It has been suggested that blockchain technology may have the potential for significant disruption and transformation of the traditional way industries, corporations, nonprofits, and organizations operate. One Web3 innovation, the decentralized autonomous organisation (DAO), has been the focus of attention in recent years. This has attracted the attention of investors, scientists, and operators alike.
DAOs are the most popular organizational structure on Web3. They can be used to fund philanthropy using blockchain technology, or to collect culturally historic NFTs through crowdfunding. What makes these organizations unique? This guide will explain what a DAO looks like, outline the steps to create one, key decisions to make, and provide best practices for running a successful operation.
What is a DAO?
What is a DAO? Let’s begin with the basics. According to our NFT dictionary, this is the definition.
A DAO (decentralized autonomous organization), is a type organization that runs on blockchain technology using smart contracts. Smart contracts are used to implement decisions and set the rules for the DAO. DAOs operate independently of traditional organizations and businesses, which are controlled by primary shareholders. Instead, they are managed by token holders. All governance token holders within a DAO can vote and participate in key decisions. A proposal is accepted and executed if it reaches a predefined level (like a number of votes).
DAOs were created and continue to be formed for a variety of purposes. These include funding digitally-native project (NFTs), administering grants through Aave Protocol, building communities (Friends With Benefits), acquiring cultural collections (ConstitutionDAO), private investment (Krause House), content creation and media (Bankless), and many other uses.
A DAO’s caveats
The DAOs are supposed to be more transparent and ethical in the way they operate organizations. They not only eliminate the need to have centralized, hierarchical decisions made but also align incentives between all stakeholders. This transforms users and contributors into real investors and owners. DAOs give those who are actively involved in the organization the opportunity to participate in key decisions about its future.
While successful DAOs create a circular environment that allows everyone to have their say, it is important to remember that all DAOs still hold orders of power. Governance tokens are often used to reward individuals for their contributions in most DAOs. The most valuable contributors have the most governance tokens, and therefore the highest reputational voting rights.
DAOs are new, and many still face operational hurdles. A DAO that is collaborative and takes place over time will not work without the support of the entire community. It can be difficult to reach a consensus. It can be difficult to get a proposal through the voting stage if there are too many parties involved in the initial stages of a DAO.
Lauren Kacher, founder and CEO of Alterrage, a DAO-led fashion label, said that this comes with operational risk. Kacher stated that it is important to decide the level of risk you are willing and able to accept from the beginning. DAOs offer great growth opportunities, but also come with the risk of losing control if you don’t have the right fundamentals.
DAOs pose a significant security risk, even if they are smaller than formal organizations and corporations. Web3 is still a wild frontier, and even the most secure smart contracts have been hacked. Before you can move forward with your DAO formation, it is important to have a team skilled developers and multiple risk mitigation strategies in place.
When is a DAO to be started?
A range of factors must be considered before forming or transitioning into a DAO organization. Potential organizers need to focus on two main areas: utility and purpose. DAOs may not be practical or favorable for all uses, so there are many areas that need to be improved.
If you are interested in creating a DAO ask yourself: “Is a DAO necessary to achieve this goal?” Then, ask the question “How would our company benefit from being able coordinate trustlessly on blockchain and align incentives through a complicated tokenomics system?”
After you have answered both of these questions, you can begin to look at the following areas for development.
How to create a DAO
It is much easier to start a DAO than it was a year ago. The market offers several DAO creation platforms and tools that can be used to create DAOs. These include all-in-one tools like Aragon, as well as specific tools for governance and treasury creation. While the barriers to entry are lower, there are still important decisions to make.
Building a community, assembling a founding team
A strong community is the core of any successful DAO. A core DAO formation team is at the heart every strong community. It is important to spend the time looking for the right partners when building this team. The group must be passionate about the problem you are trying to solve. They must be committed to reaching the highest possible potential of the organization’s long-term goals.
It is best to choose members who have similar views but with different and complementary skills. To be a key member, you will need to have the technical Web3 knowledge. However, traditional fields such as economics, marketing and operations are essential to the long-term success of a DAO. This guide is not intended to be used as financial or business planning advice. Any successful DAO will tell you that it is highly recommended that you consult an attorney to ensure you meet all legal and financial requirements. This is especially important if you intend to issue a native DAO token.
Without community governance, it’s difficult to establish a DAO. It is crucial to find the right service or mechanism for members to connect their wallets, vote on treasury/protocol decision proposals, review them, and make suggestions. On-chain voting can become expensive due to rising gas prices. DAOs and prominent projects such as Doodles rely on Snapshot, an off-chain governance tool that allows them to make governance proposals. The core DAO team must decide whether to conduct off-chain or on-chain voting.
Creation and allocation of tokens
Once you have established a community and a governance mechanism, it is time to start thinking strategically about tokenomics for your DAO. Tokenomics can be used as an incentive structure in many cases. However, be aware that tokenomics can cause irreparable damage to the integrity of a community and even derail the longevity of a DAO.
