Since the dawn of Bitcoin, it has been theorized that blockchain technology could have the potential to significantly disrupt and transform the way that industries, corporations, organizations, and nonprofits traditionally operate. But in the last few years alone, one specific Web3 advent — the decentralized autonomous organization (DAO) — has made national headlines, garnering attention from investors, operators, and scientists alike.
From blockchain-based philanthropy to crowdfunding culturally historical NFT collecting efforts, DAOs have risen to prominence as the defacto organizational structure in Web3. But what makes these types of organizations so unique? In this guide, we’ll explain what a DAO is, lay out the steps for DAO creation, important decisions to consider, and best practices for successful operation.
WTF is a DAO?
So what is a DAO? Let’s start with the basics. By definition, as listed in our NFT dictionary:
“A DAO (a decentralized autonomous organization) is a type of organization that is run on the blockchain through the use of smart contracts. The smart contracts lay out the rules that govern the DAO and are used to execute decisions. Unlike traditional businesses and organizations, where decisions are governed by centralized primary shareholders, DAOs are operated by a community of token holders. All governance token holders in a DAO are able to vote and have a say in key decisions. If a proposal achieves a predefined level of consensus (like a certain number of votes), it is accepted and executed according to the rules within the smart contract.”
DAOs have been (and continue to be) formed around a wide range of use cases. This includes financing digitally-native projects (NFTs), administering grants (Aave Protocol), building communities (Friends With Benefits), acquiring cultural collectibles (ConstitutionDAO), private investing (Krause House), media and content creation (Bankless), and more.
The caveats of a DAO
In theory, DAOs should act as a more ethical and transparent way to operate organizations. Not only do they eliminate the need for centralized, hierarchical decision-making, but they also successfully align incentives among all stakeholders. This upgrades users and contributors of the organization into genuine investors and owners. By opting for community ownership, DAOs allow those actively working in the organization to have a say in critical decisions regarding its future.
But, while successful DAOs do create a circular ecosystem that operates without a single individual having the final say, it’s important to note that all DAOs still contain orders of power. In most DAOs, an individual’s contribution level is often rewarded with governance tokens. Those who contribute the most also hold the most governance tokens and, therefore, the highest reputational voting power.
DAOs are novel, which is why many are still working through operational roadblocks. Collaborative decision-making takes time and requires full community buy-in for a DAO to run smoothly. Reaching a consensus can be challenging. Even getting a proposal to the voting stage can be difficult if too many parties are involved in the early stages of a DAO’s formation.
With this difficulty comes operational risk, according to Lauren Kacher, founder of Alterrage, the first DAO-led fashion label. “It’s important to determine the amount of risk you are willing to take on from the start,” Kacher said in an interview with nft now. “DAOs bring great opportunity for growth, but at the risk of losing control without proper fundamentals.”
Compared to corporations and formal organizations, DAOs also bring sizable security risks. Web3 is still very much a wild west, and we’ve seen even the most iron-clad smart contracts get hacked. So, before moving forward in your DAO formation, you must have a team of skilled developers and multiple risk mitigation plans in place.
When to start a DAO
Before forming or transitioning to a DAO structure, a range of considerations must be made. To start, potential organizers should focus on two core areas: purpose and utility. It’s important to note that DAOs are neither practical nor favorable for all use cases, and many areas still need improvement.
Should you be interested in creating a DAO, ask yourself, “Is a DAO needed to achieve this goal?” If the answer is yes, proceed to the question, “How would our organization benefit from being able to coordinate trustlessly on the blockchain and align incentives through a complex tokenomics system?”
Only then, once you have answered both questions, should you consider the following areas of development
How to start a DAO
Luckily, starting a DAO is easier than it was even a year ago. Considering the level of maturation reached within the blockchain industry, and the rise in acceptance of Web3 and blockchain technologies, the market now offers a handful of DAO creation tools and platforms that cover everything from all-in-one toolkits like Aragon to specific tools around treasury creation and governance. But while the barrier to entry is more manageable, there are still many vital decisions to consider.
At the heart of every successful DAO lies a strong community. And at the heart of every strong community exists a core DAO formation team. When building this team, it’s essential to take the time to find the right partners. This group should go beyond being passionate about the mission you want to solve. They should also be dedicated to following through to the long-term horizon to bring about its greatest potential.
It’s best to select members with similar perspectives but different and complementary skill sets. You’ll need someone with the technical Web3 know-how to serve as a key member. Still, conventional fields like economics, marketing, operations, and community management are also crucial to a DAO’s long-term success. It’s important to note that this guide should not be considered financial or business planning advice. As any successful DAO will likely tell you, it’s highly recommended to seek advice from an attorney to ensure that you comply with all legal and financial requirements, especially if you plan to issue a native DAO token.
Governance
It’s hard to have a true DAO without community governance. That’s why finding the proper mechanism or service for members to connect their wallets and propose, review, and vote on treasury/protocol decisions is important. With rising gas fees, on-chain voting can get expensive, so certain DAOs (and prominent projects like Doodles) rely on customizable off-chain governance tools like Snapshot to facilitate governance proposals. Ultimately, choosing whether to conduct on or off-chain voting is a decision the core DAO team makes.
Token creation and allocation
Once you’ve established a community, governance mechanism, and technical infrastructure, it’s time to get strategic about the tokenomics of your DAO. In many cases, tokenomics will serve as the underlying incentive structure. But be wary, when implemented incorrectly, tokenomics can harm the integrity of a community — and even a DAO’s overall longevity.
