πŸ“–
Web3 Encyclopedia
  • Welcome aboard!
  • Source
  • πŸ˜€Evolution from Web 1.0 to Web 3.0
    • Web 1.0 Web 2.0 Web 3.0
    • Key Features
    • Current Limitations
    • Future of Web 3.0
    • Learn: What Is Web3?
    • Learn: Will Every Brand Have a Web3 Strategy?
    • Learn: Big Ideas in 2023
    • Learn: The Web3 Paradox: Why Scaling Usage Alone Won't Lead to Mass Adoption?
    • Learn: Is Web3 A Marketing Buzz or Tech Revolution?
    • Learn: What is the relationship between blockchain and Web3?
    • Learn:Empowering Women in Web 3.0: The Role and Contributions of Women in Blockchain, DeFi, and dApp
    • Learn: Web 3.0 and the Future of E-Commerce
    • Learn: 12 ways ecosystem projects can attract more developers
    • Learn: How Web3 is Impacting Education?
    • Learn: Web3 And The Future Of Digital Advertising
    • Learn: Web3’s impact on personalization, trust and engagement
    • Learn: Web3-Powered Identity Management -- Unlocking the Benefits of Decentralization
    • Learn: Why Web2 companies fail in Web3 while others made it?
    • Learn: To Identify or Not in a Web3 World?
    • 🀫[Insider Series] McKinsey x Web3
    • TL;DR πŸ‘€
  • πŸ’²Blockchain Fundamentals
    • Why is Blockchain So Popular?
    • Introduction to Blockchain
    • Blockchain Misconceptions
    • Blockchain vs Bitcoin, Database, Cloud
    • Consensus Mechanism
    • Public and Private Keys
    • Hash Functions and Cryptography
    • Sharding
    • Types of Blockchains: PoW, PoS and Private
    • Understanding Cryptocurrency
    • Coins vs Tokens
    • Blockchain Trilemma
    • Legality
    • Learn : Google’s Cloud Based Blockchain Node Service
    • Learn: How Blockchain, Digital assets, and Web3 Unlock Financial Inclusion Globally
    • Learn: Will Chinese-Made Crypto Soar Higher?
    • Learn: What Does MiCA Mean for Crypto in Europe?
    • Learn: Unraveling the Intricacies of Blockchain Forensics and Asset Tracking
    • Learn: Promising blockchain use cases in healthcare industry
    • Learn: The Role of Blockchain in Authenticating and Provenance Art
    • Learn: Blockchain-Based Digital Identity: Benefits, Risks, and Implementation Challenges
    • Learn: The Future of Energy Supply Chains
    • Learn: Revolutionizing smart contracts and cryptocurrency
    • Learn: Nigeria goes blockchain
    • Learn: A Game Changer for Online Gaming?
    • Learn: Is blockchain technology ready for high-storage applications?
    • Learn: Will Blockchain Technology Mark a Turning Point in Fraud Prevention?
    • Learn: Why ZK-rollups need data availability?
    • Learn: How will generative AI disrupt blockchain?
    • Learn: A New Blockchain for Generative AI?
    • TL;DR πŸ‘€
  • 🏟️Web3 Utilities
    • Decentralized Applications (dApps)
    • Cross-chain Bridges
    • DAO
    • Artificial Intelligence
    • Learn: Is Community-building Essential for Web3 Startups?
    • Learn: β€˜Decentralization Theater’
    • Learn: Crypto and AI- A yay or nay combination?
    • Learn: Dissecting the DAO
    • Learn: What is motivating Lido DAO to rise?
    • Learn: How to Turn Your Community Into a DAO?
    • Learn: The Key to Decentralized Decision Making
    • Learn: How Web 3.0 can disrupt the supply chain industry?
    • TL;DR πŸ‘€
  • πŸͺ™Bitcoin
    • What is Bitcoin
    • Bitcoin's Blockchain Technology
    • UTXO Model and Transaction Fees
    • Bitcoin Mining and Mempool
    • Learn: What is bitcoin mining?
