Beginner’s Guide to Decentralized Autonomous Organizations
DAOs empower individuals from around the world to collaborate, make decisions, and create value through decentralized governance—without the need for intermediaries. This transformative approach has been made possible by blockchain technology, which enables secure, transparent, and autonomous systems. But what exactly is a DAO, how does it work, and how can you become a part of one? In this beginner’s guide, we’ll explore the fundamentals of DAOs, their benefits, and the practical steps to help you join the DAO movement. Read Also: The Rise of Decentralized Finance (Defi) Key Takeaway Decentralized Autonomous Organizations (DAOs) Decentralized Autonomous Organization (DAO) is a Web3 concept where communities are built on the blockchain, and these communities operate without a central authority. They are designed so that everyone within the community decides together what happens within the community using computer code and rules stored on a blockchain. This way, everything is transparent and secure. Example: Imagine a company where the CEO or the executive team does not make decisions. Instead, every employee within the company (from the highest to the lowest position) has a voice and can decide what happens in the company by casting their votes. That is basically what a DAO is. In a DAO, power is distributed among members who hold its tokens. These tokens give them voting power; the more tokens a member holds, the more votes they have. DAO founders who create these tokens distribute them to members interested in joining the DAO. Those interested members can then buy these tokens on exchanges or places where they are sold, like cryptocurrencies. One distinctive feature of DAOs is that they operate without a centralized leadership, and decisions are made by voting. Members can even submit project proposals, which the group then votes on. This creates a democratic and open management structure. DAOs are used by various organizations, such as businesses, nonprofits, and investment schemes. They’re entirely governed by smart contracts, making them a new and innovative way of working together. History of DAOs Vitalik Buterin, the founder of Ethereum, first introduced the concept of DAOs in 2014 in a whitepaper titled “DAOs, DACs, DAs, and More.” Then, in 2016, the first DAO was created by developers on the Ethereum Blockchain. This Decentralized Autonomous Organization (DAO) was called “The DAO.” It was an investment company where investors could contribute Ether and vote on funding proposals for startup companies. The DAO was controlled by a smart contract, which was supposed to be its central authority. Sadly, a coding error that wasn’t fixed on time allowed a hacker to steal $70 million worth of Ether that same year. Due to the blockchain’s immutability, the organizers couldn’t stop the theft. To mitigate the loss, a proposal was made to create a “hard fork” to roll back the blockchain and recover the stolen funds. This was controversial, as some argued it went against the principle of immutability. However, the hard fork was implemented, but in July 2016, opponents of this idea created a new blockchain called Ethereum Classic (ETC), which didn’t roll back the theft. Ultimately, the hacker received millions of dollars worth of Classic Ether. After this incident, DAOs began to gain popularity with the launch of new DAO platforms like DAOstack, Colony, and Aragon. They were created for various purposes, including decentralized governance, fundraising, and community decision-making. In 2020, DAOs continued to evolve, creating new frameworks like DAOhaus and the growth of existing ones. Today, DAOs are being explored and utilized in various industries, including decentralized finance (DeFi), gaming, and social media. Read Also: How Decentralized Identity (DID) Works in Crypto Features of a DAO As an organization based on the blockchain, here are the key features of a DAO that set it apart from a traditional community or organization. How they work Building a DAO begins with a desire to change an industry, launch a groundbreaking business, or champion a vital cause. This is where DAOs genuinely excel. However, here is how they work. In a traditional organization, the founder handles everything, but in a DAO (Decentralized Autonomous Organization), smart contracts handle everything. Founders or programmers of a DAO write code to automate all rules and structures, including financial transactions, that will be performed within the DAO. They also create DAO tokens, which will serve as the organization’s governance and utility tokens. Note: Most DAOs allow votes to be based on the investment amount made by a member. Once the DAO is formed, its founders promote their project to potential investors and participants to attract supporters. Now, depending on the DAO’s design, individuals can contribute in two ways: In return, participants/contributors can earn rewards, fostering a sense of community and incentivizing engagement. Once a DAO is running, more members can be allowed into the community by following its early members’ steps. Purpose of a DAO By fostering a culture of collective ownership and collaboration, DAOs aim to create a fair, transparent, and accountable system in which every member actively shapes the organization’s direction and future. This is the primary purpose of DAOs. However, there are more reasons they exist. These decentralized organizations allow members to control the narrative by empowering them to vote on proposals and make decisions collectively without a central authority. This ensures everyone has a voice and can contribute to the organization’s direction. It uses smart contracts to execute rules and actions, ensuring transparency, efficiency, and consistency in decision-making and operations and reducing the risk of human error or bias. Members within a DAO collectively make investments or donations, often in the form of cryptocurrencies, providing a decentralized and transparent way to fund projects and initiatives. Members of this organization pursue a common goal, such as developing a new technology, promoting a social cause, or creating a community resource, bringing people together around a shared purpose. Funds, assets, or rewards are allocated to members or projects based on predetermined rules or voting outcomes, ensuring fair and transparent distribution of resources. Blockchain technology records transactions, decisions, and actions. This makes
