Inspired by the decentralization of cryptocurrencies, DAOs are entities without a central leadership and are essentially companies where its bylaws are written in code that automatically execute whenever a set of criteria are met. This promotes reliability, security, and trust in the system.
Smart contracts are the core of the DAO, which assure the transparency and security which DAOs base themselves on.
Blockchain and smart contracts are governance technologies that have the potential to provide higher levels of transparency while reducing bureaucracy with self-enforcing code.
(more about smart contract on this article — https://medium.com/@mirev89/trust-and-security-in-the-blockchain-part-3-blockchain-101-ad67784b2cd6)
Decisions get made from the bottom-up, governed by a community organized around a specific set of rules enforced on a blockchain hence making their functioning fully autonomous and transparent.
As they are built on open-source blockchains, anyone can view their code, and anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.
The Principal-Agent Dilemma — Source: Wikipedia
DAOs tackle an age-old problem of governance, which political scientists and economists refer to as the principal-agent dilemma.
This occurs when the agent of an organization has the power to make decisions on behalf of, or impacting, the principal — another person or entity in the organization.