    • What are Hard Forks and Soft Forks
    • What is SegWit and the Lightning Network
    • Bitcoin Ecosystem
    • Can Bitcoin be Destroyed? Game Theory and Network Attacks
    • Learn: Crypto token supplies explained
    • Learn: What is crypto tax-loss harvesting, and how does it work?
    • Learn: Can Crypto Go Green? How to Invest in Eco-Friendly Cryptocurrencies
    • Learn: Why Did FTX Collapse? Here’s What to Know.
    • Learn: How Sam Bankman-Fried swindled $8 billion in customer money?
    • Learn: How much is Bitcoin worth today?
    • Learn: The Costs of Running a Bitcoin Node In Nigeria
    • Learn: Has 2022 Left Any Crypto Positives?
    • Learn: How Crypto Exchanges Can Be Free of Risk?
    • Learn: Greed, Lies and FTX: Is Crypto a Force for Good or Evil?
    • Learn: Is Crypto a Cultural Movement?
    • Learn: What are the consequences of crypto’s ongoing regulatory process?
    • Learn: Beyond the Crash and Embracing NFTs?
    • Learn: Understanding crypto bag holders and their mindset
    • Learn: Inscriptions: Just A Fad, Or A Real Threat To Bitcoin Becoming Decentralized Money?
    • Learn: How Bitcoin Ordinals Can Change the Future Of Mining?
    • Learn: What is a supernet?
    • Learn: Bitcoin Miners Celebrate 10 Years Since First ASIC, What Changed Since Then?
    • Learn: Bill Vs. CBDC – Why This US Congressman Wants To Block The Fed From Issuing A Digital Dollar?
    • Learn: Why Bitcoin Will Blow People’s Minds In 2025?
    • Learn: How the Howey Test Sheds Light on Cryptocurrency's Regulatory Gray Area
    • Learn: Cryptocurrency vs AI: A Complex Debate
    • Learn: Where the U.S. Government Went Wrong in Regulating Crypto?
    • Learn: The Nostr Privacy Paradox
    • Learn: Do algorithmic stablecoins have a future as centralized coins are under scrutiny?
    • Learn: Is Bitcoin Set To Revolutionize The Financial World With Its Superior Purchasing Power?
    • Learn: What is Shibarium, and what does it mean for Shiba Inu?
    • Learn: What is a crypto dusting attack?
    • Learn: Is the Adoption of Central Bank Digital Currencies (CBDCs) the Future?
    • Learn: How Artificial Intelligence Could Revolutionize Crypto?
    • Learn: What’s next for EU’s crypto industry as European Parliament passes MiCA?
    • Learn: Why the EU Has MiCA and the U.S. Has Securities Law Confusion?
    • Learn: Six New Projects Looking to Mitigate Bitcoin Mining’s Energy Footprint
    • Learn: Who on Crypto Twitter chose not to pay for a blue checkmark?
    • Learn: What is the wash-sale rule in Crypto?
    • Learn: What is Pepecoin and can it flip memecoins Dogecoin and Shiba Inu?
    • Learn: Can you recover stolen Bitcoin from crypto scams?
    • Learn: What the β€˜anti-mining bill’ means for the crypto industry in Texas?
    • Learn: Does the US have a crypto β€˜tax loophole’ problem?
    • Learn: How users can stay protected?
    • Learn: How Crypto Revolutionize Cheaper and Faster Transactions?
    • Learn: Can NFTs and CFDs be BFFs?
    • Learn: A PR expert’s tips for memecoin projects
    • Learn: Why politicians aren't convinced about the Digital Euro?
    • Learn: How A 90-Year Old TA Theory Predicted The Sudden Bitcoin Boom?
    • Learn: Social Trading Platforms and CFDs: A New Paradigm in Investment
    • Learn: How could the Chinese economic crisis impact Bitcoin and crypto?
    • Learn: How do they compare: Bitcoin IRA vs. traditional IRA?
    • Learn: Why Tokenized Assets Are Safer During a Banking Crisis?
