staking” before, multiple times, even. It’s a word that keeps popping up on various cryptocurrency exchange platforms, wallet interfaces, and so on. Now, have you ever thought - “what in the world does this word mean?!”? Well, that is EXACTLY what I will tell you about, in this section!</p>\n<p>In this section, we’re going to answer what is “staking” in crypto. Specifically, we’ll examine what this term ACTUALLY means, talk about the concepts of <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-work-pow/">
Proof-of-Work and <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-stake-pos/">
Proof-of-Stake, and take a look at some of the risks associated with the process, too!</p>\n<p>Let’s get to it!</p>\n<h2>What is Staking?</h2>\n<p>So, then - what in the world is “staking”?</p>\n<p>Well, in order to truly understand staking, you will need to be aware of concepts known as “Proof-of-Work” and “Proof-of-Stake”.</p>\n<p>I’ve discussed these terms in a section about <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">
blockchains. If you’d like to learn more about it, and understand the topic in-depth, I’d highly advise you to go check that section out, and then come back to this one.</p>\n<p>With that out of the way, allow me to give you a brief run down.</p>\n<p>In the world of crypto, there are two main ways how blockchains function - those ways are called “Proof-of-Work” and “Proof-of-Stake”. Both of these concepts are called <strong>“consensus algorithms”</strong> - in human-speak, this refers to the methods of how blockchains verify the transactions (or, simply, processes) happening on them in order to save those transactions into the blockchain. So, when you buy or sell cryptocurrency, this is a transaction, and it needs to be checked & confirmed!</p>\n<p style=\"text-align: center;\"><img title=\"What is staking in crypto: what is staking.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-1.o.jpg/" alt=\"What is staking in crypto: what is staking.\" width=\"800\" height=\"619\" /></p>\n<p>Proof-of-Work is the oldest and best-known transaction verification process. It’s used with <a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">
Bitcoin, <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">
Ethereum 1.0, and many other popular cryptocurrencies. With PoW, you have miners - special computers and crypto machines that are plugged into the network, and are constantly competing for their chance to earn cryptocurrency.</p>\n<p>Being the oldest form of transaction confirmations, PoW is often seen as the worst option, as well. Even though it’s used by a huge number of cryptocurrencies out there, most new and emerging coins are switching to the second, opposite one - the Proof-of-Stake concept.</p>\n<p><img title=\"What is staking in crypto: Proof-of-work.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-2.o.jpg/" alt=\"What is staking in crypto: Proof-of-work.\" width=\"800\" height=\"422\" /></p>\n<p>The way you can look at both concepts of transaction verification is like this - imagine that there are two car race events happening in your town. In the Proof of Work racing event, all of the cars race to the finish line - however, only one of the cars wins the race! So, all of the other cars basically wasted <strong>fuel and energy</strong>.</p>\n<p>As opposed to that, in the Proof-of-Stake racing event, out of all the cars near the starting line, only one, let's say randomly, is selected to drive in the race. Thus, if there are, say, 100 different cars near the starting line, that’s a huge amount of fuel saved!</p>\n<p>With Proof-of-Work, all miners compete to verify transactions happening on the blockchain, but only one, in most cases the biggest and most powerful one, wins and receives a reward. On the flip side, with Proof-of-Stake, only a single miner (well, here, it’s actually called a validator) is chosen, and he needs to verify the transaction. And after that, let’s say, a few extra validators are needed to check his final result. It’s much more energy-efficient!</p>\n<p style=\"text-align: center;\"><img title=\"What is staking in crypto: Proof-of-Work and Proof-of-Stake.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-3.o.jpg/" alt=\"What is staking in crypto: Proof-of-Work and Proof-of-Stake.\" width=\"800\" height=\"754\" /></p>\n<p>Now, this is where we get into the “staking” part of the section.</p>\n<p>As I’ve mentioned earlier, with PoW, transactions are confirmed with miners. These miners are special machines used to mine cryptocurrency. They are usually very expensive, consume astonishing amounts of electricity, and are <strong>bad for the environment.</strong></p>\n<p>In regards to PoS, there are no expensive machines to do the work. Well, at least none that you’d need to buy. Machines do exist, but you “mine” by staking your coins, and not turning on a special mining rig. In other words, transactions are confirmed by staking your existing cryptocurrency!</p>\n<p><img title=\"What is staking: Proof-of-Stake.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-4.o.jpg/" alt=\"What is staking: Proof-of-Stake.\" width=\"800\" height=\"613\" /></p>\n<p>Let’s illustrate this with an example. Let’s take, say, the ADA coin, also known as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/tutorials/how-to-buy-cardano/">
Cardano. It’s one of the most popular cryptocurrencies that uses a PoS consensus algorithm.</p>\n<p>If you want to become one of the people who confirm transactions on <strong>the ADA network</strong>, you don’t need to buy an expensive “ADA miner” - such machines do not exist. Instead, all that you need to have is some ADA cryptocurrency. Then, in a random order, validators are selected, and rewarded for legitimate transaction confirmations - this is as opposed to PoW, where everyone participates in the “race”.</p>\n<p>You will be confirming the transactions with your ADA coins - in a way, this acts as a casino. You stake your coins, and if the transaction is legitimate, you will receive rewards. If it’s not, you will lose all of your staked coins.</p>\n<p>Unlike a casino, though, your chances of “winning” aren’t based on luck. Instead, they are purely up to you - if there are malicious individuals trying to push a fraudulent transaction, they will be punished by losing all of their staked coins - this incentivizes the validators to remain fair, and <strong>avoid foul play</strong>.</p>\n<p>Remember the car race example I gave a bit earlier? Well, you might say - why would other cars go to the starting line, if only one car will actually drive in the race?</p>\n<p>Well, other cars - or, as it relates to our topic, other validators - are there to ensure that the chosen car does a good job, and actually finishes the race. When you stake your cryptocurrency, and validate a transaction, other validators are going to check whether or not you’ve done so successfully. If that’s the case, you get rewarded - if not, you get penalized, and your coins get taken away from you.</p>\n<p>As you can see, in a very general sense, the process is actually <strong>quite simple</strong> - it’s like you playing a multiple-choice guessing game, where your goal is to increase the value of your pot. The entire process described here is a representation of Proof-of-Stake, and showcases how blockchains confirm transactions in a fast, efficient, and energy-preserving way.</p>\n<p>One last point to discuss before moving on is the validator selection process. In other words, when all of the cars align at the starting line, and get ready to race, how is the single car that’ll participate in the race chosen?</p>\n<p>Well, there are three major criteria for choosing the one validator that’ll confirm a transaction - age, amount of coins, and a randomness-ensuring factor.</p>\n<p>The first two are self-explanatory - if you hold a huge amount of coins, and are staking them for a long time already, the network recognizes that you’re probably legitimate, and <strong>prioritizes picking you as the validator</strong>. However, in order to avoid a monopoly of large staking companies taking control of the entire blockchain infrastructure, there’s a random number picker inserted into the selection process, as well.</p>\n<p>In other words, even if you don’t hold a lot of coins, and have just started staking crypto, there is a chance that you’ll get picked as the validator, as well.</p>\n<h2>An Alternative Look at Staking</h2>\n<p>Up to this point in time, we’ve discussed staking from a very technical point of view - PoW, PoS, validators, transactions, and so on. I’d like to remind you that, if you want to learn more about each of these topics, make sure to go through the \"Bitdegree Crypto 101 Handbook\", you’ll find sections on all of the important topics that might interest you!</p>\n<p>Moving on, though, I would now like to tell you about an alternative way that you can look at staking - one that’s much simpler and more <strong>user-friendly</strong> than all of the technical stuff we’ve discussed up to this point.</p>\n<p>Staking allows blockchains to confirm transactions - that’s true. However, nowadays, the term can be seen on a huge variety of cryptocurrency exchanges, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">
wallets, and other services. You might even notice terms such as “<strong><a href=https://www.bitdegree.org/"/crypto/learn/what-is-liquidity-pool-in-crypto/">liquidity pool</a></strong>” being mentioned, as well.</p>\n<p style=\"text-align: center;\"><img title=\"What is staking: An alternative look at staking.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-5.o.jpg/" alt=\"What is staking: An alternative look at staking.\" width=\"801\" height=\"479\" /></p>\n<p>All of that is because staking allows you - the simple user - to earn rewards in almost the same way as original big Proof-of-Stake validators, but without setting up and owning machines or solving software and connection issues!</p>\n<p>For us, small or medium crypto holders - staking is a good chance to earn extra with cryptocurrencies that we have decided to hold and not to trade for a specific period of time. Imagine, you have decided to earn from your Bitcoins that you have just bought, just by holding them for 10 years, you’re not a day trader, but a long-term crypto “hodler” with no speculative intentions or even knowledge.</p>\n<p>In this situation, with <strong>staking pool services</strong>, you’ll be able to earn the same way, by just holding your Bitcoins and not selling them for 10 years, predicting that the value of Bitcoin will grow, and as an extra, by “lending” those same Bitcoins to the staking pool and earning. </p>\n<p>Specifically, while you stake your crypto coins on exchange pools, you are able to earn a passive interest. It’s like trusting your money with a friend, for a specified amount of time, and then getting back more than you’ve given.</p>\n<p>The concept is very popular among smaller or medium crypto enthusiasts, since it involves earning more cryptocurrency, without actually doing anything. You just delegate your coins to an exchanges’ staking pool for a specific period - it may look complicated, but with many exchanges or wallets, all that you need to do is to click a single button, and wait. That’s it!</p>\n<p>All other technical parts of the validation process are covered by <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-exchange/">