In most DAOs, tokens are used to either reward members, vote on proposals, unlock access to other benefits, or a combination of the three. Before continuing, you should consider what purpose your tokens will serve in your DAO. Will they be used to vote on the direction of the organization? Will they hold inherent value? Can they be further staked for additional yield?
Not only will you need talent and knowledge from DAO members to create the token itself, but also to consider the impact of token supply and allocation. Given the undeniable psychological implications of supply and demand on cryptocurrency pricing, finding this sweet spot is one of the most challenging parts of starting a DAO and has been documented as such by both ENS and Uniswap.
As for allocation, it’s imperative to find the right balance between incentivizing and rewarding your community and having enough funds in the community treasury to progress toward larger goals. Again, we can’t overemphasize the importance of speaking to an attorney throughout the token creation process to ensure safety and legal compliance.
Treasury
Perhaps the most crucial decision of your DAO is where to house your treasury. While a DAO treasury acts like any standard bank account, these funds will likely be the lifeblood of whatever purpose your DAO holds and should be safeguarded with the highest security. To limit the risk of bad actors and ensure that no one person has control over the DAO’s funds, most DAOs elect to create a multi-signature (multi-sig) wallet.
Multi-sig wallets require multiple people to sign blockchain transactions before they are executed. For this, Gnosis Safe and SafeSnap have become the industry standard. Gnosis also allows the storage of multiple tokens within the same wallet. For example, Gnosis can hold a mixture of both ETH and a DAO’s native governance or social token. Other examples of DAO Treasury management tools include Parcel and Llama.
Dos and don’ts for your DAO
While it’s technically relatively easy to create a DAO, running one successfully is an entirely different story. But who better to learn about the ins and outs of DAO success from than those who have first-hand experience with it? In the interest of providing both a guiding light and practical testimony to this guide, we spoke with a range of DAO creators and core members to get their thoughts on the most important dos and don’ts when approaching DAOs.
Learn from the experts
First off to share wisdom was the pseudonymous Web3 builder and co-creator of Krause House, Commodore, who said that without a strong community, a DAO will never be able to get off the ground. And he should know, as the Krause House encompasses a DAO with global reach that embodies the grand goal of owning and operating an NBA team.
“Getting a group of people together and acting with a DAO ethos is an incredibly powerful signal that building a DAO is worth the time,” said Commodore. “I always recommend finding 100 people via Twitter, Discord, or a podcast to see if there’s momentum in the idea. If there is, then explore as a collective how to become a DAO.”
Cooper Turley, one of the most prominent players in Web3 music and the founder of Fire Eyes DAO, echoed a similar sentiment. He argued that without product market fit, a DAO will be short-lived and that it is crucial to find a differentiated niche that will want to make members come back every day. When starting Fire Eyes, Turley made sure to take a simple and realistic approach. “Think practically and focus on a very small number of people,” he said, offering up the best practice of not overcomplicating things.
The same thing applies when considering a tokenomics structure. While it can be fun to incorporate functions like staking, burning, and game theory, there is no reason to launch things that you don’t understand. It’s much better to take a slow and steady path to success rather than try to do everything at once.
Yet a slow, steady, and simplistic ethos can also apply to a DAO’s organizational structure. Because although hierarchy is still present in all DAOs, it’s essential to eliminate the ability of a single voice or authority to dictate key decisions. In fact, the aforementioned founder of Alterrage, Kacher, credits the designing of a simple and thoughtful leadership infrastructure within her organization as a beacon of its success, offering an additional best practice of not tying your DAO to a single leader.
“At Alterrage, we don’t have one single leader, but rather seven different spheres (ex: atelier, tech, web3 architecture, etc.) that focus on core areas of the business,” said Kacher. “Each sphere is led by one ‘guide’ with additional help from three support leaders that are all equally trained. Without training or a form of leadership, members of vague DAO communities are often lost and leave out of frustration.”
Streamline onboarding and documentation
In addition to the dos and don’ts laid out by those involved with DAOs, some other best practices should be considered. The first of which is accessibility because it should be simple and easy for people to learn more about how your DAO works and what it aims to do.
This discovery and onboarding flow should be one of the first action items for the core team since it’s essential for the growth of the DAO. All rules and standards should be clearly documented and linked to in numerous places. If this is a “serious” DAO with full-time paid contributors, it’s even more vital to outline highly precise membership requirements and establish documentation now to avoid disputes down the road. Standards and processes around conflict resolution should also be implemented, as no organization, DAO or otherwise, is conflict-free.
Secondarily, as folks are onboarding into your DAO, it’s important to ensure your community feels heard and understood at all times. This necessity stretches far beyond governance and voting proposals and should include in-person feedback, Discord conversations, Twitter discussions, and more.
Start small and invest in the right tools for growth
As most DAOs are global communities, and growth is often top of mind, founders should invest in scalable, accessible, and manageable communication platforms to support various languages and content mediums. Only time will tell whether DAOs will become mainstream organizations. But for now, the best method of action for aspiring DAO founders and the broader Web3 community, as seen by Commodore, is just to get started.
“Part of the beauty of innovation and disruption is that new tools are built, and humans use these tools for all sorts of different needs in their lives,” said Commodore. “We’re just in an early phase of exploring this powerful new tool, so it’s still too early to know which things make good or bad fits. I’m just excited to see so many people try [creating a DAO] because we’ll collectively make more progress quickly as we collect wins.”
