Are DAOs future of organizations?
Are DAOs future of organizations?
A primer on DAOs and how to launch one
TL;DR: This article goes over the history of DAO; from its initial days of formation to what it means today. It touches on numerous iterations and categories of DAOs. It, then, extracts common properties of DAOs and addresses each one of them separately. Finally, the article talks about DAO stack and how to launch your own - complete checklist and lifecycle.
NFT craze has cooled down; DeFi TVLs are not breaking all-time highs; and people are wondering whether we are in the midst of bear market. However, building never really stops and new ideas are always coming up. One such concept that has existed for a while in crypto but hasn’t truly had its moment yet are DAOs. In the post titled The Future of Work, Ben Schecter argues that soon an average man won’t be working at a traditional company. But what does that exactly imply? And how are DAOs any different than traditional companies?
Let’s explore the potential of DAO (short for Decentralized Autonomous Organizations). We will go through a bit of history and then extract common properties of a DAO.
What does it mean?
The term was coined by none other than Vitalik Buterin who is known for his cheeky style. However, the necessity of a DAO comes from Bitcoin. One of the early challenges that Bitcoin faced was, due to its decentralized nature, it was quite difficult to agree on particular decisions. The classic example is the block size debate, whereby miners had the incentive to support bigger blocks whereas the developer community felt that a better solution to go with SegWit. There was no good way to settle the debate. This sparked a need for some sort of governing body. Vitalik in his article for the Bitcoin Magazine wrote a piece titled: Bootstrapping a Decentralized Autonomous Corporation where he attempted to address the question: do we really need the people? He then went on to introduce Decentralized Autonomous Organizations in the Ethereum White Paper.
The general concept of a “decentralized autonomous organization” is that of a virtual entity that has a certain set of members or shareholders which, perhaps with a 67% majority, have the right to spend the entity’s funds and modify its code. The members would collectively decide on how the organization should allocate its funds. Methods for allocating a DAO’s funds could range from bounties, salaries to even more exotic mechanisms such as an internal currency to reward work.
Today, the DAOs have evolved quite a bit. We have DApps such as Compound Finance running on ETH chain leveraging DAOs for making governance decisions. Governance tokens are distributed among early adopters and investors to allow for decision making. More on that later.
Vitalik’s definition of DAO is a little dated though now. In her post, A beginner’s guide to DAOs, Linda Xie gives a broader, more abstract definition of a DAO:
A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.
Perhaps that’s a bit too vague though. Packy McCormick of Not Boring breaks it down a bit more concretely.
More simply, DAOs are a new way to finance projects, govern communities, and share value. Instead of a top-down hierarchical structure, they use Web3 technology and rapidly evolving governance and incentive systems to distribute decision-making authority and financial rewards. Typically, they do that by issuing tokens based on participation, contribution, and investment. Token holders then have the ability to submit proposals, vote, and share in the upside.
Let’s take a trip through history. And see how this concept has evolved over time.
Decred: Humble beginnings
There are models of governance that pre-dates Ethereum. For instance, the origin of Decred can be traced back to 2013 when an anonymous Bitcointalk user named ‘tacotime’ started a thread highlighting the problem with Bitcoin stating that PoW miners have amassed too much power and proposed a new chain “Decred” that gives power to the people who hold the currency via a Proof of Stake model. It wasn’t the first chain to introduce Proof of Stake. Decred is still relevant to this day, with a marketcap just shy of $1B making it the #86 in the top cryptocurrencies by marketcap. However, it hasn’t been as powerful as Ethereum.