    • TL;DR πŸ‘€
  • πŸ›’οΈEthereum
    • Bitcoin vs Ethereum
    • What can Ethereum do?
    • What is Ether (ETH)?
    • What's Unique About ETH?
    • What are Smart Contracts?
    • Energy Consumption?
    • Ethereum Virtual Machine (EVM)
    • Pros & Cons of Smart Contracts
    • Decentralized Applications (dApps)
    • Ethereum Token Standards (ERC-20, ERC-721 and ERC-1155)
    • Evolution of Ethereum
    • How to Get Your First Ethereum
    • Learn: Next Ethereum Upgrade β€” Shanghai Upgrade
    • Learn: Tipping Scale for Crypto Adoption: Usability vs. Accessibility
    • Learn: Major Publicly Traded U.S. Bitcoin Miner Files For Chapter 11 – Impact On The Market?
    • Learn: 5 altcoin projects that made a real difference in 2022
    • Learn: How Tether Can Be a More Stable Stablecoin?
    • Learn: Are the Ethereum Killers Still Deadly?
    • Learn: What Ethereum Tech Trends Are Weathering the Bear Market?
    • Learn: How Ethereum’s token burns are making it a deflationary cryptocurrency?
    • Learn: A few things to know about Ethereum's Shanghai Upgrade
    • Learn: The Role of Enterprise Ethereum
    • Learn: Understanding Layer 2 Scaling Solutions for the Ethereum Network
    • Learn: The Battle of Giants: Bitcoin vs Ethereum
    • Learn: Cryptography, Smart Contracts and Distributed Networks
    • Learn: The Memecoin Grift and How It Threatens Ethereum Culture
    • Learn: What Is Ethereum’s β€˜Data Availability' Problem, and Why Does It Matter?
    • TL;DR πŸ‘€
  • πŸ‘›Wallet
    • What is a Blockchain Wallet?
    • Hardware / Software Wallet
    • How to Get Your First Cryptocurrency
    • Setting up Metamask Wallet
    • Learn: How to connect the Avalanche network to MetaMask?
    • Learn: How to pass on your crypto when you die?
    • Learn: What are hierarchical deterministic (HD) crypto wallets?
    • Learn: Pros and Cons of Digital Wallets
    • Learn : How Web 3.0 Wallets Are Redefining Digital Asset Security?
    • Learn: Open source: Buzzword or real security for crypto wallets?
    • TL;DR πŸ‘€
  • πŸŒ•New & Rising Protocols
    • Binance
    • NEAR
    • Solana
    • Fantom
    • Polygon
    • Cardano
    • Polkadot
    • Cosmos
    • Harmony
    • Cronos
    • Optimism
    • Terra
    • Who Will Win the L1 Wars?
    • Learn: New Layer 1 Blockchains Are Expanding the DeFi Ecosystem But No Eth Killers Yet
    • Learn: Is an Increased Focus on Layer-2 Scaling and ZK Technology Justified?
    • Learn: What Are the Stakes in the SEC vs. Ripple Case?
    • Learn: What is The Graph, and how does it work?
    • TL;DR πŸ‘€
  • πŸ“ˆDecentralized Finance (DeFi)
    • CEX vs DEX
    • CeFi vs DeFi
    • Algorithmic Stablecoins
    • Airdrop
    • Liquidity Pool
    • Impermanent Loss
    • Swapping
    • Wrapped Token
    • Arbitrage Opportunities
    • Staking
    • Yield Farming
    • Total Value Locked (TVL)
    • Gas Fees
    • Lending & Borrowing
    • Useful Tools
    • Activity: Uniswap & Pancake Swap
    • Learn: Automated Market Makers (AMMs) in DeFi
    • Learn: Crypto Moving towards ESG: What Is Regenerative Finance (ReFi)
    • Learn: What Is dYdX? Understanding the Decentralized Crypto Exchange
    • Learn: It's A Wrap - DeFi in 2022
    • Learn: Why DeFi should expect more hacks this year?
    • Learn: The Security Challenges of DeFi
    • Learn: The Promising Future of Decentralized Social Media on Web 3.0
    • Learn: Can CBDCs, Tokenized Deposits, Stablecoins and DeFi Coexist?
