DAO’s (Decentralized Autonomous Organizations) use smart contracts to encode their ground rules and the foundation of their organization and its functionality. These blockchain-based rules baked into the code also decide how the funds are spent. By using Smart Contracts, DAOs aim to remove the ability of one person (CEO, CFO) to make unilateral decisions that affect the entire organization. If Smart Contracts are the backbone and foundation of the DAO, what exactly are Smart Contracts, and how do they work?
A Smart Contract is a self-executing program that automates the actions required in an agreement or contract and removes the necessity of the 3rd party intermediary in a transaction. In our current digital world, there is always a 3rd party. Want to sell an item? Use Craigslist or eBay. Want to sell your skills? Use Fiverr or Upwork. Want to share a picture with a friend or send a message? Use Facebook, What’s App, Instagram, etc. Using a Smart Contract removes this intermediary and removes the issue of trust. In simple terms and situations, the buyer can provide the funds, which are then only released by the code--the Smart Contract--once the item or skills are provided.
This also works on a larger scale for business and organizations like a DAO. The Smart Contract permits trusted transactions and agreements to be carried out between different parties, anonymously if they wish, and from anywhere in the world, without the need for outside authority, or the legal system.
A Smart Contract is code scripts that contain if/then statements, functions, module imports and other programming that automate the actions specified by the parties of the contract and the original programmer. They do not contain legal language, terms, or agreements, only the code.
The original programmer of the Smart Contract writes very specific code, detailing how and when the funds of this Smart Contract can be used. Once the smart contract is out on the blockchain of the chosen platform (most commonly Ethereum), this effectively enforces the contract. All the conditions of the contract must be met before the funds can be used. Once the conditions are met and code is executed, the transactions are trackable and irreversible.