO is created in phases, where the launch phase is used to define and activate the first set of rules, encoded as a smart contract.
After the launch phase, the DAO moves onto the funding phase because it needs an internal property that uses currency to carry out smart contract functions.
When both phases are complete, a DAO can function by itself and its functions are carried out by its stakeholders via way of voting.
After a DAO is deployed it becomes independent from its creators and is fully autonomous.
Every decision on how it operates and where to spend its funds are determined via voting and reaching collective consensus from it’s stakeholders.
All users who purchased a stake in a DAO have a right to make proposals regarding its future by paying a monetary fee for each proposal.
Then the stakeholders would vote on the proposal. To carry out the winning proposal, the majority must reach a consensus.
There’s a minimum percentage required to reach consensus and it can vary with per DAO. As with every operational rule, the required percentage to reach consensus is stated in the code.