Enter “The DAO”
Ethereum whitepaper introduced the concept of DAO, but Christoph Jentzsch took the bold step to author it. It launched in April 2016 as a decentralized venture capital fund. Members contributed ETH and received DAO tokens in return that could be used for voting on which projects the funds should be allocated to. 11,000 people invested 11.5 million ETH, 14% of the total supply at the time, worth roughly $150 million, which they planned to collectively invest in crypto projects. It was one of the largest crowdfunding campaigns in history. But soon turned out to the most controversial of the projects too. Two months into the project, hackers were able to steal 3.6 million ETH by exploiting a bug in the code. Luckily, the funds were put on a 28-day hold based on the terms of the smart contract, which gave the community some time to think. Eventually, after a contentious debate, the Ethereum core team released a hard fork of the Ethereum blockchain since it was a substantial amount. History was rewritten on the blockchain and in the new chain, there was no hack. Bitcoin maximalist immediately pointed fingers at Ethereum saying that the hard fork by small group of people demonstrated that the chain was not decentralized enough and a small group of people were able to critical decisions about Ethereum.
Aragon: power of composability
Despite “The DAO” hack and the consequent Ethereum fork that made many question decentralization of Ethereum, DAOs were not done just yet. Developers were learning from their mistakes and they started writing code that could be composed. Aragon promised to provide the picks and the individual teams were to be responsible for implementing their own DAO. This is a common pattern in programming whereby the framework creator simply makes it easy for the developers to implement their code with less errors as they do the heavy lifting themselves.
Aragon was one of more successful ICOs that managed to raise $25 million in matter of 15 minutes. Their vision was to make new company setup a plug-and-play experience. Any entrepreneur would have the ability to set up company ownership (via tokens), issue tokens, and raise funds for a project in a matter of minutes. You could set rules for the new company’s governance by creating tokens with various voting rights and tweaking percentages needed to pass a motion. You can also set rules for vesting schedules. Hence, making the experience of setting up a company leveraging a DAO very painless. Aragon wasn’t just the only name out there that was building such capabilities. There was also the DAOStack, District0x and others.
Today Aragon boasts to have created 1900+ DAOs with 60,000 members. But it hasn’t really been able to capture the market that well. Possibly because they were too early.
MakerDAO: first real use-case of DAO
Rune Christensen, co-Founder of MakerDAO, came up with a novel idea in a Reddit post to create a stablecoin (token whose value is pegged to the US dollar) by leveraging the power of three tokens: DAI (stable), ETH (collateralized) and MKR (govern). DAI was issued as a debt and required ETH as a collateral. More specifics on that some other time, but for now it is worth noting down that such a system as Maker required adjusting risk parameters and deciding on future iterations of the product. It needed guardianship and right incentives. The consequence: a governing token (MKR) that gave users voting powers and incentives to make the right decision. MakerDAO is one of the earliest applications of Ethereum.
MakerDAO’s governance model has been adopted by many protocols. Similar to Maker, the Compound protocol wants community consensus on which new markets to add, what parameters to change, how to issue COMP governance tokens (as a reward to protocol participants so they can participate in the DAO as well), and what to do with their three billion dollar treasury! By owning COMP tokens, your ownership weight is your voting weight.
Another example is Curve DAO building an automated market maker (AMM) that generates fees and provides revenue sharing for token holders that lock their tokens. The longer the Curve token (CRV) is locked for, the greater the amount of voting power and rewards received for the DAO member. Unlike traditional companies where profits are paid out pro rata, this DAO is setup such that voting power and revenue share is weighted according to the length of time a token holder has remained invested.
Moloch DAO and treasury management
During the depths of bear market, Ameen Soleimani, founder of SpankChain, recognized a problem with the Ethereum ecosystem. The developers didn’t have incentives to work on the Ethereum and as a result, progress on ETH2 was being hampered. He decided to fix it by building a DAO. The design was kept purposefully minimal, and thus reducing risk. Using MolochDAO, the members were able to propose projects and then acquire funding. One interesting feature of Moloch DAO was the ability to ragequit, i.e if a member don’t like a proposal, they can exit with their funds before the proposal goes through. MolochDAO’s contracts have been forked many times to create other DAOs.
Building on MolochDAO was MetaCartel. MetaCartel Ventures is a for-profit fund that invests in DApps and is an early investor in many prominent crypto projects including Zapper and Rai. Members consist of experienced builders in the crypto community. Similarly, The LAO is another DAO made up of Ethereum enthusiasts that has invested early on in projects. MetaCartel Ventures and The LAO are both examples of DAOs that have strong access to deal flow in the crypto ecosystem. Today, you need a staggering amount of 375 ETH minimum to become a member of the LAO.