    • Learn: The Increasing Popularity of DeFi and Its Potential to Disrupt Traditional Finance
    • Learn: The future of DeFi is ReFi
    • Learn: DeFi aggregation
    • TL;DR πŸ‘€
  • πŸ™ˆNon-Fungible Token (NFT)
    • What are NFTs?
    • Case Study
    • Storage
    • Who are the Players?
    • NFT Marketplace
    • NFT Useful Resources
    • Activity: Mint Your Own NFT
    • Learn: How You Can Prevent Hackers From Stealing Your NFTs?
    • Learn: What Is an NFT Floor Price?
    • Learn: Should Bored Ape buyers be legally entitled to refunds?
    • Learn: China’s view of NFTs different from rest of the world’s
    • Learn: NFTs IRL: How Digital Collectibles Are Forging Offline Experiences
    • Learn: How NFT Brands Can Cut Through The Noise
    • Learn: How Web3 disrupts the music sector?
    • Learn: Unlockable content in NFTs
    • Learn: Why Meta Matters in NFTs?
    • Learn: Should NFT Marketplaces Become Centralized?
    • Learn: HermΓ¨s vs. MetaBirkins: The NFT Case That Could Have Major Trademark and Artistic Consequence
    • Learn: What are phygital NFTs, and how do they work?
    • Learn: What is NFT ticketing and how does it work?
    • Learn: Why Solana NFT marketplace is seeing less active users?
    • Learn: NFTs and Intellectual Property
    • Learn: How AI Is Changing Artistic Creation and Challenging IP Laws?
    • Learn: The Future of NFTs: Exploring Dynamic NFTs and Their Versatile Use Cases
    • Learn: NFTs in the event and ticketing industry
    • Learn: What is NFT rarity, and how to calculate it?
    • Learn: What happens to your NFTs when you die?
    • Learn: Dogecoin-Like Spike in Milady NFTs After Elon Musk’s Tweet, But Will It Last?
    • Learn: What are NFT royalties, and how do they work?
    • Learn: How developers aim to store crypto inside NFTs?
    • Learn: Generative Art NFTs: What Are They & Why Are They So Popular?
    • TL;DR πŸ‘€
  • πŸ’—Metaverse
    • What is the Metaverse?
    • Metaverse Economy
    • Metaverse Companies
    • GameFi
    • Learn: Are We in the Metaverse Yet?
    • Learn: Can the Metaverse exist without blockchain?
    • Learn: Can the Metaverse Facilitate Sustainable Growth of Defi Systems?
    • Learn: What is the role of biometrics in the metaverse?
    • Learn: Can metaverse be the future court?
    • Learn: Metaverse Fashion Is on the Rise, but for Whom?
    • Learn: Sustainability in the Metaverse: Challenges and Opportunities
    • Learn: How To Build A Responsible Metaverse?
    • Learn: What is a VTuber, and how do you become one?
    • Learn: How proof-of-identity provides human experiences?
    • Learn: The β€œMetaverse” Next Frontier for Business: Impact And Challenges
    • Learn: The 5 Biggest Misconceptions About The Metaverse
    • Learn: Why culture and ownership are critical to the metaverse?
    • TL;DR πŸ‘€
  • πŸ‘ΎCareer in Web3 (coming soon)
    • Developers
    • Moderators
    • Community Managers
    • UI/ UX Designers
    • Digital Fashion Designers
  • 🌱Sustainability (Coming Soon)
    • Industry Effort
    • Co-author
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On this page
  • The concentration of governance token holdings
  • The impact of high concentration on DAO governance
  • How do DAOs govern, exactly?
  • Where are DAOs most common and well-funded?
  • Treasury management: What assets do DAOs hold?
  • Who contributes to DAOs?
  • The future of DAOs
  1. Web3 Utilities

