Pros And Cons Of DAO – Next Generation Organization

About 30 years have passed since the Internet was born in the world, and the world of the Web has entered the phase of “Web 3.0” based on the blockchain. “DAO (Decentralized Autonomous Organization)” is attracting attention as a symbol of this.

Unlike traditional organizations that make decisions based on centralized existence, operations are automated without an administrator, and anyone can participate, providing a variety of services that have never been seen before. Of particular note is the fact that the characteristics of DAO are beginning to show their true potential due to the fusion with Metaverse.

Therefore, this time, I will explain in detail the reasons why DAO is attracting attention, its advantages and disadvantages, as well as actual examples and future potential.

What is DAO?

DAO is an abbreviation for Decentralized Autonomous Organization, which is translated as “autonomous decentralized organization” in Japanese.

Traditional organizations such as governments, local governments, and joint-stock companies have a centralized authority to make decisions, and generally have a hierarchy of command hierarchies. Multiple departments are assigned under the CEO and directors, and the relationship between superiors and subordinates is clear within each department. Roles and authorities are also fixed, and it is not permissible to jump over them to do business.

DAO, on the other hand, is an organization built on a blockchain and not controlled by a centralized entity, and is characterized by the fact that anyone can participate (= decentralized). All contracts, transactions and rights building are automatically implemented by Ethereum smart contracts and recorded on the blockchain, making them extremely transparent and impartial.

Investors and other participants who sympathize with DAO projects purchase their own governance tokens and retain voting rights for decision making. When making a decision, if the vote is in favor of more than half, it will be passed and then put into practice. In addition, there is an incentive to get an economic return by getting other tokens, such as stablecoin as well as governance tokens.

Since smart contracts define operational rules, once deployed, there is no other way to change rules or decisions with voting decisions. In the case of a joint-stock company, the CEO, directors, executive officers, etc., who actually operate the company, maintain an independent relationship with the shareholders. However, DAO can be said to be a next-generation new organization in which shareholders have management authority in the management of the company, in which the sympathizers of the project are directly involved in each business by holding the governance token.

According to a DeepDAO survey, in just nine months from January 2021, the funds managed by DAO have increased 40 times from about 44 billion yen to about 1.8 trillion. The number of DAO members and token holders in December of the same year also increased to 1.3 million, 130 times the number at the beginning of the year.

Why is DAO Attracting Attention?

As mentioned above, the number of DAOs has skyrocketed, especially since the beginning of 2021.

There are three main reasons for this.

First, DAO can be established on the blockchain by anyone, and it is possible to raise funds quickly. Normally, it takes a certain amount of preparation time to set up a company or obtain a loan from a bank. In that respect, DAO can be established 24 hours a day, 365 days a year, anytime, anywhere (without an office), and can start raising funds from all over the world at the same time as the start.

Second, if you participate in DAO and own your own tokens, if the significance of the project is evaluated by many investors and the price rises in the virtual currency market, you can increase your assets accordingly.

Third, with Ethereum’s smart contract, which is the base of DAO, it is possible to integrate with Metaverse, such as purchasing land in virtual space, performing virtual live, selling NFT, and monetizing it. 2021 is a year that deserves to be called the “first year of the Metaverse”, and expectations for a worldview of freely enjoying games using avatars in virtual space and conducting various economic activities are clearly expanding.

As a background to this, it cannot be overlooked that the dependence on the Internet has increased dramatically due to the influence of the Corona disaster, which has made it impossible to go out worldwide. The growing demand for tools that are more practical, exciting, and new than ever before, combined with the penetration of blockchain technology, has led to a rapid increase in the need for and attention to the Metaverse.

Benefits of DAO

Highly Transparent and Fair

DAOs running on the blockchain are extremely transparent because all transactions are recorded and visualized throughout. This is not the case with centralized organizations such as ordinary companies and local governments. It is not uncommon for the details to be unclear, such as decisions being made in a closed room or new policies being set out for the convenience of the top management.

In addition, DAO maintains fairness in that anyone can participate and everyone with a governance token is entitled to vote, allowing them to participate in decision-making equally.

No Need for Detailed Procedures

In DAO, all transactions are executed by smart contracts. Therefore, it is not necessary for a person to create a contract or put a seal on each contract. Since there is no hierarchy like a general organization, there is no need to set up many departments unnecessarily, take extra care in human relationships, and do not have to worry about it, the organizational structure is simplified and you can work in a stress-free environment.

You Can Expect a Big Return

Many DAOs have a limit on the number of unique tokens that can be issued, and as projects are approved and cryptocurrencies become more popular, the price of tokens will also increase. Token holders can expect great economic returns, as some can jump several to tens of times.