Tokens can be used in most DAOs to reward members, vote for proposals, unlock other benefits or a combination thereof. Before you proceed, think about the purpose of your tokens in your DAO. They will be used to vote for the direction of the organisation. Do they have intrinsic value? Are they able to be staked further for increased yield?
To create the token, you will need the talent and knowledge of DAO members. You also have to consider the effects of token supply allocation. Given the psychological effects of price and supply on cryptocurrency pricing, it is difficult to find the sweet spot. This has been documented by both ENS as Uniswap.
Allocation is key. You need to strike the right balance between rewarding and incentivizing your community, and keeping enough money in the community’s treasury for larger goals. We cannot stress enough the importance of consulting an attorney during the token creation process in order to ensure safety compliance.
Your DAO’s most important decision is where to store your treasury. Although a DAO Treasury acts as any regular bank account, these funds are likely to be the lifeblood for whatever purpose your DAO holds. Therefore, it is important that you protect them with the best security. Most DAOs create multi-signature wallets to limit the possibility of bad actors and keep control over DAO funds.
Multisig wallets require multiple signers to verify the transactions are valid before they can be executed. Gnosis Safe, SafeSnap and other similar services have been the industry standard. Gnosis allows multiple tokens to be stored in one wallet. Gnosis can store ETH, native governance tokens or social tokens. Parcel and Llama are two other examples of DAO Treasury management instruments.
What you should and shouldn’t do for your DAO
Although it is technically easy to set up a DAO, managing one effectively can be a challenge. Who better to share their knowledge about DAO success than those who have had it firsthand? We spoke to a variety of DAO creators to find out their opinions on the best practices for approaching DAOs.
Learn from the experts
First to offer his wisdom was the Web3 builder pseudonymous, Commodore. He said that a DAO cannot succeed without a strong community. He should be, because Krause House is a DAO that has global reach and embodies the grand dream of owning an NBA team.
“Getting a group together and acting with a DAO ethos, is an incredibly powerful signal that building a DAO was worth the effort,” stated Commodore. I recommend reaching out to 100 people via Twitter, Discord or podcast to determine if momentum is building for the idea. If there is momentum, then you can explore together how to become an autonomous organization.
Cooper Turley, an important player in Web3 music, and the founder of Fire Eyes DAO, shared a similar sentiment. Turley argued that a DAO that lacks product market fit will fail. It is important to find a niche that will keep members coming back each day. Turley was pragmatic and practical when he started Fire Eyes. He advised that it is important to think practically and only focus on a small group of people. This is the best way to not complicate things.
This is true for tokenomics structures as well. It can be fun and exciting to combine functions such as staking, burning, or game theory. However, you shouldn’t launch things that aren’t clear. It is better to follow a steady and slow path to success than trying to do it all at once.
A DAO’s organizational structure can still be guided by a simple, slow, steady and straightforward ethos. Although hierarchy is still present in DAOs, it is important to remove the power of a single authority or voice to make key decisions. Kacher, Alterrage’s founder, attributes Alterrage’s success to the design of a simple, thoughtful leadership infrastructure. This is an example of a best practice: Don’t tie your DAO to one leader.
Alterrage doesn’t have one leader. Instead, there are seven spheres that lead the company (ex. atelier, tech and web3 architecture). Kacher stated that these spheres are focused on core business areas. Each sphere has a leader with three support leaders who are equally qualified. Members of DAO communities that lack a formal leadership training are more likely to be lost than successful and abandon frustration.
Documentation and onboarding streamlined
There are other best practices that should be followed in addition to the dos-and-don’ts as outlined by DAOs. Accessibility is the first. It should be easy for everyone to find out more about your DAO and its goals.
The core team should make this a priority as it is essential for the development of the DAO. It is important to clearly document all rules and standards and link them in many places. It is even more important to define precise membership requirements for DAOs with paid contributors. This will help avoid any disputes later. It is important to establish standards and procedures for conflict resolution, since no DAO, or other organization, is free from conflict.
Listen to the Community
Secondarily, when people are onboarding into your DAO it is important to ensure that your community feels heard. This is more than governance and voting proposals. It should include in-person feedback and Discord conversations as well as Twitter discussions.
Start small, and invest in the right tools to grow.
Because most DAOs are international communities, growth is often top-of-mind. Founders should invest in scalable communication platforms that can be accessed and managed to support different languages and content media. It will be a long time before DAOs become mainstream organizations. Commodore believes that the best way to help aspiring DAO founders as well as the wider Web3 community is to just get started.
“Part of innovation and disruption’s beauty is that new tools are created, and people use these tools to meet all their different needs,” stated Commodore. We’re still in the early stages of exploring this new tool. It’s too early to determine which features are good or not. It’s exciting to see so many people trying [creating a DAO], because together we’ll make faster progress as we collect more wins.
The post Launching a DAO: A Guide for Inception to Launch appeared originally on nft.