Rug Pulled! How to Avoid Crypto’s Most Sinister Scams
With the creation of cryptocurrencies came lucrative financial opportunities, but like opening a Pandora’s box, sinister scams, like Rug Pulls, were released. According to Payments Dive, the US crypto market lost over $3.9 billion to crypto scams in 2023, a $1.33 billion increase from 2022 (just in the U.S.). Recommended reading: Top 5 Effective Crypto Technical Analysis Signals in 2024 Today, crypto scams have reached staggering heights, with $25 billion lost in the global crypto market. With a record of 400 instances in 2023, these cunning scams continue to wreak havoc on unsuspecting investors—and the numbers keep climbing. In this article, we will discuss rug pulls and how to avoid being a victim of one. Key Takeaway Rug Pulls Since its inception, rug pulls have ravaged the global DeFi (Decentralized finance) market, resulting in staggering losses of billions of dollars. For starters, the word ‘rug pull’ originated from the notion that scammers pull the rug out from under unsuspecting investors’ feet, suddenly leaving them with devastating financial losses. A “rug pull” is a scam in which developers mostly create a fake project (such as a crypto or NFT project), promise high returns, and then steal investors’ money. To lure investors to their fake project, they list their token on decentralized exchanges (DEXs) like Uniswap or Pancakeswap, pair it with popular cryptocurrencies like Ethereum, Solana, or TON, and promote it through social media and crypto influencers. Once many investors who easily give in to FOMO buy the token, the developers withdraw all the funds, causing the token’s price to drop to zero. Most rug pull projects often involve: In the end, victims are left with worthless tokens and financial losses. How they work To understand how Rug Pulls work, we must first examine the psychological tactics that make them so effective. The crypto space is a breeding ground for get-rich-quick dreams, and the promise of overnight fortunes can cloud even the most brilliant minds. Recommended reading: Trust and Transparency in the Crypto Community Scammers know this and prey on this vulnerability, exploiting emotions and knowledge gaps to execute their deceitful schemes. Some of the emotional and knowledge-based tactics used by rug pull con artists include: Understanding how rug pulls work on the mind allows you to recognize red flags, avoid falling victim to these scams, and keep your funds safe. Here is how Rug Pulls work. As they do so, they make false promises of high returns, guaranteed profits, or participation in something revolutionary. They immediately deactivate their social media handles or go private, block investors who call them out, and sometimes flee the country. Types Of Rug Pulls There are two categories of rug pull scams. They include the Hard and Soft rug pull. Under these categories are different types. Here is an explanation of how they work. Hard rug pull A hard rug pull occurs when scammers drain all the liquidity from a token or project, causing its price to drop to almost zero, making it nearly impossible for investors to sell their tokens. This type of rug pull happens quickly or within a few days after launching the token. It is often accompanied by a complete project abandonment, with the scammers disappearing with the funds. Types of this scam include: 1. Liquidity Draining Here, scammers create a token, list it on a DEX, and encourage investors to buy. Once enough liquidity is pooled, they withdraw all the funds, leaving investors with worthless tokens. Example: The scammer creates a token called ‘SunnyCoin’ on the Ethereum blockchain and lists it on Uniswap, a decentralized exchange. They promote it heavily on social media, attracting investors who add liquidity to the pool (a mix of ETH and SunnyCoin). The scammer, who controls most of the tokens, waits for the price to peak, then sells off their large share, causing the token’s value to plummet and triggering panic among investors. Finally, the scammer withdraws all the ETH from the liquidity pool, leaving SunnyCoin holders with worthless tokens they cannot sell. 2. Flash loan attacks Flash loans are DeFi loans that allow borrowers to access liquidity without collateral. They are called “flash” loans because they are typically taken out and repaid quickly, often in the same blockchain block. Scammers use these loans to manipulate token prices and dump the tokens, causing a price crash. Example: A scammer takes out a flash loan of 100,000 DAI to buy up “PumpToken,” driving the price from $0.10 to $1.00. Then, they sell the tokens, causing the price to drop to $0.01, leaving investors who bought in at the peak with a 99% loss. 3. Honeypot traps Scammers create a smart contract that appears to be a legitimate token sale, but unknowingly to investors, it is a trap designed to drain their funds. Example: The scammer creates a smart contract for “GrooveToken” that promises a 100% return on investment. Investors send their ETH to the contract to make sure they get all the benefits, but it’s designed to drain their funds instead of providing a return. Soft rug pull Soft rug pulls are also known as “slow rug pulls.” They occur when the scammers gradually drain the liquidity from a token or project over a while (weeks or years, depending on the scammers), often while maintaining a facade of activity and engagement. This type of rug pull can be more challenging to detect, as the price may stay relatively high, and the scammers may continue to provide updates and support to avoid raising suspicion. 1. Pump & dump Scammers artificially inflate the token’s price by buying it themselves or paying others. They then sell their shares, causing the price to plummet, leaving investors with significant losses. Example: A group of scammers creates a Telegram channel promoting “MountainToken.” They buy the token, driving the price from $0.01 to $1.00. They then sell their tokens over time, causing the price to drop to $0.001 within a few weeks of its launch. Investors who bought in at the peak then
