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What is DAO (Decentralized Autonomous Organization)? Simple explanation for beginners!

Official | 2023.03.30

Text by Hinata official

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Recently, there are more opportunities to see the word “DAO” in relation to words such as crypto assets, NFTs, and metaverses.

Under such circumstances, even if you see the explanation of DAO = decentralized autonomous organization, there are probably some people who think, “I don’t quite understand it” or “I don’t know what’s so great after all…” .

In this article, I will explain DAO in an easy-to-understand manner while comparing it with existing organizations.

Let’s deepen our understanding of “DAO”, which is attracting attention from all over the world.

1. What are DAOs

DAO is an abbreviation for “Decentralized Autonomous Organization”, which literally means “decentralized autonomous organization”.

the termJapanese translationPronunciation *
DecentralizedDecentralizedDecentralized
AutonomousautonomyAutonomous
Organizationorganizationorganization
*It’s written in katakana, so it’s not the correct pronunciation.

In order to understand “decentralized and autonomous organization”, I will explain three characteristics.

  1. Organizational decision-making is user-driven
  2. The organization is operated based on the program
  3. Trusted for its high operational transparency

At first glance, it may seem difficult, but if you compare it with an existing organization, it will be easier to imagine, so let’s look at it while comparing it with a stock company.

(1) Features of DAO ①: Organizational decision-making is done by users

In the case of DAO, when deciding the direction and activities of the organization, the participating users vote. Governance tokens are often used for voting.

Governance tokens change the weight of votes depending on the amount of tokens held, and are similar to “stocks” in a corporation. Some governance tokens are traded on exchanges as crypto assets, so you can buy them like stocks to increase your holdings.

However, the big difference from stocks is that they are also granted by activities within the DAO.

Participating users of DAO can also receive governance tokens as rewards by contributing to DAO. Of course, the presence or absence and amount of the reward is also decided by user votes, so it is not only affected by the amount of funds and influence.

Participating users will actively work to hold a large amount of governance tokens and try to contribute to the development of DAO. As DAO develops, more users will participate and the value of the governance token itself will increase, so incentives for participating users will work.

DAO is operated autonomously through incentives for participating users and the mechanism of governance tokens.

(2) Characteristics of DAO ②: The organization is operated based on the program

DAO is operated based on programs such as blockchain and smart contracts.

Blockchain is a technology that proves the correctness of records between users and makes it difficult for them to be tampered with or fraudulent. A smart contract is a program that runs on a blockchain and enables automatic contract execution.

In DAO, the contents decided by user votes are automated with smart contracts and recorded on the blockchain to prevent tampering and fraud. By automating contracts and approvals programmatically in this way, it is also a feature of DAO to reduce losses and mistakes.

DAOs are sometimes referred to as “Internet-native organizations” because they are operated using such cutting-edge technology.

For example, the IoT and DX that we often hear about these days are movements to utilize the Internet and AI in existing products, services, and mechanisms. On the other hand, DAO is an organization established on the Internet from the beginning, so the Internet and programs are the base of its operations.

Unlike existing stock companies, there is no general meeting of shareholders or directors to make decisions, so the advantage of DAO is that it has excellent speed and flexibility in decision making.

(3) Characteristics of DAO ③: Trusted due to high transparency of management

Anyone can participate in DAO. There is no need to exchange written documents when participating or withdrawing.

Anyone can check who is participating in the DAO and what activities are being carried out.

DAO content is also freely available for users. In addition, the programs related to the operation of DAO are also called “open source”, and the code is open to the public.

In this way, anyone can participate, and by disclosing all internal circumstances, the transparency increases and the DAO itself is trusted.

It is attracting attention that it will become a different organization from the past because it does not create a central organization for operation and makes decisions mainly by users.

2. DAO example

Here are three examples of DAO.

  1. DAO “Bitcoin” that changes the common sense of currency
  2. New financial service “Maker DAO”
  3. Promote creativity “Ninja DAO”

(1) DAO “Bitcoin” that changes the common sense of currency

Image: Bitcoin.org

“Bitcoin”, the king of crypto assets (virtual currency), is operated as a DAO. In discussions about DAO, there is even an opinion that “the only genuine DAO at the moment is Bitcoin.”

Bitcoin was born from a paper published by Satoshi Nakamoto in 2008. The paper describes the problems of existing financial services and the concept of Bitcoin to solve them (Reference: Bitcoin: P2P Electronic Currency System | Bitcoin.org ) .

Engineers who sympathized with the concept and mechanism described in this paper gathered together, created a community, and proceeded with development, resulting in the birth of Bitcoin.

This developer community still supports the improvement and operation of Bitcoin, and operates in the form of a DAO.

(2) New financial service “Maker DAO”

Image: Maker DAO

Maker DAO is a project representing DeFi. DeFi is an acronym for Decentralized Finance, which means “decentralized finance”.

Until now, financial services have taken it for granted that transactions are brokered by organizations such as banks and securities companies. On the other hand, DeFi allows users to trade directly with each other using smart contracts.

This makes it possible to keep brokerage fees low and shorten the time required for transactions, so it is attracting attention as a system that will change existing financial services.