exchanges or staking pool owners themselves. By attracting your extra funds, exchanges make their staking pool bigger, they get chosen to validate transactions more frequently, and because of a higher probability to be chosen, <strong>they earn more</strong>, and finally, they share the revenue from these validations with you.</p>\n<h2>Staking Risks</h2>\n<p>Now, I don’t want to alarm you, but you should be aware of the fact that there are risks associated with staking, too. Just like in the earlier-mentioned casino example, you might end up with more crypto than you’ve initially started with, or lose everything.</p>\n<p>That’s the biggest risk, actually - if you or a staking pool confirm a faulty transaction, you are at risk of losing all of your staked coins. This is why it is very important to choose the verified and well-known staking pool as a service provider. However, while this is the most commonly-referenced risk, there are other things to be aware of when deciding on whether or not you should start staking your crypto!</p>\n<p><img title=\"What is staking: Staking risks.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-6.o.jpg/" alt=\"What is staking: Staking risks.\" width=\"800\" height=\"219\" /></p>\n<p>For example, the process is still rather technical. If you plan to stake simply in order to earn interest, on an exchange platform, things are going to be simple - most exchanges and wallets have <strong>guides on how to do so.</strong></p>\n<p>However, if you want to become an actual validator of a network on your own, you’ll need to delve deeper into the topics of blockchains, Proof-of-Stake, and hardware stuff.</p>\n<p>Furthermore, while staking your coins, you will need to <strong>lock</strong> them up for a period of time. Meaning that you won’t be able to <strong>withdraw</strong> or trade them! The time periods will differ depending on a few different criteria, but if you’re an active day trader, this might pose an issue.</p>\n<p>The topic of staking (and Proof-of-Stake) can be difficult and complicated, but in this section, we’ve covered all of the core aspects, in simple terms. That being said, I hope that the concept is understandable for you now.</p>","meta_title":"What is Staking in Crypto: Proof-of-Work or Proof-of-Stake?","meta_description":"Learn what staking means in crypto, how it is defined, & and how it works. Find out about PoW and PoS, and the possible staking risks.","meta_keywords":"What Does Staking Mean in Crypto, What is Staking in Crypto, staking in crypto, staking in crypto meaning, define staking in crypto, how does staking work in crypto","order":8,"language":"en","created_at":"2022-05-03T08:40:39.000000Z","updated_at":"2023-03-10T08:17:31.000000Z","modified_content":"<p>In this section, I will tell you what is staking in crypto!</p>\n<p>I bet you’ve heard the term “<a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-crypto-staking-platform/">
staking” before, multiple times, even. It’s a word that keeps popping up on various cryptocurrency exchange platforms, wallet interfaces, and so on. Now, have you ever thought - “what in the world does this word mean?!”? Well, that is EXACTLY what I will tell you about, in this section!</p>\n<p>In this section, we’re going to answer what is “staking” in crypto. Specifically, we’ll examine what this term ACTUALLY means, talk about the concepts of <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-work-pow/">
Proof-of-Work and <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-stake-pos/">
Proof-of-Stake, and take a look at some of the risks associated with the process, too!</p>\n<p>Let’s get to it!</p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"What Does Staking Mean in Crypto? (Easily Explained!)\"\n title=\"What Does Staking Mean in Crypto? (Easily Explained!)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: What is the Goal of Staking Crypto Assets?</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"What is the Goal of Staking Crypto Assets?\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"irhlfrCrywo\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">What Does Staking Mean in Crypto? (Easily Explained!)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/irhlfrCrywo/hq720.jpg/"/n alt=\"What Does Staking Mean in Crypto? (Easily Explained!)\"\n title=\"What Does Staking Mean in Crypto? (Easily Explained!)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"What Does Staking Mean in Crypto? (Easily Explained!)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"irhlfrCrywo\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What is Staking?</h2>\n<p>So, then - what in the world is “staking”?</p>\n<p>Well, in order to truly understand staking, you will need to be aware of concepts known as “Proof-of-Work” and “Proof-of-Stake”.</p>\n<p>I’ve discussed these terms in a section about <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">
blockchains. If you’d like to learn more about it, and understand the topic in-depth, I’d highly advise you to go check that section out, and then come back to this one.</p>\n<p>With that out of the way, allow me to give you a brief run down.</p>\n<p>In the world of crypto, there are two main ways how blockchains function - those ways are called “Proof-of-Work” and “Proof-of-Stake”. Both of these concepts are called <strong>“consensus algorithms”</strong> - in human-speak, this refers to the methods of how blockchains verify the transactions (or, simply, processes) happening on them in order to save those transactions into the blockchain. So, when you buy or sell cryptocurrency, this is a transaction, and it needs to be checked & confirmed!</p>\n<p style=\"text-align: center;\"><img title=\"What is staking in crypto: what is staking.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-1.o.jpg/" alt=\"What is staking in crypto: what is staking.\" width=\"800\" height=\"619\" /></p>\n<p>Proof-of-Work is the oldest and best-known transaction verification process. It’s used with <a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">
Bitcoin, <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">
Ethereum 1.0, and many other popular cryptocurrencies. With PoW, you have miners - special computers and crypto machines that are plugged into the network, and are constantly competing for their chance to earn cryptocurrency.</p>\n<p>Being the oldest form of transaction confirmations, PoW is often seen as the worst option, as well. Even though it’s used by a huge number of cryptocurrencies out there, most new and emerging coins are switching to the second, opposite one - the Proof-of-Stake concept.</p>\n<p><img title=\"What is staking in crypto: Proof-of-work.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-2.o.jpg/" alt=\"What is staking in crypto: Proof-of-work.\" width=\"800\" height=\"422\" /></p>\n<p>The way you can look at both concepts of transaction verification is like this - imagine that there are two car race events happening in your town. In the Proof of Work racing event, all of the cars race to the finish line - however, only one of the cars wins the race! So, all of the other cars basically wasted <strong>fuel and energy</strong>.</p>\n<p>As opposed to that, in the Proof-of-Stake racing event, out of all the cars near the starting line, only one, let's say randomly, is selected to drive in the race. Thus, if there are, say, 100 different cars near the starting line, that’s a huge amount of fuel saved!</p>\n<p>With Proof-of-Work, all miners compete to verify transactions happening on the blockchain, but only one, in most cases the biggest and most powerful one, wins and receives a reward. On the flip side, with Proof-of-Stake, only a single miner (well, here, it’s actually called a validator) is chosen, and he needs to verify the transaction. And after that, let’s say, a few extra validators are needed to check his final result. It’s much more energy-efficient!</p>\n<p style=\"text-align: center;\"><img title=\"What is staking in crypto: Proof-of-Work and Proof-of-Stake.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-3.o.jpg/" alt=\"What is staking in crypto: Proof-of-Work and Proof-of-Stake.\" width=\"800\" height=\"754\" /></p>\n<p>Now, this is where we get into the “staking” part of the section.</p>\n<p>As I’ve mentioned earlier, with PoW, transactions are confirmed with miners. These miners are special machines used to mine cryptocurrency. They are usually very expensive, consume astonishing amounts of electricity, and are <strong>bad for the environment.</strong></p>\n<p>In regards to PoS, there are no expensive machines to do the work. Well, at least none that you’d need to buy. Machines do exist, but you “mine” by staking your coins, and not turning on a special mining rig. In other words, transactions are confirmed by staking your existing cryptocurrency!</p>\n<p><img title=\"What is staking: Proof-of-Stake.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-4.o.jpg/" alt=\"What is staking: Proof-of-Stake.\" width=\"800\" height=\"613\" /></p>\n<p>Let’s illustrate this with an example. Let’s take, say, the ADA coin, also known as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/tutorials/how-to-buy-cardano/">
Cardano. It’s one of the most popular cryptocurrencies that uses a PoS consensus algorithm.</p>\n<p>If you want to become one of the people who confirm transactions on <strong>the ADA network</strong>, you don’t need to buy an expensive “ADA miner” - such machines do not exist. Instead, all that you need to have is some ADA cryptocurrency. Then, in a random order, validators are selected, and rewarded for legitimate transaction confirmations - this is as opposed to PoW, where everyone participates in the “race”.</p>\n<p>You will be confirming the transactions with your ADA coins - in a way, this acts as a casino. You stake your coins, and if the transaction is legitimate, you will receive rewards. If it’s not, you will lose all of your staked coins.</p>\n<p>Unlike a casino, though, your chances of “winning” aren’t based on luck. Instead, they are purely up to you - if there are malicious individuals trying to push a fraudulent transaction, they will be punished by losing all of their staked coins - this incentivizes the validators to remain fair, and <strong>avoid foul play</strong>.</p>\n<p>Remember the car race example I gave a bit earlier? Well, you might say - why would other cars go to the starting line, if only one car will actually drive in the race?</p>\n<p>Well, other cars - or, as it relates to our topic, other validators - are there to ensure that the chosen car does a good job, and actually finishes the race. When you stake your cryptocurrency, and validate a transaction, other validators are going to check whether or not you’ve done so successfully. If that’s the case, you get rewarded - if not, you get penalized, and your coins get taken away from you.</p>\n<p>As you can see, in a very general sense, the process is actually <strong>quite simple</strong> - it’s like you playing a multiple-choice guessing game, where your goal is to increase the value of your pot. The entire process described here is a representation of Proof-of-Stake, and showcases how blockchains confirm transactions in a fast, efficient, and energy-preserving way.</p>\n<p>One last point to discuss before moving on is the validator selection process. In other words, when all of the cars align at the starting line, and get ready to race, how is the single car that’ll participate in the race chosen?</p>\n<p>Well, there are three major criteria for choosing the one validator that’ll confirm a transaction - age, amount of coins, and a randomness-ensuring factor.</p>\n<p>The first two are self-explanatory - if you hold a huge amount of coins, and are staking them for a long time already, the network recognizes that you’re probably legitimate, and <strong>prioritizes picking you as the validator</strong>. However, in order to avoid a monopoly of large staking companies taking control of the entire blockchain infrastructure, there’s a random number picker inserted into the selection process, as well.</p>\n<p>In other words, even if you don’t hold a lot of coins, and have just started staking crypto, there is a chance that you’ll get picked as the validator, as well.</p>\n<h2>An Alternative Look at Staking</h2>\n<p>Up to this point in time, we’ve discussed staking from a very technical point of view - PoW, PoS, validators, transactions, and so on. I’d like to remind you that, if you want to learn more about each of these topics, make sure to go through the \"Bitdegree Crypto 101 Handbook\", you’ll find sections on all of the important topics that might interest you!</p>\n<p>Moving on, though, I would now like to tell you about an alternative way that you can look at staking - one that’s much simpler and more <strong>user-friendly</strong> than all of the technical stuff we’ve discussed up to this point.</p>\n<p>Staking allows blockchains to confirm transactions - that’s true. However, nowadays, the term can be seen on a huge variety of cryptocurrency exchanges, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">