Learn: Dissecting the DAO

The Chainalysis State of Web3 Report | DAOs

PreviousLearn: Crypto and AI- A yay or nay combination?NextLearn: What is motivating Lido DAO to rise?

Last updated 2 years ago

Decentralized autonomous organizations (DAOs) are a staple of web3. Internet-native and blockchain-based, DAOs are intended to provide a new, democratized management structure for businesses, projects, and communities, in which any member can vote on organizational decisions just by buying into the project. At a high level, this is how DAOs work:

  1. DAO founders create a new cryptocurrency, known as a governance token;

  2. They distribute these tokens to users, backers, and other stakeholders;

  3. Each token corresponds to a set amount of voting power within the organization.

Each token also corresponds to a price on the secondary market, where it can be bought and sold at will. While this process is often described as a way to decentralize power, governance token data suggests that DAO ownership is highly concentrated.

The concentration of governance token holdings

By analyzing the distribution of ten major DAOs’ governance tokens, we find that, across several major DAOs, less than 1% of all holders have 90% of voting power.

This has meaningful implications for DAO governance. For example, if just a small portion of the top 1% of holders worked together, they could theoretically outvote the remaining 99% on any decision. This has obvious practical implications and, in terms of investor sentiment, likely affects whether small holders feel that they can meaningfully contribute to the proposal process.

The impact of high concentration on DAO governance

For a governance token holder, there are three key governance actions. Voting is simple β€” any holder can do it. But what about creating a proposal? And what about passing it? Per these ten DAOs proposal requirements, we find that:

  1. A user must hold between 0.1% and 1% of the outstanding token supply to create a proposal.

  2. A user must hold between 1% and 4% to pass it.

Using these ranges as lower and upper bounds, we find that between 1 in 1,000 and 1 in 10,000 of these ten DAOs’ holders have enough tokens to create a proposal.

There are several tradeoffs at play here. If too many holders can create a proposal, the average proposal’s quality may fall, and the DAO may be riddled with governance spam. But if too few can, the community may come to feel that β€œdecentralized governance” rings false.

When it comes to single-handedly passing a proposal, between 1 in 10,000 and 1 in 30,000 holders have enough tokens to do so.

Overly concentrated voting power in DAOs can result in decision-making that seemingly contradicts the tenets of decentralization on which web3 is built. For instance, in June 2022, the DAO governing the Solana-based lending protocol Solend faced a problem: Solana’s price was dropping, and if it fell much further, the protocol’s biggest whale user would face a margin call that could render Solend insolvent and send roughly $20 million worth of Solana onto the market, potentially tanking the asset’s price and upending the entire Solana ecosystem. The DAO called a vote to take control of the whale’s account and liquidate its position through OTC desks, rather than the open market.

The proposal passed easily, with over 1.1 million β€œyes” votes to 30,000 β€œno” votes. However, more than 1 million of those votes came from a single user with enormous governance token holdings. Without their vote, the motion wouldn’t have passed the 1% participation rate necessary for quorum.

The decision triggered a backlash from the cryptocurrency community, with many questioning how a platform could claim to be decentralized and then take control of a user’s funds against their will. Following this, the Solend DAO voted again to invalidate the proposal, and the whale user eventually began to unwind their position. While the crisis was averted in this case, it raises questions about the ability of a DAO to act in the best interest of all participants when some voters control such an outsized share of governance tokens.

How do DAOs govern, exactly?

Actual governance processes vary enough from DAO to DAO that this question is best answered with examples. Let’s start with the biggest one: Uniswap.

Example: Uniswap Governance

Uniswap is a decentralized exchange (DEX), and, like many DeFi protocols, it is governed by a DAO. Anyone who holds Uniswap’s governance token, UNI, is a member of this DAO. They can participate in governance by delegating their voting rights to their own or another’s address, by publicizing their opinions, or by submitting their own proposal. The contents of these proposals vary widely: holders have recently voted on whether to finance a grant program, whether to integrate a new blockchain, and whether to reduce the governance proposal submission threshold.

But before someone can submit a proper proposal, their idea must pass the first two phases: temperature checks and consensus checks.

  1. The temperature check determines whether there is sufficient community will to change the status quo. At the end of the two days, a majority vote with a 25,000 UNI yes-vote threshold wins.

  2. The consensus check establishes formal discussion around a potential proposal. At the end of five days, a majority vote with a 50,000 UNI yes-vote threshold wins.

If both checks pass, an official governance proposal can be put to a vote. Then, there’s a seven-day deliberation period to discuss the merits of this proposal occurs on governance forums. If at the end of this period there are at least 40 million yes-votes with no-votes as a minority, the proposal has passed, and will be enacted after a two-day timelock.

Example: Dream DAO Governance

Not all DAOs function like Uniswap, but most at least run on similar infrastructure, using voting systems like Snapshot and chat servers like Discord. Dream DAO is no exception, though its mission and therefore its governance process is necessarily unique.

Dream DAO is an impact-oriented DAO created by 501(c)(3) charity Civics Unplugged and designed to provide diverse Gen Zers globally with the training, funding, and community they need to use web3 to improve humanity. Their governance process is run by holders of SkywalkerZ β€” NFTs that function as both governance tokens and fundraising incentives for anyone interested in donating to the program. For every SkywalkerZ NFT purchased by a donor, a new SkywalkerZ is reserved for a future Gen Zer to join as a voting member, thereby receiving power in the DAO without needing to pay. The purchaser of the NFT can apply to join the DAO and become a voting member as well, or they can leave it to the Gen Z student they’ve sponsored β€” either way, the NFT is theirs to keep.

