Wayne Boulais, Managing Director, Tensility Venture Partners

Armando Pauker, Managing Director, Tensility Venture Partners

Alex Poon, Co-Founder, CharmVerse

Distributed Autonomous Organizations (DAOs) became possible with the advent of blockchain and Web3 infrastructure. DAOs are appealing because of decentralization, community building and the promise of shared outcomes. The participants in a DAO can have more input on the direction and governance of the organization than the average employee in a traditional corporation. The flexible structure allows individuals across the globe to seamlessly come together and build a community centered around a common objective. And the token incentive structure allows all the members of the organization to benefit from the collective success of the project.

The first DAO, The DAO, was launched in 2016 on the Ethereum blockchain as an investor-directed investment fund that crowd sourced funds with a token sale. This DAO quickly ran into problems when its smart contract was hacked allowing the hacker to drain 40% of The DAO’s treasury. At the time of the hack, the Ethereum blockchain was only about one year old. In a controversial move, the Ethereum blockchain instituted a hard fork that rolled back the Ethereum history to before the hack. This change allowed the stolen funds to be returned to investors. (See What was the DAO?)

Since 2016 the blockchain ecosystem has gained acceptance and credibility in crypto trading, decentralized finance and non-fungible tokens (NFTs) for collectors and creators. This acceptance has led to renewed interest in DAOs as an organizational model and to fast growth in the number of DAOs. According to DeepDAO.io, in March of 2022, more than 600 new DAOs were formed, and they are now tracking nearly 4,900 DAOs. DAOs are growing at more than 160% annually. Yury Lifshits, the founder of SuperDAO.co, has predicted that one million DAOs will exist in the near term.

The ability to organize and manage people, tasks and money in a decentralized organization is a challenge. Blockchains, smart contracts and tokens are the critical pieces of enabling infrastructure that allow organizations to create and align incentives in a decentralized fashion. Crypto wallets are an essential control point for the DAO to manage role-based access, voting rights and payment methods.

Numerous DAO tooling companies have been created recently to assist in the formation and management of these decentralized organizations (see market map below).

While there are many different DAOs forming, there are four broad categories of DAOs.

Investment DAOs gather funds to make shared investment decisions in companies, grant distributions or shared collections of art, NFTs and other collectibles. In 2021, the Constitution DAO raised over $42M attempting to buy a copy of the US Constitution. Links DAO is intent on buying a golf course in 2022, while Krause House DAO is a collective effort to buy an NBA team. These DAOs have a strong focus on the protocol they are built upon because a DAO can have large, shared treasuries that require security, transparency and smart contracts to distribute funds into projects, pay contributors and document the approval process.

Social DAOs bring a community together to collaborate around shared interests. They focus on communication methods, community content, and shared values using a token gating process. For example, the Friends with Benefits DAO is a group of artists, thinkers, and Web3 enthusiasts attempting to bridge culture and technology with a creative, Web3-native ethos. The $FWB token enables governance and ownership for the members that share the DAO’s collective values.

Entertainment DAOs enable community driven content decisions for people like film makers, authors, artists and other creatives. These DAOs allow creators to leverage their brand to build a broader ecosystem of content delivered by community members across various channels (podcasts, newsletters, social, etc.).

Product and Services DAOs provide various business offerings. For example, RaidGuild is a design and development agency for the Ethereum ecosystem. Juicebox is a platform for fundraising from the community and building a treasury. DAO Masters and DAO Central are showcasing DAO projects.

Key elements of a DAO:

• Definition of strategy, values and goals of the DAO is set by founders
• The selection of the blockchain, and the creation of the smart contract, as well as the issuing of tokens, is also set by the founders
• Funding of the treasury is accomplished by token sales to the community and investors
• Distribution of approved funds is executed using tokens and crypto wallets
• Governance and decision-making is accomplished by having token holders approve proposals, distribution of funds, as well as policy and strategy changes. The tokens are stored in contributors’ crypto wallets and allow for role based privileges
• Operations processes to on-board community contributors, define and manage proposals, projects and tasks, as well as send payments to contributors, service providers and utilities. For example, CharmVerse combines the management of tasks, documents and bounties in one platform. Gnosis Safe allows for multiple parties to approve transactions. And Snapshot simplifies the voting process.

It is early days for DAOs, but things are moving very rapidly. As DAOs grow and demonstrate success in the Web3 eco-system, we see the potential of their novel organization techniques, tools and processes to be adopted initially where Web 2 to Web 3 businesses converge. Some potential examples are:

1. Collaboratively engage customers to anonymously vote on the direction of a company’s R&D plans
2. Creating a direct collaboration between creators, artists, entertainers and influencers and their fans using NFTs
3. Democratizing the way contract (1099 workers) find, perform and get paid for contributing to a company’s or DAO’s mission
4. Radically alter the transparency of decisions if a public, shared ledger as the system of record is used for governance or managerial decisions
5. Creating novel employee engagement practices by viewing the community of employees and former employees as valuable assets to help guide company policy and direction
6. Enabling workers to showcase their portfolio of verified work, accomplishments and skills publicly in their digital wallet
7. Defining new identity and access control systems that use pseudonymous crypto tokens in digital wallets.