wallets, and other services. You might even notice terms such as “<strong><a href=https://www.bitdegree.org/"/crypto/learn/what-is-liquidity-pool-in-crypto/">liquidity pool</a></strong>” being mentioned, as well.</p>\n<p style=\"text-align: center;\"><img title=\"What is staking: An alternative look at staking.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-5.o.jpg/" alt=\"What is staking: An alternative look at staking.\" width=\"801\" height=\"479\" /></p>\n<p>All of that is because staking allows you - the simple user - to earn rewards in almost the same way as original big Proof-of-Stake validators, but without setting up and owning machines or solving software and connection issues!</p>\n<p>For us, small or medium crypto holders - staking is a good chance to earn extra with cryptocurrencies that we have decided to hold and not to trade for a specific period of time. Imagine, you have decided to earn from your Bitcoins that you have just bought, just by holding them for 10 years, you’re not a day trader, but a long-term crypto “hodler” with no speculative intentions or even knowledge.</p>\n<p>In this situation, with <strong>staking pool services</strong>, you’ll be able to earn the same way, by just holding your Bitcoins and not selling them for 10 years, predicting that the value of Bitcoin will grow, and as an extra, by “lending” those same Bitcoins to the staking pool and earning. </p>\n<p>Specifically, while you stake your crypto coins on exchange pools, you are able to earn a passive interest. It’s like trusting your money with a friend, for a specified amount of time, and then getting back more than you’ve given.</p>\n<p>The concept is very popular among smaller or medium crypto enthusiasts, since it involves earning more cryptocurrency, without actually doing anything. You just delegate your coins to an exchanges’ staking pool for a specific period - it may look complicated, but with many exchanges or wallets, all that you need to do is to click a single button, and wait. That’s it!</p>\n<p>All other technical parts of the validation process are covered by <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-exchange/">
exchanges or staking pool owners themselves. By attracting your extra funds, exchanges make their staking pool bigger, they get chosen to validate transactions more frequently, and because of a higher probability to be chosen, <strong>they earn more</strong>, and finally, they share the revenue from these validations with you.</p>\n<h2>Staking Risks</h2>\n<p>Now, I don’t want to alarm you, but you should be aware of the fact that there are risks associated with staking, too. Just like in the earlier-mentioned casino example, you might end up with more crypto than you’ve initially started with, or lose everything.</p>\n<p>That’s the biggest risk, actually - if you or a staking pool confirm a faulty transaction, you are at risk of losing all of your staked coins. This is why it is very important to choose the verified and well-known staking pool as a service provider. However, while this is the most commonly-referenced risk, there are other things to be aware of when deciding on whether or not you should start staking your crypto!</p>\n<p><img title=\"What is staking: Staking risks.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-does-staking-mean-in-crypto-6.o.jpg/" alt=\"What is staking: Staking risks.\" width=\"800\" height=\"219\" /></p>\n<p>For example, the process is still rather technical. If you plan to stake simply in order to earn interest, on an exchange platform, things are going to be simple - most exchanges and wallets have <strong>guides on how to do so.</strong></p>\n<p>However, if you want to become an actual validator of a network on your own, you’ll need to delve deeper into the topics of blockchains, Proof-of-Stake, and hardware stuff.</p>\n<p>Furthermore, while staking your coins, you will need to <strong>lock</strong> them up for a period of time. Meaning that you won’t be able to <strong>withdraw</strong> or trade them! The time periods will differ depending on a few different criteria, but if you’re an active day trader, this might pose an issue.</p>\n<p>The topic of staking (and Proof-of-Stake) can be difficult and complicated, but in this section, we’ve covered all of the core aspects, in simple terms. That being said, I hope that the concept is understandable for you now.</p>","preview_url":"https://www.bitdegree.org/crypto/learn/what-is-staking-in-crypto","youtube_video":{"id":2,"channel_id":1,"sort":52,"video_title":"What Does Staking Mean in Crypto? (Easily Explained!)","description":"What does staking mean in crypto?\n\nIn the crypto world, staking is a process when you take your cryptocurrency, and “employ” it to earn a passive interest over time. Staking usually refers to Proof-of-Stake - a consensus algorithm that allows cryptocurrency holders to become validators on the network, and confirm the transactions happening within.\n\nAdmittedly, staking isn’t a simple topic to wrap your head around. In this video, I aim to help you do just that - I’ll tell you about staking and Proof-of-Stake, and all of the processes associated with these concepts!\n\nHave you ever staked any crypto coins yourself? Share your experiences in the comments down below!\n\nVideo Time Table:\n\n0:00 Introduction to What Does Staking Mean in Crypto\n0:53 What is Staking?\n7:03 Alternative Look at Staking\n9:13 Staking Risks\n10:19 Wrap-up: What Does Staking Mean in Crypto?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#WhatDoesStakingMeanInCrypto #WhatIsStakingInCrypto #StakingInCrypto #StakingInCryptoMeaning #DefineStakingInCrypto #HowDoesStakingWorkInCrypto #StakingCrypto","video_id":"irhlfrCrywo","duration":641,"view_count":1882,"thumbnail_url":"https://i.ytimg.com/vi/irhlfrCrywo/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-02-15 12:39:31","created_at":"2022-02-21T13:20:28.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"prevSection":{"id":5,"featured_image_id":6413,"original_id":null,"youtube_video_id":7,"author_id":40,"translator_id":null,"chapter_id":6,"title":"What is the Core Purpose of Smart Contracts?","slug":"what-are-smart-contracts","definition":"Did you know that it is impossible to stop or adjust a smart contract once it's started?","status":"published","content":"<p>Have you ever played on an online slot machine? If you have, or maybe just have seen it, then you’re probably quite familiar with the premise of how it works - you wager some money, and press the button to play. If the outcome of the images that appear on the screen is in your favor, you will be paid out your winnings right after.</p>\n<p><strong>In other words, once you initiate the slot machine, the process happens automatically, and depending on the outcome, rewards are paid out automatically, as well.</strong> This is actually exactly how smart contracts function, as well.</p>\n<p>In this section, we’re covering smart contracts. Specifically, what smart contracts are, how they work, and what they are used for.</p>\n<p>Let’s get right to it!</p>\n<h2>What are Smart Contracts?</h2>\n<p>Officially, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">
Smart Contracts</strong></a> in crypto are a set of pre-coded rules that will initiate some actions on the blockchain without interventions from a third party. You can call it a program, or simply, <strong>a blockchain app, with its own sense of how things should work in one situation, or another</strong>. Smart contracts are built by developers and launched on blockchains to bring some logic into people's actions. Let’s just say, it makes blockchains work smarter, and in accordance to set conditions.</p>\n<p>So - what are smart contracts in human-speak, exactly?</p>\n<p>Well, as the name implies, they are contractual obligations for something to happen. In other words, if you make an agreement with your friend that you’ll mow their lawn if they help you with your math homework, this can be considered a contract.</p>\n<p style=\"text-align: center;\"><img title=\"What are smart contracts: What are smart contracts?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-1.o.jpg/" alt=\"What are smart contracts: What are smart contracts?\" width=\"1000\" height=\"300\" /></p>\n<p>Obviously, the “smart” part in the term “smart contract” is the important bit. To put it simply, it signifies that <strong>the contract will be executed automatically, without human intervention</strong>, and that once it’s set, it cannot be altered.</p>\n<p>A close example of this idea is if you’d decide to take out a loan. You would have to settle the details with your bank, and sign a contract. Once all of the details are settled, your bank would pay out the money into your bank account.</p>\n<p>In this situation, though, the process is performed by a human - someone checks your information, and pays out your loan, or maybe not! With a smart contract, there would be no middleman - <strong>your information would be verified automatically, according to some set criteria, and the money would be paid out without human intervention, as well.</strong></p>\n<p>This is one of the core purposes that smart contracts serve, in the first place - they allow for certain processes to happen automatically, without the need for a human being to intervene. Think of a coffee machine - instead of boiling the water in a kettle, adding coffee to a mug, and then filling the mug with hot water, all that you need to do is push a button on the coffee machine, and wait - the process happens automatically! And YES, now you can call your coffee machine a smart one. <strong>Smart, because it works based on some initially programmed logic with no need for third parties to be involved.</strong> The absolute same can be said about Smart Contracts.</p>\n<p>It’s convenient, fast, and effective. However, what if you decide that you actually want tea instead of coffee, midway through the machine making your drink? You could probably just press one button, and cancel the process!</p>\n<p>Well, this is an opposite core feature of smart contracts - once they’re in action, there’s no going back. No matter what happens, <strong>a smart contract will be executed, once it’s started</strong>.</p>\n<p>While this does sound a bit intimidating, I assure you - this is a good thing!</p>\n<p>The strict nature of smart contract execution means that users won’t be tricked, once the contract is in motion. Let’s go back to the coffee machine example. Imagine that you really want a cup of coffee - you set the machine to start making your favorite latte, and then go to do something else while it does the deed. However, some guy walks past the machine, notices that you’re making coffee for yourself, and decides to press the “STOP” button, simply to pull a prank on you.</p>\n<p>You come back, and the machine is turned off, with no coffee to be made - that’s frustrating!</p>\n<p style=\"text-align: center;\"><img title=\"What are smart contracts: What is the core purpose of smart contracts?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-3.o.jpg/" alt=\"What are smart contracts: What is the core purpose of smart contracts?\" width=\"1000\" height=\"600\" /></p>\n<p>Now, sure - this is nothing more than a minor inconvenience. However, since smart contracts usually involve money (and lots of it!), the risks would be far more dire and noteworthy.</p>\n<p>In other words, <strong>malicious individuals would be able to scam investors out of their funds by promising something great and then simply running away with the money</strong>. Smart contracts help potential investors avoid this by checking out the details behind them, and providing the guarantees that, once initiated, the contracts won’t be altered.</p>\n<p>How? Unlike coffee machine logic, smart contracts are public, so anyone can check and see what exact logic is set, and when and how it will proceed after you perform one action or another. And this is definitely a <strong>transparency</strong> question! If some blockchain activities involve hundreds or thousands of people, the community will always check what will happen according to the smart contract initiated for those activities. </p>\n<h2>How Do Smart Contracts Work?</h2>\n<p>Let’s look into how smart contracts work, exactly.</p>\n<p>The vast majority of smart contracts are built (and issued) on the smart network - specifically, the <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum network. And this is the key difference between Ethereum-based blockchains and <a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">Bitcoins’. /nEthereum is a “smart” crypto-powered network - a decentralized (no single authority-possessing) global node of computers, if you will.</strong> On it, people are able to create various applications, including smart contracts. Bitcoins’ blockchain network, is, let’s call it - the dumb one, because of its lack of smart functionality. So, no smart contracts on a Bitcoin network.