There are various projects in DeFi. Among them, Maker DAO is one of the DeFi projects used around the world due to its large scale and high reliability.

Project system changes and improvements are decided by voting within the DAO using a governance token called MKR (Maker).

DeFi and Maker DAO are attracting attention as new financial services, such as the high transparency of DAO operations and the efficiency of programmatic transactions.

(3) Promote creativity “Ninja DAO”

Image: Ninja DAO

Ninja DAO is the largest DAO in Japan, launched by influencer Mr. Ikehaya (Mr. Hayato Ikeda).

At Ninja DAO, various contents are being developed, centering on the NFT work called “Crypto Ninja”.

Crypto Ninja fully allows “derivative creation”, which has been avoided in art works so far. It means that you can sell art and goods with the motif of Crypto Ninja as long as it is within the scope of the rules (Reference: Ikehaya’s tweet ).

As a result, many creators are using their skills to create derivative works. As the official website of Crypto Ninja says, “This is a village where anyone can play a leading role,” it is one of the DAOs that promotes creative activities.

There is also an effort to decide the NFT holders of Crypto Ninja, the main content of Ninja DAO, by voting within the DAO.

While many DAOs originate from overseas and are communicated in English, it is also a feature that there are many Japanese participants. Anyone can participate in Ninja DAO, so if you want to experience what DAO is like, it’s a good idea to join the official Discord.

3. Why DAO is attracting attention

As you can see from the explanations so far, the reason why DAO is attracting attention is that it will change the way organizations are organized.

The term DAO was coined by Ethereum founder Vitalik Buterin and has been around since 2014.

From around 2020, words such as crypto assets, NFT, DeFi, and metaverse have become buzzwords, and the DAO, which is the operator, has also begun to attract attention.

In the past, organizations had a clear master-servant relationship, such as operators and participants. Having clear relationships makes the rules clear, and there are benefits such as participants being able to move without hesitation.

However, there is also a disadvantage that the interests and rights are concentrated in the top organization.

DAO is attracting attention as “it may change the way of the organization so far” because the participating users are the main players and the operation is highly transparent.

4. Issues of DAO and points to note when using

We will explain the issues of DAO and the points to note when using it separately for the “participating side” and the “operating side”.

You may be a participant in many cases, but you can avoid the risk of getting into trouble by knowing the precautions of the management side.

Let’s take a closer look.

(1) Participants

The point to note on the participatory side is that “there are also users who act fraudulently.”

In addition to those who try to contribute to the development of DAO, there are also users who commit fraud against DAO. Alternatively, you should be aware that some users may hack or defraud participating users of DAO.

In fact, when you join DAO, you may receive a DM (direct message) with a URL from an unknown user. If you open a URL, you may be redirected to a fraudulent site or your device may be infected with a virus, so be careful.

In addition, there are cases of sending messages pretending to be DAO’s official account.

As a countermeasure, take actions to protect yourself in the same way as with previous Internet troubles.

  • Do not open suspicious URLs
  • verify the identity of the person
  • Never disclose personal information
  • Don’t reply to messages you don’t recognize
  • When investing, always do so with surplus funds

As an Internet-native organization, DAOs have many advantages, but they also have some caveats, such as “you can’t see the other person’s face or know their identity.”

Keep the above precautions in mind and stay out of trouble.

(2) Management side

As a point of caution for the management side, “the money relationship is quite a gray zone”.

Users from all over the world participate in DAO, and crypto assets are used as governance tokens.

DAO does not set up an office in any country or region or register as a corporation, so it is a gray area when it comes to “money” such as taxes.

Even from a global perspective, the legal development of the genre called Web 3.0, such as “crypto assets, DAO, NFT, DeFi, and metaverse,” has not progressed.

In Japan as well, there has finally been a movement to develop laws related to Web 3.0, but the current situation is that the speed of development of Web 3.0 is lagging behind.

5. Major stocks related to DAO

Stocks related to DAO include:

  • BTC(Bitcoin)
  • ETH(Ethreum)
  • MKR(MakerDAO)
  • BIT(BitDAO)
  • UNI (Uniswap)
  • COMP(Compound)

These are used as governance tokens, and if you own them, you can be involved in DAO decision-making.

In addition, some are invested not only as governance tokens but also as a single financial product.

By the way, BIT, UNI, etc. cannot be purchased without using an overseas exchange. Even if you use an overseas exchange, you will be sending crypto assets from a domestic exchange, so if you haven’t opened a domestic exchange yet, let’s create one.

6. The new organization “DAO” needs attention from now on

Finally, I will summarize the contents of this article.

  • DAO is a form of new organization called “decentralized autonomous organization”
  • There are merits that existing joint-stock companies do not have, and the world is paying attention
  • Basically anyone can participate in DAO and can be involved in the decision making of the organization.

As a contrast to DAO, I have explained it using a stock company as an example. The form of organization called a joint-stock company was created more than 100 years ago.

On the other hand, DAO is a term and concept that was born around 2014. From now on, various DAOs will be born and will develop while solving problems and issues.

If you are interested in DAO, why not join the DAO that interests you, including the ones introduced in the article?

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