In addition to financial instruments, DAOs have also been used to manage funds that seek to invest in specific types of projects. Similarly, PleasrDAO is a group that leverages a DAO with the goal of buying art in the form of NFTs. Most members of this group have never met, and some are still anonymous, but this hasn’t stopped them from buying an NFT of Edward Snowden for over $5M in April. At the time of writing, FlamingoDAO has a portfolio of $1B USD owning 215 CryptoPunks and 22 Bored Apes.
Constitution DAO and the connection to traditional institutions
In mid-November 2021, an internet collective called Constitution DAO crowdfunded close to $47 million in Ether. The goal was to use the funds to bid on a rare copy of the U.S. Constitution at a Sotheby’s auction on Nov. 18. This wouldn’t actually result in a tangible outcome that donors could use beneficially, but rather it exemplified that people could come together in novel ways to upend a traditionalist institution. Although, they lost the bid to Ken Griffin, CEO of Citadel, the move was significant enough to create waves in media and at one point, it was the favorite candidate to win the bid. It signified the power of DAOs and how quickly it could align people towards a single goal. It issued an admonition to traditional institutions: innovate or be displaced.
In late Feb 2022, Russia declared war on Ukraine that sparks protests across the globe. Around the same time, Shevchenko a Ukrainian based in UK, started a DAO for fund raising and donating to Ukraine. By end of March, it has raised around $8 million from people donating across the globe. As a consequence, Ukrainian President Volodymyr Zelenskyy legalized cryptocurrency in the country to address the deluge of digital assets that people wanted to donate to support humanitarian aid and Ukraine’s defense. This demonstrated enormous potential for DAOs as use-case for humanitarian causes.
One big milestone in getting DAOs recognized as a legitimate entity was getting Bill 38 passed in Wyoming that clarifies the legal status of DAOs. DAO contracts can be viewed as an LLC. The legal aspect of DAO has really been capitalized by Open Law. Open Law further makes it easier to create real world contracts using Ethereum. They essential wrap legal contracts within smart contracts. And makes it possible to sign and execute such contracts. Another product SyndicateDAO introduces the concept of web3 investment clubs. It can attach legal entities, open bank accounts, and issue K-1s. And allow a group of individuals to collectively invest in the web3 products such NFTs or tokens. Thus, we are ushering into this new era where DAOs will have legitimate place in the legal world.
The many faces of DAO
DAOs have come a long way. It originally started as a mechanism for ensuring that miners don’t have all the power and influence to dictate changes over the blockchain protocol. The new mechanism transferred power to tokens that could be distributed systematically. This incited a spark to add more powerful controls. Aragon was born that attempted to disambiguate power and money by building a blueprint for governing structures. It wasn’t super effective as the needs of the community were constantly changing. Birth of DeFi apps such as Compound, Uniswap and Curve required controls to be baked into the native protocol. Governance dashboards were built. Tools for monitoring and voting on proposals were created. Seeing success of governance tokens, DAOs were built that were essentially funding instrumentation for web3. Being decentralized and easily accessible, they managed to amass quite a bit of funding. Seeing their success, there was a need to bridge the gap from a legal perspective. And legitimize DAOs.
Coopahtroopa has a great article that sketches out the lay of the land and puts DAOs in different buckets.
There are 300+ DAOs with more emerging every day: check out this list which compiles DAO Tooling Matrix.
Holy Trinity: Power, Capital, Community
I spent some looking at the various DAOs that exist today and extracted common elements from them. Broadly speaking, all DAOs have some form of interjection of roles, capital and community. As an example, Grant DAOs are heavy on the capital side of things whereas a Protocol DAO requires stronger controls and access privileges. Similarly, Social DAOs has strong sense of community alignment. Same for Media DAO. But an investment DAO might be more heavy on the capital and access controls.