</p>\n<p>Namely, on Ethereum, smart contracts are built with the help of <strong>Solidity</strong> - a programming language that was specifically designed for developers working with the Ethereum network. These developers receive the criteria for a smart contract (for example, “if Sam pays me $10, I will send Sam the article”), and then create it by using Solidity. Essentially, a smart contract is basically an <strong>“IF something happens, THEN do this”</strong> function.</p>\n<p>When a smart contract is created, it needs to be deployed on the network. Once that happens, the contract becomes active, and the terms of the contract can be executed.</p>\n<p style=\"text-align: center;\"><img title=\"What are smart contracts: How do smart contracts work?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-4.o.jpg/" alt=\"What are smart contracts: How do smart contracts work?\" width=\"1000\" height=\"400\" /></p>\n<p>As I’ve mentioned earlier, <strong>smart contracts work in an automatic manner</strong>. This means that, once they’re deployed, developers won’t need to add or change anything else - if the terms of the contract are met, it will perform its intended function.</p>\n<p>Furthermore, I would like to reiterate the fact that smart contracts are <strong>immutable</strong> - in other words, they can't be changed. This makes them secure and reliable, as long as the conditions by which they were deployed were checked and verified to be fair.</p>\n<p>That said, you might be wondering - WHY can’t smart contracts be tampered with? Specifically, how is this ensured?</p>\n<p>Well, this is thanks to blockchain technology. I won’t go too in-depth with the technical stuff on how that works, since it’s an entire section of its own, but in essence, in order to change the terms of a smart contract once it’s deployed, <strong>you’d need to be in command of at least 51% of the blockchain that the contract is based on</strong> - this is practically impossible.</p>\n<p>And also if you’d like to find out more about how <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">blockchains work, make sure to check out the section on the topic.</p>\n<h2>What Can Smart Contracts Be Used for?</h2>\n<p>So - thus far, we’ve covered what smart contracts are, and also how they perform the processes that they do. As a final point, let’s take a look at some examples of what these pieces of technology can be used for.</p>\n<p>For starters, let’s say that you’re a farmer who wants to insure their crops, in case there’s a drought this year. The insurance company uses a smart contract for your insurance, with these terms:</p>\n<p><strong>“If the air temperature between the months A and B is above 90 degrees Fahrenheit for at least C amount of days, consecutively, pay out the farmer X amount of money.”</strong></p>\n<p>The insurance company would then make the smart contract track the local weather news platforms that have high reliability. Thus, the entire process would be automatized - <strong>if there was a drought that year, you would automatically receive your insurance payout!</strong></p>\n<p style=\"text-align: center;\"><strong><img title=\"What are smart contracts: What are smart contracts used for?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-5.o.jpg/" alt=\"What are smart contracts: What are smart contracts used for?\" width=\"999\" height=\"368\" /></strong></p>\n<p>And what's most important is that nobody ever will change the rules you, as the farmer, agreed to.</p>\n<p>Here’s another example - imagine that you want to receive a yearly bonus in your job, and are trying to negotiate it with your boss. Your boss lays down the requirements that you need to meet in order to receive that bonus and gives you a deadline. He also creates a smart contract that states:</p>\n<p><strong>“If A performs B, C, and D tasks until December 31st, 2022, A receives a bonus of X amount of money.”</strong></p>\n<p>In a situation like this, you know that you will DEFINITELY receive the bonus, if you meet all of the requirements by the end of the year - after all, once the smart contract is created, there’s no turning back! <em>And your crazy boss will never change his opinion just because of bad weather!</em></p>\n<p style=\"text-align: center;\"><em><img title=\"What are smart contracts: An example of using a smart contract.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-6.o.jpg/" alt=\"What are smart contracts: An example of using a smart contract.\" width=\"1000\" height=\"339\" /></em></p>\n<p>These are just a couple of examples that illustrate the potential of smart contract technology. Truth be told, the opportunities for smart contract application are vast - this technology can be incorporated into a huge variety of different areas, and, frankly, <strong>smart contracts are making their way into the mainstream</strong>, as we speak!</p>\n<p>So, in this section, we’ve covered all of the essential information that you need to know about smart contracts - what they are, how they work, and the variety of different ways of how we can use them. If you would like to learn about various crypto topics - check out our section about <a href=https://www.bitdegree.org/"/crypto/learn/what-are-nfts/">NFTs.
","meta_title":"What are Smart Contracts: Smart Contracts Explained","meta_description":"Wondering what are smart contracts and how they work? Check out this in-depth explanation alongside a lot of easy-to-understand examples.","meta_keywords":"what are smart contracts, what are smart contracts explained, what are smart contracts used for","order":6,"language":"en","created_at":"2022-05-02T10:34:33.000000Z","updated_at":"2023-03-10T08:17:31.000000Z","modified_content":"<p>Have you ever played on an online slot machine? If you have, or maybe just have seen it, then you’re probably quite familiar with the premise of how it works - you wager some money, and press the button to play. If the outcome of the images that appear on the screen is in your favor, you will be paid out your winnings right after.</p>\n<p><strong>In other words, once you initiate the slot machine, the process happens automatically, and depending on the outcome, rewards are paid out automatically, as well.</strong> This is actually exactly how smart contracts function, as well.</p>\n<p>In this section, we’re covering smart contracts. Specifically, what smart contracts are, how they work, and what they are used for.</p>\n<p>Let’s get right to it!</p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"What is a Smart Contract? (Explained with Animations)\"\n title=\"What is a Smart Contract? (Explained with Animations)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: What is the Core Purpose of Smart Contracts?</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"What is the Core Purpose of Smart Contracts?\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"0VCMtKx9AxU\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">What is a Smart Contract? (Explained with Animations)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/0VCMtKx9AxU/hq720.jpg/"/n alt=\"What is a Smart Contract? (Explained with Animations)\"\n title=\"What is a Smart Contract? (Explained with Animations)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"What is a Smart Contract? (Explained with Animations)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"0VCMtKx9AxU\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What are Smart Contracts?</h2>\n<p>Officially, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">Smart Contracts</strong></a> in crypto are a set of pre-coded rules that will initiate some actions on the blockchain without interventions from a third party. You can call it a program, or simply, <strong>a blockchain app, with its own sense of how things should work in one situation, or another</strong>. Smart contracts are built by developers and launched on blockchains to bring some logic into people's actions. Let’s just say, it makes blockchains work smarter, and in accordance to set conditions.</p>\n<p>So - what are smart contracts in human-speak, exactly?</p>\n<p>Well, as the name implies, they are contractual obligations for something to happen. In other words, if you make an agreement with your friend that you’ll mow their lawn if they help you with your math homework, this can be considered a contract.</p>\n<p style=\"text-align: center;\"><img title=\"What are smart contracts: What are smart contracts?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-1.o.jpg/" alt=\"What are smart contracts: What are smart contracts?\" width=\"1000\" height=\"300\" /></p>\n<p>Obviously, the “smart” part in the term “smart contract” is the important bit. To put it simply, it signifies that <strong>the contract will be executed automatically, without human intervention</strong>, and that once it’s set, it cannot be altered.</p>\n<p>A close example of this idea is if you’d decide to take out a loan. You would have to settle the details with your bank, and sign a contract. Once all of the details are settled, your bank would pay out the money into your bank account.</p>\n<p>In this situation, though, the process is performed by a human - someone checks your information, and pays out your loan, or maybe not! With a smart contract, there would be no middleman - <strong>your information would be verified automatically, according to some set criteria, and the money would be paid out without human intervention, as well.</strong></p>\n<p>This is one of the core purposes that smart contracts serve, in the first place - they allow for certain processes to happen automatically, without the need for a human being to intervene. Think of a coffee machine - instead of boiling the water in a kettle, adding coffee to a mug, and then filling the mug with hot water, all that you need to do is push a button on the coffee machine, and wait - the process happens automatically! And YES, now you can call your coffee machine a smart one. <strong>Smart, because it works based on some initially programmed logic with no need for third parties to be involved.</strong> The absolute same can be said about Smart Contracts.</p>\n<p>It’s convenient, fast, and effective. However, what if you decide that you actually want tea instead of coffee, midway through the machine making your drink? You could probably just press one button, and cancel the process!</p>\n<p>Well, this is an opposite core feature of smart contracts - once they’re in action, there’s no going back. No matter what happens, <strong>a smart contract will be executed, once it’s started</strong>.</p>\n<p>While this does sound a bit intimidating, I assure you - this is a good thing!</p>\n<p>The strict nature of smart contract execution means that users won’t be tricked, once the contract is in motion. Let’s go back to the coffee machine example. Imagine that you really want a cup of coffee - you set the machine to start making your favorite latte, and then go to do something else while it does the deed. However, some guy walks past the machine, notices that you’re making coffee for yourself, and decides to press the “STOP” button, simply to pull a prank on you.</p>\n<p>You come back, and the machine is turned off, with no coffee to be made - that’s frustrating!</p>\n<p style=\"text-align: center;\"><img title=\"What are smart contracts: What is the core purpose of smart contracts?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-3.o.jpg/" alt=\"What are smart contracts: What is the core purpose of smart contracts?\" width=\"1000\" height=\"600\" /></p>\n<p>Now, sure - this is nothing more than a minor inconvenience. However, since smart contracts usually involve money (and lots of it!), the risks would be far more dire and noteworthy.</p>\n<p>In other words, <strong>malicious individuals would be able to scam investors out of their funds by promising something great and then simply running away with the money</strong>. Smart contracts help potential investors avoid this by checking out the details behind them, and providing the guarantees that, once initiated, the contracts won’t be altered.</p>\n<p>How? Unlike coffee machine logic, smart contracts are public, so anyone can check and see what exact logic is set, and when and how it will proceed after you perform one action or another. And this is definitely a <strong>transparency</strong> question! If some blockchain activities involve hundreds or thousands of people, the community will always check what will happen according to the smart contract initiated for those activities. </p>\n<h2>How Do Smart Contracts Work?</h2>\n<p>Let’s look into how smart contracts work, exactly.