Disadvantages of DAO

It Takes Time to Make a Decision

While DAO has the advantage that all participants are involved in decision-making, it also has the disadvantage that it takes time to ask everyone, vote, and get results. This can be a big disadvantage in a business environment where speed is required. Even “Bitcoin,” which is said to be the first successful example, takes three months to make a decision. Therefore, it will not be quick from the usual business sense.

Decisions are not Always Correct

Anyone can participate in DAO, but conversely, it is unpredictable and difficult to prevent what kind of person or organization will participate. Therefore, depending on the members, the decisions made by DAO may not always be valid. Especially when the number of participants is small, it may be difficult to get a majority by voting, and once the opinions are divided, it may be difficult to make a decision and the project itself may run into a deadlock.

Security Remains Uncertain

DAO cannot deny the risk of hacking as all transactions are done on the blockchain. Especially when purchasing virtual currency on an exchange, if the exchange itself is hit by a cyber attack, it will not be possible to cash in, and all the invested assets may be wasted. As for DAO, the legislation has not caught up, so even if it is damaged, it is not always compensated, and this point is a disadvantage that cannot be overlooked.

DAO Example

PleasrDAO

PleasrDAO is a DAO aimed at collecting NFT art. In addition to the large number of prominent investors and protocol founders in the blockchain industry, DAO’s successful bid for the expensive NFT art of tens of millions of yen was also very much talked about.

In addition, Pleasr DAO has succeeded in raising funds using Defi, through the obtained NFT as collateral. In addition, it is expanding the range of its activities, such as creating and selling NFT art, and future trends are drawing attention.

Decentraland

Decentraland is a DAO platform where you can enjoy various games and economic activities in your own virtual space via Avatar. Users can use the token MANA to buy and sell “LAND”, which is the land in the virtual space.

You can freely build your own buildings and facilities in LAND, for example, you can build a gallery and display and sell NFT art in the facility. If you create a game center, you can invite players to hold battle tournaments, link with other NFT games, and sell those characters and items as NFTs. If you create a live house and hold a virtual live, you can monetize by selling admission fees and ticket prices.

At Decentraland, a large community in virtual space has been built and is already an autonomous organization that drives the Metaverse market, where investors around the world are looking to grow. As evidence, MANA’s price has been sluggish and volatile for a long time since its release, but the situation changed completely in 2021. A large investor called a whale invested a large amount of money in MANA, and FaceBook changed the company name to “Meta”, and attention to the Metaverse increased at a stretch, and it was 9 yen on January 1st of the same year. However, it was 127 yen at the end of October. Furthermore, as of January 2, 2022, the price was 384 yen. It’s been about 40 times higher in just one year.

The Future of DAO

In April 2021, the state of Wyoming in the United States passed a law recognizing DAO as a corporation, and three months later, “American CryptoFed DAO” was registered as the first DAO corporation. As a result, it can be said that not only the recognition of DAO but also the social credibility has greatly increased.

In 2021, the NFT market boiled in response to DAO. Decentraland, which I introduced earlier, is an ecosystem that attracts users widely to DAO, such as linking with the popular NFT game “Axie Infinity” and opening a virtual gallery by the global auction company “Sotheby’s” in the virtual space, is steadily being built.

Asobi System Co., Ltd., to which many entertainers and models belong in Japan, acquired Decentraland’s LAND and started the cultural city “Meta Tokyo” in virtual space, and the world’s first full-scale entertainment and culture utilizing Metaverse started its distribution.

DAO operates on Ethereum, but the high gas cost (commission) of the virtual currency ETH required for participation has been regarded as a problem. However, with Decentraland, a new transition between MANA and the cryptocurrency Polygon has become possible, and gas costs have been significantly reduced. Since DAO utilizes virtual currency, it seems difficult for young people in their teens and early twenties to get used to it, but if talents of the same generation begin to play an active role in Decentraland and the gas bill becomes cheaper,we can expect that the familiarity will increase at once and we can expect that DAO will spread to a wide range of generations.

Metaverse and DAO, whose market size is said to reach 100 trillion yen in 2030, are inseparable two-wheeled relationships. Considering that the metaverse-related virtual currencies such as MANA are soaring rapidly, the market must be further developed by being pulled by the movement.

Summary

We explained in detail about DAO from the basics to the latest trends. Knowing the connection with the Metaverse will give you a good idea of how it has great potential for future development.

In addition, Relipa is helping customers who want to start DAO from now on. Experienced engineers are always waiting for you, so feel free to contact us.