What is a Decentralized Autonomous Organization (DAO)?

For some users, the world of cryptocurrencies only ends with buying and selling Bitcoin, Ethereum, and other digital currencies on exchanges. These people are not interested in the more advanced discussions that take place behind the scenes and only want to make money from the fluctuations of this market.

But others prefer to get acquainted with the developments in this field and technical issues and find more opportunities to earn money. The term DAO or decentralized self-governing organization is one of these advanced topics in the world of cryptocurrencies, familiarity with which can have its own advantages.

Most likely, you are also among these people and you want to learn more about DAO and its concept, in which case we must say that you have come to a good place. In the following, we will first provide a general definition of decentralized self-governing organizations and then talk about how it works in a more concrete language. Most importantly, we say why such organizations are needed at all and what is their exact application.

Therefore, we suggest that you stay with us until the end of the article, even if you are not interested in specialized discussions. Who knows, perhaps getting to know DAO will give you effortless profitability in the future!

What is a Decentralized Autonomous Organization or DAO?

The word DAO stands for  Decentralized Autonomous Organization  , which in Persian sources is referred to by equivalents such as ” decentralized autonomous organization “, “decentralized autonomous organization”, “decentralized independent organization” or “DAO”.

In a simple definition, a DAO can be considered an organization where no single person or entity has complete control over its decisions.  In such organizations, everything is done by the members in a  completely decentralized way.

If you are one of the old readers of the Hosseini Finance collection blog, you know very well that the philosophy of this collection is far from bookish and incomprehensible definitions, and the definition we presented above does not help much to understand the meaning of this word. Therefore, in order to better understand the issue, we would like to get acquainted with a simple example of a decentralized autonomous organization that has been operating in this field for a long time and you have probably heard its name.

“UniSwap” (UniSwap) is a digital currency exchange of the type of decentralized exchanges that operates in the form of a decentralized self-governing organization or DAO. On this site, anyone can buy, sell and trade cryptocurrencies by connecting their digital wallet directly and without the need to transfer assets to the exchange account.

UniSwap itself also has a native digital currency, which you must have seen with the symbol ” Uni ” (UNI) in various exchanges. We say that UniSwap is a decentralized self-governing organization because users of this exchange can be recognized as voting users by purchasing a certain amount of UNI cryptocurrency and keeping it in their   wallets . In this way, they can play a role in the development process of the UniSwap exchange and its management decisions.

In other words, any user who uses UniSwap and invests in its UNI cryptocurrency, can register their desired offers to make changes in the exchange. The rest of the users can also express their positive or negative opinion about that change and participate in the important decisions of the exchange as a group.

That is why such projects are called decentralized self-governing organizations. Decentralized because no central person or institution controls the decisions and self-governing because the users themselves are responsible for the development and management of the organization they participate in (here, the exchange) and are completely independent.

Now, in the UniSwap example of this organization, it was a decentralized exchange, but other projects may have different goals.

For example, ” Decentraland ” is a metaverse project that works in the field of games and virtual worlds. Decentraland is also a decentralized self-governing organization because holders of the digital currency ” Mana ” (MANA) can participate in its decisions.

Importance of Decentralized Autonomous Organizations or DAOs

First of all, we must say that at the opposite point of a decentralized self-governing organization, there are centralized organizations. For example, consider the application “Instagram”.

This application is managed centrally and users have no role in its management. In fact, a central company called “Meta” or the “former Facebook” is responsible for managing and making changes to this platform.

Such a company can wake up one morning and implement a new change in its Instagram application that maybe more than half of its users are unhappy with. But if Instagram was a decentralized self-governing organization, this would never have been possible.

In such a situation, in order to make a change on Instagram, such as removing the like button from posts, such a change must first be proposed on the special DAO page on Instagram, and then users who had Instagram’s native cryptocurrency in their digital wallets would give a positive or negative comment. They registered themselves for this proposal, and this change was applied to Instagram only when the majority vote was positive.

Therefore, the main advantage of decentralized self-governing organizations shows itself here. In such organizations, the power is taken from the media giants of the world such as Meta and given to the users of each platform who have spent their time and capital to use it.

How does the decentralized self-governing organization work?

But again, an important question arises, and that is, how is voting and recording opinions done in a decentralized self-governing organization? Do users have to go to a physical environment and register their offer and vote, like traditional voting in the real world?

In response to this question, we must say that no, it is not like that. In fact, the entire process of registering the offer and voting is done online and on the blockchain platform.

In this way, each project has a special page for this purpose, and users can first connect their digital wallet by referring to this website and then choose their vote from the available options by making a transaction.

The entire voting process is also managed by ” Smart Contracts ” and therefore the possibility of fraud and error in it is zero. We have already talked about smart contracts in detail and we suggest that if you are not familiar with this concept, read the article “What is a smart contract”.

But in short, smart contracts can be considered pieces of programming code where all the provisions of the contract are written in advance and in the form of code, and as soon as the initial conditions are met, the agreed provisions are automatically implemented.

Another important issue that you should pay attention to is that each user will be worth more in proportion to the amount of digital currency they have.

For example, in the UniSwap exchange, whoever has 100 yen in his digital wallet, his vote will be twice as valuable and has more impact than someone who has 50 yen.

The reason for this is quite clever. A user who spends his valuable capital to buy a native token of a DAO certainly does not want something to happen to it and cause the value of his cryptocurrency to decrease further.

Imagine that in a DAO, a large amount of the entire native cryptocurrency is in the possession of one person, it is true that the value of this person’s vote is much higher than the vote of other users who have less cryptocurrency, but because he invested more capital in this project in the same proportion, He does not want to damage the credibility of that project by participating in destructive voting.