</p>\n<p>The vast majority of smart contracts are built (and issued) on the smart network - specifically, the <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum network. And this is the key difference between Ethereum-based blockchains and <a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">Bitcoins’. /nEthereum is a “smart” crypto-powered network - a decentralized (no single authority-possessing) global node of computers, if you will.</strong> On it, people are able to create various applications, including smart contracts. Bitcoins’ blockchain network, is, let’s call it - the dumb one, because of its lack of smart functionality. So, no smart contracts on a Bitcoin network.</p>\n<p>Namely, on Ethereum, smart contracts are built with the help of <strong>Solidity</strong> - a programming language that was specifically designed for developers working with the Ethereum network. These developers receive the criteria for a smart contract (for example, “if Sam pays me $10, I will send Sam the article”), and then create it by using Solidity. Essentially, a smart contract is basically an <strong>“IF something happens, THEN do this”</strong> function.</p>\n<p>When a smart contract is created, it needs to be deployed on the network. Once that happens, the contract becomes active, and the terms of the contract can be executed.</p>\n<p style=\"text-align: center;\"><img title=\"What are smart contracts: How do smart contracts work?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-4.o.jpg/" alt=\"What are smart contracts: How do smart contracts work?\" width=\"1000\" height=\"400\" /></p>\n<p>As I’ve mentioned earlier, <strong>smart contracts work in an automatic manner</strong>. This means that, once they’re deployed, developers won’t need to add or change anything else - if the terms of the contract are met, it will perform its intended function.</p>\n<p>Furthermore, I would like to reiterate the fact that smart contracts are <strong>immutable</strong> - in other words, they can't be changed. This makes them secure and reliable, as long as the conditions by which they were deployed were checked and verified to be fair.</p>\n<p>That said, you might be wondering - WHY can’t smart contracts be tampered with? Specifically, how is this ensured?</p>\n<p>Well, this is thanks to blockchain technology. I won’t go too in-depth with the technical stuff on how that works, since it’s an entire section of its own, but in essence, in order to change the terms of a smart contract once it’s deployed, <strong>you’d need to be in command of at least 51% of the blockchain that the contract is based on</strong> - this is practically impossible.</p>\n<p>And also if you’d like to find out more about how <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">blockchains work, make sure to check out the section on the topic.</p>\n<h2>What Can Smart Contracts Be Used for?</h2>\n<p>So - thus far, we’ve covered what smart contracts are, and also how they perform the processes that they do. As a final point, let’s take a look at some examples of what these pieces of technology can be used for.</p>\n<p>For starters, let’s say that you’re a farmer who wants to insure their crops, in case there’s a drought this year. The insurance company uses a smart contract for your insurance, with these terms:</p>\n<p><strong>“If the air temperature between the months A and B is above 90 degrees Fahrenheit for at least C amount of days, consecutively, pay out the farmer X amount of money.”</strong></p>\n<p>The insurance company would then make the smart contract track the local weather news platforms that have high reliability. Thus, the entire process would be automatized - <strong>if there was a drought that year, you would automatically receive your insurance payout!</strong></p>\n<p style=\"text-align: center;\"><strong><img title=\"What are smart contracts: What are smart contracts used for?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-5.o.jpg/" alt=\"What are smart contracts: What are smart contracts used for?\" width=\"999\" height=\"368\" /></strong></p>\n<p>And what's most important is that nobody ever will change the rules you, as the farmer, agreed to.</p>\n<p>Here’s another example - imagine that you want to receive a yearly bonus in your job, and are trying to negotiate it with your boss. Your boss lays down the requirements that you need to meet in order to receive that bonus and gives you a deadline. He also creates a smart contract that states:</p>\n<p><strong>“If A performs B, C, and D tasks until December 31st, 2022, A receives a bonus of X amount of money.”</strong></p>\n<p>In a situation like this, you know that you will DEFINITELY receive the bonus, if you meet all of the requirements by the end of the year - after all, once the smart contract is created, there’s no turning back! <em>And your crazy boss will never change his opinion just because of bad weather!</em></p>\n<p style=\"text-align: center;\"><em><img title=\"What are smart contracts: An example of using a smart contract.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-smart-contract-6.o.jpg/" alt=\"What are smart contracts: An example of using a smart contract.\" width=\"1000\" height=\"339\" /></em></p>\n<p>These are just a couple of examples that illustrate the potential of smart contract technology. Truth be told, the opportunities for smart contract application are vast - this technology can be incorporated into a huge variety of different areas, and, frankly, <strong>smart contracts are making their way into the mainstream</strong>, as we speak!</p>\n<p>So, in this section, we’ve covered all of the essential information that you need to know about smart contracts - what they are, how they work, and the variety of different ways of how we can use them. If you would like to learn about various crypto topics - check out our section about <a href=https://www.bitdegree.org/"/crypto/learn/what-are-nfts/">NFTs.
","preview_url":"https://www.bitdegree.org/crypto/learn/what-are-smart-contracts","youtube_video":{"id":7,"channel_id":1,"sort":57,"video_title":"What is a Smart Contract? (Explained with Animations)","description":"What is a Smart Contract?\n\nSmart contracts are automated agreements between two or more parties for something to happen. Essentially, they are blockchain-based lines of code that allow users to perform transactions without a middleman, or some sort of a third-party escrow service provider.\n\nApplication options for smart contracts are vast, and the use cases for this piece of blockchain technology are expanding every single day. If you want to learn about the awesome areas where smart contracts can be used, you’ll find all of the relevant information in my video! I will also explain how smart contracts work, in the simplest way possible.\n\nWhat do you think smart contracts can be used for, as far as daily chores and activities go? Share your opinions in the comments below!\n\nVideo Time Table:\n\n00:00 Introduction to What Are Smart Contracts\n1:08 What Are Smart Contracts?\n2:51 What is the Core Purpose of Smart Contracts?\n5:40 How Do Smart Contracts Work?\n8:21 What Are Smart Contracts Used For?\n10:10 Wrap-up: What Are Smart Contracts?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#SmartContract #SmartContracts #WhatisaSmartContract #WhatAreSmartContracts #SmartContractsBlockchain #SmartContractsExplained","video_id":"0VCMtKx9AxU","duration":660,"view_count":942,"thumbnail_url":"https://i.ytimg.com/vi/0VCMtKx9AxU/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-01-31 08:51:06","created_at":"2022-02-21T13:20:28.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"chapterTitle":"dApps & Defi","cryptoBookSection":{"id":12,"featured_image_id":6502,"original_id":null,"youtube_video_id":1,"author_id":42,"translator_id":null,"chapter_id":6,"title":"The Notion of a Decentralized Autonomous Ogranization (DAO)","slug":"what-is-a-dao-in-crypto","definition":"Did you know that the term \"decentralized autonomous organization\" was initially used to characterize multi-agent systems in an Internet-of-things (IoT) context in the 1990s?","status":"published","content":"<p>In this section, I will tell you <strong>what is a DAO in crypto!</strong></p>\n<p>If you’re an avid coffee lover just like I am, chances are that, at some point in your life, you’re going to purchase a modern coffee machine. A single press of a button, and you’ve got your coffee made! While the machine does all of the work for you, though, you still need to clean it, refill it with water, add coffee beans, and perform general maintenance.</p>\n<p>In essence, this example is the perfect illustration of how DAOs work. In this section, I’ll explain the concept of a DAO in simple-to-understand terms, and we’ll also discuss why DAOs are important in the world of cryptocurrencies, in general!</p>\n<p><em>So, let’s get to it!</em></p>\n<h2>What is a DAO?</h2>\n<p>First things first - what is a DAO, in the first place?</p>\n<p>DAO abbreviates as a “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-decentralized-autonomous-organizations-dao/">Decentralized Autonomous Organization</strong></a>”. Three very big words, but when you break them down, the concept itself is rather simple.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-1.o.jpg/" alt=\"What is a DAO in crypto: Decentralized Autonomous Organization.\" width=\"800\" height=\"443\" /></p>\n<p>“<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralization/">Decentralization” is something I’ve covered quite a few times already - if you’re interested in studying the concept in-depth, you should check out the previous sections. To put it shortly, though, decentralization refers to <strong>something lacking a single, central authority</strong> - imagine a company without a CEO where all of the employees are equally responsible for making decisions!</p>\n<p><strong>Autonomous</strong> is a fancy way of saying “self-sufficient”. This refers to a system being able to complete certain processes without someone else intervening, and having to manually complete the process. Here, you can simply think about the earlier-mentioned coffee machine example - once you press the button, you don’t need to push and pull any more levers, or grind the coffee beans by hand - the machine does all of the work for you in an automatic manner.</p>\n<p>Lastly, in this context, “<strong>organization</strong>” references the fact that there is a group of people making the decisions. So, when you add all of that together, <strong>DAO simply stands for a group of individuals who are concerned with some sort of an active project and are responsible for making decisions, changes, and upgrades to that said project.</strong></p>\n<p>In all honesty, the example of the coffee machine is the perfect visualization here. The machine works by itself - just as I’ve stated earlier, you do not need to do anything after pushing the “Start” button! Simply sit back, and wait until the machine does its job.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-2.o.jpg/" alt=\"What is a DAO in crypto: An example with a coffee machine.\" width=\"801\" height=\"554\" /></p>\n<p>In the cryptocurrency world, the equivalent of this would be a <strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">smart contract</a>.</strong> Smart contracts are special programmed agreements that allow for certain processes to happen automatically, without the need for a human to intervene.</p>\n<p>In the same way how you turn on your coffee machine, and the rest of the processes happen automatically, smart contracts allow users to participate in multiple different processes - cryptocurrency trading, lending and borrowing money, trustless gambling, and so much more. If you’d like to learn more about smart contracts, make sure to check out the section <strong>\"<a href=https://www.bitdegree.org/"/crypto/learn/what-are-smart-contracts/">What are Smart Contracts?</a>\"</strong>.</p>\n<p><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">Going back to the coffee machine example, even though all of its processes are automatic, every once in a while, you are going to need to clean the machine & its filters, fill its water tank, and perform general maintenance, too. Well, the same can be said about smart contracts, as well!</span></p>\n<p>In order to perform certain updates and programmable changes to the contract, and to take care of the project behind it, in general, you have DAOs - groups of people who all vote on proposed changes to their respective network, and implement them, if <strong>a</strong> <strong>mutual decision</strong> is made.