By removing financial barriers from the process of participating in DAO governance, Dream DAO empowers its target audience – future Gen Z leaders – to influence decision-making, immerse themselves in web3, and leverage blockchain technologies positively.

Where are DAOs most common and well-funded?

DAOs span the entire length of web3. They govern:

β€’ DeFi protocols like Uniswap ($UNI) and Sushi ($SUSHI).

β€’ Social clubs like Friends With Benefits ($FWB) and Bored Ape Yacht Club ($APE). β€’ Grant-makers like Gitcoin ($GTC) and Seed Club ($CLUB).

β€’ Play-to-earn gaming guilds like Good Games Guild ($GGG) and Yield Guild Games ($YGG).

β€’ NFT generators like Nouns (1 NFT = 1 vote).

β€’ Venture funds like MetaCartel and Orange DAO.

β€’ Charities like Big Green DAO and DreamDAO (1 SkywalkerZ = 1 vote).

β€’ Virtual worlds like Decentraland ($MANA) and Sandbox ($SAND).

β€’ And more. In terms of the number of DAOs and their treasury sizes, however, DeFi-related DAOs have a giant lead.

The DeFi category accounts for 83% of all DAO treasury value held and 33% of all of the DAOs by count.

There are also a large number of DAOs focused on venture capital, infrastructure, and NFTs, suggesting that DAOs are appealing to investors, developers, and artists. Their on-chain treasuries, however, are relatively tiny.

To be fair, the lines between these categories are blurry. Gaming DAOs often engage with NFTs, venture DAOs often provide funding to DeFi, and infrastructure DAOs support all of the above categories.

Treasury management: What assets do DAOs hold?

Even though DAOs vary in type and size, most of their on-chain treasuries hold similar cryptocurrencies. The most commonly held cryptocurrency is the stablecoin USD Coin (USDC), with over half of the 197 DAOs we analyzed holding a balance of USDC.

However, stablecoins seldom account for a majority of an on-chain treasury’s value. On average, 85% of DAOs’ on-chain treasuries are stored in a single asset, and that asset is a stablecoin in only 23% of the DAOs we studied.

These on-chain treasuries are roughly as volatile as Bitcoin. By assuming DAOs’ current holdings are their historical portfolios over the last year, we find that:

β€’ The average DAO with assets over $1 million has an annualized volatility of 82%, versus 69% for Bitcoin.

β€’ The average DAO with assets over $1 million suffered a maximum drawdown of 51% over the past year, compared to Bitcoin’s drawdown of 72%.

DAO treasury values are also fairly correlated with Bitcoin price movements. 38% of on-chain DAO treasuries have correlations with Bitcoin that are between 0.5 and 1.00.

One of the most interesting areas of DAO treasury management that has yet to take off is in mergers and acquisitions (M&A). M&A makes sense for DAOs because it allows them to get into adjacent areas without having to develop internal tooling. As the DAO model matures, we suspect M&A will become more commonplace.

DAOs thus far have also been fairly limited in terms of the types of instruments they use and hold. For example, few DAOs to date have used loans or credit, perhaps due to their uncertain legal status. As DAOs mature, we are likely to see more standardized regulations, management strategies, and reporting practices.

Who contributes to DAOs?

While we don’t collect demographic data about DAO participants, we can learn some things about DAO contributors using blockchain data:

As one might expect, DAO participants are advanced users of cryptocurrency services. Only 17.9% of DAO treasury funds came from centralized services, while the remaining 82.1% originated at decentralized services. This suggests that most DAO contributors also engage with DeFi platforms and likely self-host their cryptocurrency.

The future of DAOs

As DAOs gain momentum, a cottage industry of tooling services and advocacy groups have emerged to help them grow and govern. Superdao streamlines DAO creation; Snapshot simplifies governance; and Coin Center advocates for the industry on Capitol Hill. As they continue to expand, it will be interesting to see what they can accomplish, what they will become, and to what extent they will achieve their goal to decentralize the ownership of the internet. With the proliferation of DAOs today, we’ll have plenty of chances to see.

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