1. Community
One common mistake people make when valuing ideas is that they don’t put enough emphasis on community. Products that built around DAO should gravitate where there is already community present. Today, most companies are dependent on some social chat product for internal communication. The are two big competitors are: Slack and Microsoft Teams. You can’t have coordination in a decentralized, distributed organization with such chat tool. The crypto community isn’t using Slack or Teams. They are use Twitter for getting the latest news and updates; Discord for engaging in active discussions and Reddit for knowledge sharing.
DAOs are becoming exclusive investment clubs that you can join if you can set aside certain amount of capital. NoiseDAO is one such example of a DAO that you can join by putting in minimum of 2 ETH. You pass in your discord username and it gives you access to a gated discord channel where participants of the channels are all members of the DAO. This gives some sort of exclusivity to members.
What is even more interesting are tools such collabland that allow folks to verify that they are indeed true owners of a particular NFT or some tokens. This tool integrates with Discord.
2. Capital
One interesting thing that catches the eye when looking at the list of highest funded crowdfunding projects is that majority of them are blockchain in nature. Crowdfunding, as a movement, had already been growing, but crypto tokens has put that on steroids. Platforms such as kick-starter allowed for crowdfunding and in return, the investor would be the first ones to see the product. In world of blockchain, when you invest in a project, you aren’t just incentivized by getting first look at the product, but you are actually making money if you are an early investor. A lot of people have made quite a fortune from investing early in blockchain projects. And as an entrepreneur, blockchain has proven to be a great vehicle for raising money.
But raising capital is just one part of the story. You could be building decentralized internet, but it doesn’t necessarily qualify you as a DAO. In order to be a DAO, the capital has to be locked up in treasury and only accessible by some people. Thanks to the open nature of the blockchain, people can know where the funds are being spent and if they have the right governance structures in place then it would be very hard of someone with access privileges to send funds for personal interests. This makes DAO an ideal candidate for not just raising funds but also managing them and allocating it to right projects that are beneficial for the org.
For additional safety, you have products that allow funds to move only there is sign-off from sufficient number of people.
Balaji’s concept of a mirror table (inspired from cap table) is another example where blockchain solutions shine. The radical transparency of blockchains make it easier to understand the flow of funds.
3. Roles
An organization can not function effectively if all members of that organization are experts on the same thing. We saw Industrial revolution bring about assembly lines that lead to higher productivity as role became more specialized roles. Similarly, we expect a DAO to have members with various responsibilities and unique expertise. This is codified in the smart contract. There needs to be dynamicity so that these rules can evolve. As a result, we have upgradable contracts that grant/revoke accesses from members. However, for managing all of this complexity, we need UIs.
We already saw how Aragon attempted to build a framework such that it could take advantage of composability of smart contracts and build a foundation upon which all futures DAOs could be built. In practice, however, it had some challenges taking off. That being said, some patterns are starting to emerge. One such pattern is giving community tokens and letting them vote on proposals for a protocol.
💡 Member personas
Creators — founders, full-time instigators of the organization
Believers — motivated by DAO’s purpose, more interested in status rewards than financial upsideEarly contributors — doing work for pre-token equity, potential upside, and resume building
Investors — buying equity at primary sale for upside and mission support
Mainstream contributors — doing work for liquid native token, stable coins, or fiat
Management — earning token-based rewards for recruiting, managing, and evaluating contributors
Utility buyers — buying tokens to access products and services from the late stage DAO
Our thesis on “Stripe Atlas for DAOs”
We are bullish on DAO infra companies such as Superdao that are building "Stripe Atlas for DAOs". In the current landspace, there are many pain points to be addressed:
DAO formation often requires lawyers, smart contract developers, audits, and high fees.
Legal uncertainty, particularly regarding SEC guidance on token sales.