</p>\n<h2>How Do DAOs Work?</h2>\n<p>Now that you have a bit of a better idea of what is a DAO, you might naturally wonder - how do they work?</p>\n<p>Well, the underlying idea behind DAOs is actually pretty simple. However, we’re going to touch on a bit of <strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-tokenomics/">tokenomics - if this term isn’t familiar to you, or you don’t understand how blockchains work, fundamentally, I would strongly advise you to check out the section <strong>\"<a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">What is the Blockchain?</a>\"</strong>, before reading further. That will give you a better understanding of what to expect when it comes to DAOs.</p>\n<p>Now, think about the last time you and your friends got together at someone’s place, for a casual hangout. At some point in time, someone asked the big question - should you order pizza or Chinese food?</p>\n<p>Well, there’s only one way to settle this question, in a civil fashion - you and your friends decided to vote! In this situation, there was no central entity who would come and make the decision for the entire group - instead, each member of the friends’ group votes, and gets to be a part of the decision-making process.</p>\n<p>This is essentially how a DAO functions. Well, it’s a bit more complex than that, but the general idea is the same.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-3.o.jpg/" alt=\"What is a DAO in crypto: How do DAOs work?\" width=\"800\" height=\"593\" /></p>\n<p>For starters, in order for a DAO to form around a specific crypto project, there needs to be a <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-token/">token <strong>associated with that project.</strong> By the way, there is a <strong><a href=https://www.bitdegree.org/"/crypto/learn/coin-vs-token/">section about tokens</a></strong>, and how they differ from <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-coin/">crypto coins</strong></a>, too - you can check it out if you want to understand tokens a bit better!</p>\n<p>But in regards to DAOs, tokens are like <strong>voting ballots. </strong>The more tokens each individual in the DAO has, the stronger will their vote become.</p>\n<p>Think of the same pizza VS Chinese food example discussed earlier. Let’s say, some of your friends simply have a huge craving for pizza -<em> I know I would be one of those friends.</em> Well, in this case, you might feel bad for them, if you do end up ordering Chinese - those friends simply “sway” the rest of the group’s decision!</p>\n<p>While there’s no “feeling bad” or “swaying” with DAOs, <strong>individuals with a larger collection of tokens</strong> are going to have <strong>more influential votes,</strong> nonetheless. In the vast majority of cases, the tokens can be acquired by purchasing or trading them on a <strong><a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-exchange/">cryptocurrency exchange</a>.</strong></p>\n<h2>Why are DAOs Important?</h2>\n<p>Now that you have a better understanding of what is a DAO in crypto, and can comprehend how these DAOs work, in the first place, the big question that remains is simple - why do DAOs exist, and why are they even important?</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-4.o.jpg/" alt=\"What is a DAO in crypto: Why are DAOs important?\" width=\"800\" height=\"507\" /></p>\n<p>With time, the communities behind crypto projects have understood that the concept of a DAO is actually essential for any long-term decentralized ecosystem to prosper, and retain its decentralized features.</p>\n<p>The core feature of a DAO is <strong>decision-making.</strong> Namely, DAOs are responsible for all of the core decisions that might involve the crypto project - this is true with some sort of changes, upgrades and updates, new features, token logic tweaks, and so on, and so forth.</p>\n<p><img title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-5.o.jpg/" alt=\"What is a DAO in crypto: Decision-making.\" width=\"800\" height=\"246\" /></p>\n<p>The biggest benefit of a DAO, in this regard, is the fact that all of these decisions are going to be <strong>completely trustless. </strong>In other words, they won’t be made by a single person who might have some selfish intentions in mind, but rather, by the actual community behind the project.</p>\n<p>Imagine that you have your favorite coffee shop - one that you’ve been visiting for a few years now. The shop would serve some amazing coffee, and have great music playing in the background. One day, the shop owner makes a deal with a new coffee bean provider - while this provider isn’t known for the best quality coffee beans on the market, they sell them very cheap.</p>\n<p>The coffee shop owner wants to maximize his profits - thus, he makes the deal to sell coffee that’s made exclusively from the beans supplied by said provider.</p>\n<p><em>And, well… The new coffee sucks!</em></p>\n<p>Well, if the shop was owned by a DAO, this decision would have been <strong>put to a vote.</strong> If the community behind the coffee shop decided that a tiny increase in profits in the short term isn’t worth losing out on loyal customers, long-term, the decision would be made to reject the offer made by the bean provider.</p>\n<p>All of that is to say - with a DAO making the decisions on certain questions regarding the crypto project, there’s a much higher chance that the “right” decision will be made, instead of one that would maximize the profits, short-term, but lead to horrible customer experiences and “selling out”.</p>\n<p>Another benefit - and also a shortcoming, in a way - is the fact that DAOs operate in an <strong>open-source manner. </strong>What this means is that their processes can be viewed at any point in time, and the integrity of their decisions (and, following that - code) can be inspected by anybody. The shortcoming here is that DAOs then become <strong>vulnerable to external attacks</strong> - since everything is out there, in the open, malicious third parties might spot a loophole, and take advantage of it.</p>\n<p>Lastly, it’s also worth mentioning that the token voting system is sometimes brought in question, as well. As I’ve told you earlier, DAO members vote on changes and upgrades of a project with their tokens. Meaning that <strong>the more tokens you have, the more votes you will be able to cast, </strong>as well.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-6.o.jpg/" alt=\"What is a DAO in crypto: More tokens – more votes.\" width=\"800\" height=\"455\" /></p>\n<p>What this might lead to is a big player coming in, buying up an exponential amount of tokens, and thus, creating a sort of centralized environment - their votes would then be the ones that would sway decisions the most. Naturally, many DAOs tend to have safety measures against something like this happening, but the concern is still out there.</p>","meta_title":"What is a DAO in Crypto and Why is It Important?","meta_description":"Looking for a simple but informative explanation of what is a DAO in crypto? You'll find that explained here with simple everyday examples!","meta_keywords":"what is a dao, what is a dao in crypto, what is a dao nft, dao definition, what does dao mean","order":7,"language":"en","created_at":"2022-05-03T08:51:29.000000Z","updated_at":"2023-03-10T08:17:31.000000Z","modified_content":"<p>In this section, I will tell you <strong>what is a DAO in crypto!</strong></p>\n<p>If you’re an avid coffee lover just like I am, chances are that, at some point in your life, you’re going to purchase a modern coffee machine. A single press of a button, and you’ve got your coffee made! While the machine does all of the work for you, though, you still need to clean it, refill it with water, add coffee beans, and perform general maintenance.</p>\n<p>In essence, this example is the perfect illustration of how DAOs work. In this section, I’ll explain the concept of a DAO in simple-to-understand terms, and we’ll also discuss why DAOs are important in the world of cryptocurrencies, in general!</p>\n<p><em>So, let’s get to it!</em></p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"What is a DAO in Crypto? (Animated Explanation)\"\n title=\"What is a DAO in Crypto? (Animated Explanation)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: The Notion of a Decentralized Autonomous Ogranization (DAO)</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"The Notion of a Decentralized Autonomous Ogranization (DAO)\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"toSViQmtqFQ\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">What is a DAO in Crypto? (Animated Explanation)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/toSViQmtqFQ/hq720.jpg/"/n alt=\"What is a DAO in Crypto? (Animated Explanation)\"\n title=\"What is a DAO in Crypto? (Animated Explanation)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"What is a DAO in Crypto? (Animated Explanation)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"toSViQmtqFQ\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What is a DAO?</h2>\n<p>First things first - what is a DAO, in the first place?</p>\n<p>DAO abbreviates as a “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-decentralized-autonomous-organizations-dao/">Decentralized Autonomous Organization</strong></a>”. Three very big words, but when you break them down, the concept itself is rather simple.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-1.o.jpg/" alt=\"What is a DAO in crypto: Decentralized Autonomous Organization.\" width=\"800\" height=\"443\" /></p>\n<p>“<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralization/">Decentralization” is something I’ve covered quite a few times already - if you’re interested in studying the concept in-depth, you should check out the previous sections. To put it shortly, though, decentralization refers to <strong>something lacking a single, central authority</strong> - imagine a company without a CEO where all of the employees are equally responsible for making decisions!</p>\n<p><strong>Autonomous</strong> is a fancy way of saying “self-sufficient”. This refers to a system being able to complete certain processes without someone else intervening, and having to manually complete the process. Here, you can simply think about the earlier-mentioned coffee machine example - once you press the button, you don’t need to push and pull any more levers, or grind the coffee beans by hand - the machine does all of the work for you in an automatic manner.</p>\n<p>Lastly, in this context, “<strong>organization</strong>” references the fact that there is a group of people making the decisions. So, when you add all of that together, <strong>DAO simply stands for a group of individuals who are concerned with some sort of an active project and are responsible for making decisions, changes, and upgrades to that said project.</strong></p>\n<p>In all honesty, the example of the coffee machine is the perfect visualization here. The machine works by itself - just as I’ve stated earlier, you do not need to do anything after pushing the “Start” button! Simply sit back, and wait until the machine does its job.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-2.o.jpg/" alt=\"What is a DAO in crypto: An example with a coffee machine.\" width=\"801\" height=\"554\" /></p>\n<p>In the cryptocurrency world, the equivalent of this would be a <strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-smart-contract/">smart contract</a>.</strong> Smart contracts are special programmed agreements that allow for certain processes to happen automatically, without the need for a human to intervene.</p>\n<p>In the same way how you turn on your coffee machine, and the rest of the processes happen automatically, smart contracts allow users to participate in multiple different processes - cryptocurrency trading, lending and borrowing money, trustless gambling, and so much more. If you’d like to learn more about smart contracts, make sure to check out the section <strong>\"<a href=https://www.bitdegree.org/"/crypto/learn/what-are-smart-contracts/">What are Smart Contracts?</a>\"</strong>.</p>\n<p><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">Going back to the coffee machine example, even though all of its processes are automatic, every once in a while, you are going to need to clean the machine & its filters, fill its water tank, and perform general maintenance, too. Well, the same can be said about smart contracts, as well!