51% Attacks: Best Practices for Protecting Your Blockchain
What if we told you that by 2030, over 60% of blockchain networks could be at risk of attacks? According to data from Crypto51, many of today’s blockchain networks face threats like 51% attacks, primarily due to their low mining power. But this is just one of the many risks blockchain faces. In this article, we’ll dive into one of the most costly threats—51% attacks—exploring how they work and what steps you can take to protect your network. Related: What’s a Seed Phrase and Why Do You Need One? Key Takeaway 51% Attacks A blockchain is an open-source, digital record book that securely and transparently records transactions and data across a network of computers. As an innovative technology first launched in 2009 by Satoshi Nakamoto, one of its distinctive features is decentralization. Decentralization is a key feature of a blockchain network. It means all participants can contribute to the network and earn rewards as it grows. Decentralization helps prevent a single person or authority from taking control and deciding what happens on the blockchain while keeping it safe from attacks. However, this is only so for some blockchains, as most blockchain networks have vulnerabilities that hackers can exploit to harm them. 51% attack is one of the significant attacks they use. A 51% attack occurs when a group of attackers or a single entity takes over most of a blockchain’s hash rate (computational power). Related: Top Crypto Wallet Security Best Practices Here is a quick example of what we mean: Imagine a company with board members who have equal equity in the business. Each member has the right to vote on a decision for the company while having a say in the industry. If a decision needs to be made, a vote is carried out. The option with the most votes is chosen and executed; the one with the fewest votes is sidelined. It works the same way in a 51% attack. The group or entity that launches this attack has a higher percentage of the network and can execute or alter it. However, you should know that this blockchain attack is performed on only some blockchain networks. It is mainly performed on smaller networks with low hash rates, less usage, and few security measures. The bigger and more frequently a blockchain is used (think Bitcoin, Ethereum, Solana), the harder it is to launch an attack. These more prominent blockchains have more computational power and tighter security. How it all started The first 51% attack can be traced back to 2014. During this time, the Ghash.io pool (a popular bitcoin mining pool that operated from 2013 to 2016) unintentionally controlled 55% of the Bitcoin network, triggering a 25% drop in Bitcoin’s value. Although the pool voluntarily reduced its power and pledged to stay within 40%, the incident highlighted the risks of centralized mining power. In 2016, the cryptocurrencies Krypton and Shift, built on the Ethereum platform, were targeted by a group of hackers called “Team 51”. The attackers successfully double-spent and stole 22,000 coins through Bittrex (a crypto trading platform in the U.S) The most notable case occurred with Verge cryptocurrency (XVG) in 2018, compromised due to a code error. Verge’s multi-algorithm approach allowed attackers to exploit a bug, sending false timestamped blocks to the network. This resulted in blocks being generated every second instead of every 30 seconds, allowing hackers to capture 99% of blocks during a three-hour attack. Officially, 250,000 tokens were stolen, but users reported a much higher figure of nearly 4 million. How it works A 51% attack on a blockchain can seem attractive to hackers because of the benefits they stand to gain. However, you should know that carrying out this attack is very expensive, energy-consuming, and requires very serious attention to detail. This is why it is rarely done by anybody or hacker in the blockchain ecosystem. Carrying out a 51% attack is very difficult on a blockchain network with a high participation rate like Bitcoin. For this to happen, the hackers must control over 50% of the blockchain. This will mean investing in many hardware mining tools or getting most of the network’s miners to join a pool under the hackers’ control. The hackers will then have to create an “alternate” blockchain that can be introduced into the attacked blockchain at precisely the right time. The alternate blockchain would need to outhash the leading network to influence it. However, getting the mining hardware is just one-third of the challenges. The second challenge is energy to run the mining hardware, as mining consumes a lot of energy. According to Columbia Climate School, mining Bitcoin requires up to 150 Terrawatts per hour of energy yearly. This is higher than the annual energy consumption of Finland and Argentina, which have over 5.5 million and 60 million people, respectively. Finally, hackers will need to control most of the network and introduce their fake blockchain at the right moment, and this is the biggest challenge because failure to execute this well could result in their losing everything. What Happens Next: Risks & Consequences In a scenario where a 51% attack has successfully been carried out, the hackers can carry out their malicious plans, which include: 1. Double-Spending 51% of attackers use this as their major malicious plan. In this scenario, attackers can spend their already transacted funds twice by altering the blockchain to show that the money was never spent so that they can reuse it again. Example: An attacker spends 10 BTC on a purchase, then uses their control to alter the blockchain, making it seem like the transaction never occurred, allowing them to spend the same 10 BTC again. 2. Denial-of-Service (DoS) Attack The attacker takes control and blocks honest miners’ addresses, thereby preventing them from regaining network control. This move allows the attacker’s malicious transactions to become permanent. 3. Transaction Reversal The hacker blocks payments between users, disrupting the network’s regular operation, leading to significant delays in transaction confirmations, and undermining confidence in the