No proven reusable templates or one-click formation tools
No enterprise-grade support for DAOs with $10M+ AUM
Member engagement levels are low, DAOs can't efficiently reach their members
DAO tools don't have interoperability standards and are hard to use together. It is not hard to imagine that in the next decade many of the world's next great orgs will start as DAOs, not Delaware C-Corps. A lot of people are choosing to work for DAOs: aligned incentives with the DAO, equity, career velocity, etc. With DAO employment you get paid in crypto, same upside across the globe. Customer investing becomes a norm: financial upside + owner benefits. More savings are put into DAO equity than into NASDAQ-traded equity (~$20T) DAOs adopt self-tax policies and create revenue base for "crypto economy government"
Launch Checklist for DAOs
Before you launch a DAO, here is a broad checklist of things for you to consider:
Formation
What forms of DAO membership are you planning to use in the next 2-4 months?
NFT-based membership for access (content, events, etc.) and governance rights
“Private” tokens for investors (SAFTs, warrants, locked tokens)
“Private” tokens for core team, advisors, and partners (SAFTs, warrants, locked tokens)
Exchange-traded tokens
If you plan to use NFT-based membership, what features will you need?
Multiple tiers of membership
Restricting NFT trading (lock period, approval required, rights lost on transfer, etc.)
Collect royalties from secondary trading
Core team can update NFT artwork after sale
Core team can change metadata on NFTs, e.g. assign custom roles
Ability to increase the membership limit (e.g. if community votes for it)
Member dues / “property tax” — NFT owner needs to pay DAO to keep NFT
Black list / Core team’s power to mark member NFTs as “banned”
NFT recovery (for members who lost access to wallet)
What features do you need for NFT launch?
NFT airdrop to core team, advisors, partners, influencers
Whitelist collection + private mint website
Whitelist collection + free airdrop
Public mint website
Primary sale revenue management. Sending proceeds to DAO treasury, operating entity, etc.
Member data collection on whitelist application or mint site (e.g. emails)
Releasing NFTs for sale in batches
If you plan to use private tokens, what features do you need?
Private tokens for investors (SAFTs, warrants, locked ERC20 tokens)
Private tokens for core team
Private tokens for advisors influencers, partners, early customers, etc.
Lockup schedules (e.g. locked until TGE + 1 year, then released linearly for 1.5 years)
Support limited transferability (e.g. investor entity change or wallet change)
Dual on-chain + off-chain system (traditional legal agreement + ERC20 token)
Ownership transparency = owner table sharing
Chain preference
Ethereum + Polygon
Solana
Binance Smart Chain
NEAR
Other
What are your technical requirements?
Ability to upgrade or extend smart contract
Ability to acquire/add ENS domain to your DAO
Which legal entity is right for particular use cases?
Operations
What access features do you need?
Member directory
Member-only newsfeed
Token-gated content on other apps: G Docs, Notion, Airtable, etc.
Member-only chat / Discord, Telegram
Member-only events
Cross-DAO access: members of one DAO granted access to another one
What asset management features do you need?
DAO-owned wallets (stablecoin, ETH, NFT holdings, third-party tokens, etc.)
Ability to own off-chain assets (real estate, fine art, etc)
Ability to create SPVs for individual assets (e.g. for investment DAOs)
Fiat-based bank account (via linked traditional entity)
[x] Treasury dashboard tracking all assets in one place
What level of governance do you plan to use in the next 2-4 months
No community governance in the early period, core team makes all decisions
Limited governance (voting on investment deals, grants, budget, elected roles)
Proposal-based governance with veto power by core team
Full proposal-based governance
Contracts and SubDAOs
Ability to create SubDAOs with localized governance and budgeting
Ability to appoint agent-of-record for off-chain representation, e.g. property ownership, fiat banking, employment contracts
Ability to sign contracts with off-chain vendors
Ability for members to create their own DAOs (e.g. player guild DAOs)
Spend management
Workflow for contributor payments, invoices, etc.
Ability to delegate small spending decisions to individuals and small teams
Ability to pay for SaaS products as a DAO, e.g. for Notion, Typeform, etc.