</span></p>\n<p>In order to perform certain updates and programmable changes to the contract, and to take care of the project behind it, in general, you have DAOs - groups of people who all vote on proposed changes to their respective network, and implement them, if <strong>a</strong> <strong>mutual decision</strong> is made.</p>\n<h2>How Do DAOs Work?</h2>\n<p>Now that you have a bit of a better idea of what is a DAO, you might naturally wonder - how do they work?</p>\n<p>Well, the underlying idea behind DAOs is actually pretty simple. However, we’re going to touch on a bit of <strong><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-tokenomics/">tokenomics - if this term isn’t familiar to you, or you don’t understand how blockchains work, fundamentally, I would strongly advise you to check out the section <strong>\"<a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">What is the Blockchain?</a>\"</strong>, before reading further. That will give you a better understanding of what to expect when it comes to DAOs.</p>\n<p>Now, think about the last time you and your friends got together at someone’s place, for a casual hangout. At some point in time, someone asked the big question - should you order pizza or Chinese food?</p>\n<p>Well, there’s only one way to settle this question, in a civil fashion - you and your friends decided to vote! In this situation, there was no central entity who would come and make the decision for the entire group - instead, each member of the friends’ group votes, and gets to be a part of the decision-making process.</p>\n<p>This is essentially how a DAO functions. Well, it’s a bit more complex than that, but the general idea is the same.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-3.o.jpg/" alt=\"What is a DAO in crypto: How do DAOs work?\" width=\"800\" height=\"593\" /></p>\n<p>For starters, in order for a DAO to form around a specific crypto project, there needs to be a <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-token/">token <strong>associated with that project.</strong> By the way, there is a <strong><a href=https://www.bitdegree.org/"/crypto/learn/coin-vs-token/">section about tokens</a></strong>, and how they differ from <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-coin/">crypto coins</strong></a>, too - you can check it out if you want to understand tokens a bit better!</p>\n<p>But in regards to DAOs, tokens are like <strong>voting ballots. </strong>The more tokens each individual in the DAO has, the stronger will their vote become.</p>\n<p>Think of the same pizza VS Chinese food example discussed earlier. Let’s say, some of your friends simply have a huge craving for pizza -<em> I know I would be one of those friends.</em> Well, in this case, you might feel bad for them, if you do end up ordering Chinese - those friends simply “sway” the rest of the group’s decision!</p>\n<p>While there’s no “feeling bad” or “swaying” with DAOs, <strong>individuals with a larger collection of tokens</strong> are going to have <strong>more influential votes,</strong> nonetheless. In the vast majority of cases, the tokens can be acquired by purchasing or trading them on a <strong><a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-exchange/">cryptocurrency exchange</a>.</strong></p>\n<h2>Why are DAOs Important?</h2>\n<p>Now that you have a better understanding of what is a DAO in crypto, and can comprehend how these DAOs work, in the first place, the big question that remains is simple - why do DAOs exist, and why are they even important?</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-4.o.jpg/" alt=\"What is a DAO in crypto: Why are DAOs important?\" width=\"800\" height=\"507\" /></p>\n<p>With time, the communities behind crypto projects have understood that the concept of a DAO is actually essential for any long-term decentralized ecosystem to prosper, and retain its decentralized features.</p>\n<p>The core feature of a DAO is <strong>decision-making.</strong> Namely, DAOs are responsible for all of the core decisions that might involve the crypto project - this is true with some sort of changes, upgrades and updates, new features, token logic tweaks, and so on, and so forth.</p>\n<p><img title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-5.o.jpg/" alt=\"What is a DAO in crypto: Decision-making.\" width=\"800\" height=\"246\" /></p>\n<p>The biggest benefit of a DAO, in this regard, is the fact that all of these decisions are going to be <strong>completely trustless. </strong>In other words, they won’t be made by a single person who might have some selfish intentions in mind, but rather, by the actual community behind the project.</p>\n<p>Imagine that you have your favorite coffee shop - one that you’ve been visiting for a few years now. The shop would serve some amazing coffee, and have great music playing in the background. One day, the shop owner makes a deal with a new coffee bean provider - while this provider isn’t known for the best quality coffee beans on the market, they sell them very cheap.</p>\n<p>The coffee shop owner wants to maximize his profits - thus, he makes the deal to sell coffee that’s made exclusively from the beans supplied by said provider.</p>\n<p><em>And, well… The new coffee sucks!</em></p>\n<p>Well, if the shop was owned by a DAO, this decision would have been <strong>put to a vote.</strong> If the community behind the coffee shop decided that a tiny increase in profits in the short term isn’t worth losing out on loyal customers, long-term, the decision would be made to reject the offer made by the bean provider.</p>\n<p>All of that is to say - with a DAO making the decisions on certain questions regarding the crypto project, there’s a much higher chance that the “right” decision will be made, instead of one that would maximize the profits, short-term, but lead to horrible customer experiences and “selling out”.</p>\n<p>Another benefit - and also a shortcoming, in a way - is the fact that DAOs operate in an <strong>open-source manner. </strong>What this means is that their processes can be viewed at any point in time, and the integrity of their decisions (and, following that - code) can be inspected by anybody. The shortcoming here is that DAOs then become <strong>vulnerable to external attacks</strong> - since everything is out there, in the open, malicious third parties might spot a loophole, and take advantage of it.</p>\n<p>Lastly, it’s also worth mentioning that the token voting system is sometimes brought in question, as well. As I’ve told you earlier, DAO members vote on changes and upgrades of a project with their tokens. Meaning that <strong>the more tokens you have, the more votes you will be able to cast, </strong>as well.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-dao-in-crypto-6.o.jpg/" alt=\"What is a DAO in crypto: More tokens – more votes.\" width=\"800\" height=\"455\" /></p>\n<p>What this might lead to is a big player coming in, buying up an exponential amount of tokens, and thus, creating a sort of centralized environment - their votes would then be the ones that would sway decisions the most. Naturally, many DAOs tend to have safety measures against something like this happening, but the concern is still out there.</p>","preview_url":"https://www.bitdegree.org/crypto/learn/what-is-a-dao-in-crypto","youtube_video":{"id":1,"channel_id":1,"sort":51,"video_title":"What is a DAO in Crypto? (Animated Explanation)","description":"What is a “DAO” in crypto?\n\nDAO abbreviates as a “Decentralized Autonomous Organization”. In short, DAOs are groups of people who vote for changes and upgrades to be made on specific cryptocurrency-powered projects.\n\nWhile the concept of a DAO might sound complicated at first, when broken down correctly, it’s actually rather simple, from a fundamental standpoint. In this video, I will tell you about DAOs in a simple-to-understand manner. You will also be able to learn how DAOs work, and why are they important in the world of crypto, too!\n\nDo you know any cool DAO-powered projects? Share them with the rest of us, in the comment section below!\n\nVideo Time Table:\n\n0:00 Introduction to What is a DAO in Crypto\n0:53 What is a DAO?\n3:23 How do DAOs Work?\n5:20 Why are DAOs Important?\n8:10 Wrap-up: What is a DAO in Crypto?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#DAO #WhatisaDAO #WhatisaDAOinCrypto #WhatisaDAONFT #DAODefinition #WhatDoesDAOMean","video_id":"toSViQmtqFQ","duration":502,"view_count":610,"thumbnail_url":"https://i.ytimg.com/vi/toSViQmtqFQ/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-02-18 13:12:38","created_at":"2022-02-21T13:20:28.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}},"featured_image":{"id":6502,"uuid":"e58df8a9-b000-4267-91f3-bd0d697c8984","public_url":"https://assets.bitdegree.org/crypto/storage/media/what-is-a-dao-in-crypto.o.jpg","path":"crypto/storage/media/what-is-a-dao-in-crypto.o.jpg","original_path":"crypto/storage/media/what-is-a-dao-in-crypto.jpg","name":"what-is-a-dao-in-crypto.o.jpg","original_name":"what-is-a-dao-in-crypto.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"79.33KB"}},"chapterList":[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/learn-blockchain.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/blockchain-101.jpg","rating":100,"sections":[{"slug":"what-is-blockchain","title":"What is the Blockchain?","featured_image_id":6412,"status":"published","chapter_id":1,"language":"en","order":1,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/what-is-blockchain","featured_image":{"id":6412,"uuid":"152ba579-ce8d-488a-9e06-bcd99e976b7d","public_url":"https://assets.bitdegree.org/crypto/storage/media/what-is-blockchain-626fbe085a0cd.o.jpg","path":"crypto/storage/media/what-is-blockchain-626fbe085a0cd.o.jpg","original_path":"crypto/storage/media/what-is-blockchain-626fbe085a0cd.jpg","name":"what-is-blockchain-626fbe085a0cd.o.jpg","original_name":"what-is-blockchain.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"93.86KB"},"youtube_video":null},{"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","featured_image_id":7205,"status":"published","chapter_id":1,"language":"en","order":2,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/decentralized-blockchain","featured_image":{"id":7205,"uuid":"c5d6f6a7-4914-4d6b-9fdd-e94dfb0bae82","public_url":"https://assets.bitdegree.org/crypto/storage/media/decentralized-blockchain-featured-image.o.jpg","path":"crypto/storage/media/decentralized-blockchain-featured-image.o.jpg","original_path":"crypto/storage/media/decentralized-blockchain-featured-image.jpg","name":"decentralized-blockchain-featured-image.o.jpg","original_name":"decentralized-blockchain-featured-image.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"136.00KB"},"youtube_video":null},{"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","featured_image_id":7397,"status":"published","chapter_id":1,"language":"en","order":3,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/blockchain-transaction","featured_image":{"id":7397,"uuid":"e60dff45-4c5d-4b44-a2c1-a27e49f700e7","public_url":"https://assets.bitdegree.org/crypto/storage/media/blockchain-transaction-featured-mage.o.jpg","path":"crypto/storage/media/blockchain-transaction-featured-mage.o.jpg","original_path":"crypto/storage/media/blockchain-transaction-featured-mage.jpg","name":"blockchain-transaction-featured-mage.o.jpg","original_name":"blockchain-transaction-featured-mage.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"85.83KB"},"youtube_video":null},{"slug":"crypto-fees","title":"The Different Types of Crypto Fees 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Terms","updated":false,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/crypto-101-glossary.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/crypto-glossary-101.jpg","rating":100,"sections":["A","B","C","D","E","F","G","H","I","J","K","L","M","N","O","P","Q","R","S","T","U","V","W","X","Y","Z"]}],"currentChapter":"dapps-and-defi","currentSection":"what-is-a-dao-in-crypto","readingTime":8,"readingLevel":"medium"},"url":"/crypto/learn/what-is-a-dao-in-crypto","version":"cdd198d50cbe5c9c21c9329d7c096ffc"}" class="container-fluid d-flex crypto-book p-0"> Chapter 6: dApps & Defi
The Notion of a Decentralized Autonomous Ogranization (DAO)
Did you know that the term "decentralized autonomous organization" was initially used to characterize multi-agent systems in an Internet-of-things (IoT) context in the 1990s?
