The DAO stands for Decentralized Autonomous Organization. As the name implies, it is an organization which is both autonomous and decentralized. Sometimes, it is also known as Decentralized Autonomous Corporation (DAC), but the term DAO is more often used because not all organizations are corporations.
A DAO is an organization which is represented by rules encoded as a computer program that is transparent, controlled by shareholders, and not influenced by the central government. A DAO is the most complex form of a smart contract. A smart contract is a computer program that autonomously exists on the internet, but at the same time, it needs people to perform a task that it can't do by itself.
A DAO's financial transaction record and program rules are maintained on a blockchain. Since DAO runs on a blockchain, and it's running on a distributed network, you can have multiple combinations of different parties exchanging value and reaching agreements. It means that, to a Decentralized Autonomous Organization, it doesn't matter that you are a human being or you are a robot. You can actually have devices communicating with devices, or devices communicating with people, or people communicating with people.
How does DAO work?
Decentralized Autonomous Organization runs through rules encoded as a computer program called Smart Contracts. A Smart Contract is an entity that lives on the internet and exists autonomously. It also has individuals to perform a certain task that the automation program itself cannot do.
Let us take an example of Uber to understand the working of DAO. Uber is an organization that allows you to call a car for yourself using a mobile app. Once you place your call, a driver will come up in a car, will pick you up and drive you to your destination. The app will take care of processing the payment, and the driver will be set off to go to the next rider. A mobile app runs the entire process. However, there is a human component, which is the driver that drives over and drives off.
Now, if you tie-in artificial intelligence, there is no reason to need a driver to come up and interact with you. You could have a self-driving car come over and pick you up. The whole thing is automated and self-executing so you can actually process the payment directly on the app and the car will interact with you directly, without requiring a human element. This type of process can be created into a Decentralized Autonomous Organization. Now, it doesn't necessarily mean that you need to be replaced by a computer. You could actually have multiple human beings on a distributed network, and those human beings will reach these agreements based on smart contracts between each other.