Spend reporting and bookkeeping
Exit options
Pre-built process for DAO dissolution
A way to distribute DAO assets to members or appoint dissolution manager
A way to sell DAO or conduct DAO+DAO merger
🚀 The DAO Lifecycle
DAOs are similar to humans, they grow in stages, from an embryo to a fully adult organization. Below is a typical growth sequence for a DAO but each journey is unique and has its own path.
Idea stage
Leader + purpose + name
To get started, one needs a name for the DAO (can be a working title), a leader, and the purpose of the organization. The purpose needs to be stated from the perspective of members and supporters (why we want this DAO to exist) and not from the perspective of the creator. In other words, articulate what kind of good things the DAO will make for its members and the general public.
Believers
Founding members + written roadmap + public profile
Manually invite most ideologically motivated people and draft together a plan of action. How do you want the DAO to work and what are you planning to make. The decisions on tokens, NFTs, and governance system can wait, focus primarily on value creation at this point. With founding members and a draft roadmap, an “upcoming DAO” profile can be created to attract more members.
Early contributors
Contributor loop + reward system
Figure out the most common and repeatable tasks the early members can do to help your DAO. Then, propose rewards for those actions. Rewards can include special achievements NFTs (designed for status, not speculation), whitelist membership for future NFT minting and token airdrops, and options to buy future NFTs/tokens at an exceptionally low price.
Initial capitalization
Token raise or primary NFT sale
Introduce DAO’s main token or its primary NFT collection representing membership. By this stage you will have two types of members — the ones who earn their membership via labor contributions and the one acquired through primary sale. In other words, you are now mixing “work to join” with “buy to join” models. You still can be pre-screening buyers and limiting the secondary market for memberships if it's important for your specific DAO.
Governance setup
Partial decentralization + voting
Transferring some governance rights from creator to community. Typical decisions to delegate include financial parameters (“tax rate”), curation, investing, featuring, budget and grant approval, token allocations, and elected roles.
Treasury setup
Treasury composition + liquidity + spend management
Diversifying DAOs treasury to include its native token, unminted primary NFTs, major coins, stable coins, tokens from related DAOs (e.g. from the blockchain of choice) and fiat. Partnering with liquidity providers and lenders for loans, guaranteed exchange rates, and yield programs to generate more interest and currencies needed for contributor compensation.
Development program
Payroll + grants + project-based hiring + bounty program + programmatic incentives
Recruiting contributors, including engineering, business roles, influencers, customers, and ecosystem partners. Using fiat, token and NFT-based compensation models. Automating rule-based compensation, including giveaways and airdrops.
Sustainable revenue
Member dues + secondary royalties + service review + licensing
Longterm revenue models for DAOs include annual fees for holding membership NFTs (aka “property tax”), royalties from secondary NFT trading, paid services and gas fees, DAO-owned IP licensing.
Full decentralization
Governance layer + operating layer
Separating governance activities (policy, budgeting) and operating layer (an ecosystem of “labs” providing development and operation services. The main token may be split into a governance token (voting powers) and a utility token (ecosystem currency) at this point.
Future potential
DAOs aren’t a new concept. And have existed since the early days of blockchain. They have continuously been evolving from being just a great vehicle for fund-raising to managing treasury and distributing funds to areas that people decide need the most attention. As the crypto ecosystem continues to grow and draws more resourcing, it will create an even greater need for better management of capital. There are many areas where tooling can improve. Raising funds in compliant manner with no rug pulls. That’s where legal tech is going to play a pivotal role. You require better community management so that it is easier to voice opinions. And the community is adequately incentivized so that the ideas that are brought up are beneficial to the larger group. This could be mean some sort of payroll being incorporated. And having transparency in fund movements. All of these avenues for growth warrant their own exploration. But we will get to that a later point in time.
Why create a DAO?Growth incentive = give DAO equity for usage, referrals, social media activity
Collective action = resource building, advocacy, co-marketing, standard creation
Status systems = private communities with public display of membership
Labor equity = share financial upside and governance with platform workers
Liquidity = package assets to be traded on crypto exchanges, e.g. IP rights
Investment = find, fund, and promote winners together: startups, tokens, NFTs