In this section, I will tell you what is a DAO in crypto!
If you’re an avid coffee lover just like I am, chances are that, at some point in your life, you’re going to purchase a modern coffee machine. A single press of a button, and you’ve got your coffee made! While the machine does all of the work for you, though, you still need to clean it, refill it with water, add coffee beans, and perform general maintenance.
In essence, this example is the perfect illustration of how DAOs work. In this section, I’ll explain the concept of a DAO in simple-to-understand terms, and we’ll also discuss why DAOs are important in the world of cryptocurrencies, in general!
So, let’s get to it!
Video Explainer
Video Explainer: The Notion of a Decentralized Autonomous Ogranization (DAO)
Reading is not your thing? Watch the "The Notion of a Decentralized Autonomous Ogranization (DAO)" video explainer
What is a DAO?
First things first - what is a DAO, in the first place?
DAO abbreviates as a “Decentralized Autonomous Organization”. Three very big words, but when you break them down, the concept itself is rather simple.
“Decentralization” is something I’ve covered quite a few times already - if you’re interested in studying the concept in-depth, you should check out the previous sections. To put it shortly, though, decentralization refers to something lacking a single, central authority - imagine a company without a CEO where all of the employees are equally responsible for making decisions!
Autonomous is a fancy way of saying “self-sufficient”. This refers to a system being able to complete certain processes without someone else intervening, and having to manually complete the process. Here, you can simply think about the earlier-mentioned coffee machine example - once you press the button, you don’t need to push and pull any more levers, or grind the coffee beans by hand - the machine does all of the work for you in an automatic manner.
Lastly, in this context, “organization” references the fact that there is a group of people making the decisions. So, when you add all of that together, DAO simply stands for a group of individuals who are concerned with some sort of an active project and are responsible for making decisions, changes, and upgrades to that said project.
In all honesty, the example of the coffee machine is the perfect visualization here. The machine works by itself - just as I’ve stated earlier, you do not need to do anything after pushing the “Start” button! Simply sit back, and wait until the machine does its job.
In the cryptocurrency world, the equivalent of this would be a smart contract. Smart contracts are special programmed agreements that allow for certain processes to happen automatically, without the need for a human to intervene.
In the same way how you turn on your coffee machine, and the rest of the processes happen automatically, smart contracts allow users to participate in multiple different processes - cryptocurrency trading, lending and borrowing money, trustless gambling, and so much more. If you’d like to learn more about smart contracts, make sure to check out the section "What are Smart Contracts?".
Going back to the coffee machine example, even though all of its processes are automatic, every once in a while, you are going to need to clean the machine & its filters, fill its water tank, and perform general maintenance, too. Well, the same can be said about smart contracts, as well!
In order to perform certain updates and programmable changes to the contract, and to take care of the project behind it, in general, you have DAOs - groups of people who all vote on proposed changes to their respective network, and implement them, if a mutual decision is made.
How Do DAOs Work?
Now that you have a bit of a better idea of what is a DAO, you might naturally wonder - how do they work?
Well, the underlying idea behind DAOs is actually pretty simple. However, we’re going to touch on a bit of tokenomics - if this term isn’t familiar to you, or you don’t understand how blockchains work, fundamentally, I would strongly advise you to check out the section "What is the Blockchain?", before reading further. That will give you a better understanding of what to expect when it comes to DAOs.
Now, think about the last time you and your friends got together at someone’s place, for a casual hangout. At some point in time, someone asked the big question - should you order pizza or Chinese food?
Well, there’s only one way to settle this question, in a civil fashion - you and your friends decided to vote! In this situation, there was no central entity who would come and make the decision for the entire group - instead, each member of the friends’ group votes, and gets to be a part of the decision-making process.
This is essentially how a DAO functions. Well, it’s a bit more complex than that, but the general idea is the same.
For starters, in order for a DAO to form around a specific crypto project, there needs to be a token associated with that project. By the way, there is a section about tokens, and how they differ from crypto coins, too - you can check it out if you want to understand tokens a bit better!
But in regards to DAOs, tokens are like voting ballots. The more tokens each individual in the DAO has, the stronger will their vote become.
Think of the same pizza VS Chinese food example discussed earlier. Let’s say, some of your friends simply have a huge craving for pizza - I know I would be one of those friends. Well, in this case, you might feel bad for them, if you do end up ordering Chinese - those friends simply “sway” the rest of the group’s decision!
While there’s no “feeling bad” or “swaying” with DAOs, individuals with a larger collection of tokens are going to have more influential votes, nonetheless. In the vast majority of cases, the tokens can be acquired by purchasing or trading them on a cryptocurrency exchange.
Why are DAOs Important?
Now that you have a better understanding of what is a DAO in crypto, and can comprehend how these DAOs work, in the first place, the big question that remains is simple - why do DAOs exist, and why are they even important?
With time, the communities behind crypto projects have understood that the concept of a DAO is actually essential for any long-term decentralized ecosystem to prosper, and retain its decentralized features.
The core feature of a DAO is decision-making. Namely, DAOs are responsible for all of the core decisions that might involve the crypto project - this is true with some sort of changes, upgrades and updates, new features, token logic tweaks, and so on, and so forth.
The biggest benefit of a DAO, in this regard, is the fact that all of these decisions are going to be completely trustless. In other words, they won’t be made by a single person who might have some selfish intentions in mind, but rather, by the actual community behind the project.
Imagine that you have your favorite coffee shop - one that you’ve been visiting for a few years now. The shop would serve some amazing coffee, and have great music playing in the background. One day, the shop owner makes a deal with a new coffee bean provider - while this provider isn’t known for the best quality coffee beans on the market, they sell them very cheap.
The coffee shop owner wants to maximize his profits - thus, he makes the deal to sell coffee that’s made exclusively from the beans supplied by said provider.
And, well… The new coffee sucks!
Well, if the shop was owned by a DAO, this decision would have been put to a vote. If the community behind the coffee shop decided that a tiny increase in profits in the short term isn’t worth losing out on loyal customers, long-term, the decision would be made to reject the offer made by the bean provider.
All of that is to say - with a DAO making the decisions on certain questions regarding the crypto project, there’s a much higher chance that the “right” decision will be made, instead of one that would maximize the profits, short-term, but lead to horrible customer experiences and “selling out”.
Another benefit - and also a shortcoming, in a way - is the fact that DAOs operate in an open-source manner. What this means is that their processes can be viewed at any point in time, and the integrity of their decisions (and, following that - code) can be inspected by anybody. The shortcoming here is that DAOs then become vulnerable to external attacks - since everything is out there, in the open, malicious third parties might spot a loophole, and take advantage of it.
Lastly, it’s also worth mentioning that the token voting system is sometimes brought in question, as well. As I’ve told you earlier, DAO members vote on changes and upgrades of a project with their tokens. Meaning that the more tokens you have, the more votes you will be able to cast, as well.
What this might lead to is a big player coming in, buying up an exponential amount of tokens, and thus, creating a sort of centralized environment - their votes would then be the ones that would sway decisions the most. Naturally, many DAOs tend to have safety measures against something like this happening, but the concern is still out there.
