Those involved in startups know that there is a time, early in the life cycle of the business, between Seed round and Series A round, where most startups die or stall, called the Valley of Death.
Death Valley is the moment of truth for a startup. It is the gap between the “idea of a business model” and the revenue generation from the product, when expenses are high and cash is limited. It’s when the company has to hire the team, build the product, and launch it. It is when they need to show that there is a product market fit and there are potential revenues and profits coming in the future. The company must carefully manage limited startup capital from Angel investors and show enough promise to attract institutional investment, aka Venture Capital. They need to cross Death Valley before they run out of cash.
For DAOs, this moment happens at the very beginning of the DAO setup. This is when the core team needs to rally a community and get everyone to work on the mission and vision of the organization.
If you have a core team with a good reputation or an early member who has a big influence network on Twitter or in other DAOs, the outreach of the DAO can go viral quickly. Otherwise, the DAO remains in a latent stage where the core team is doing all the work to get the mission up and running. Death Valley for DAOs is about cash and community.
An amazing thing that happens in a DAO that doesn’t happen in a corporation or a web2 environment is that random people just arrive and offer their skills to help, just for the sake of the vision and the community around it. This is the biggest asset DAOs have today versus companies or institutions from the web2 world.
As the community grows, contributors rally around the mission and start collaborating. Groups are spawned in Discord channels and productivity is going through the roof at the beginning. There will be significant community involvement once a Discord server reaches a healthy critical mass, about 5-10k members.
Typically Discord servers have a high churn of users. A lot of the Discord “explorers” are just looking for the next new token to invest in. They can distract from your mission and vision, and only stay for the hype of the token they will get on the airdrop.
Others will relate to your vision and will want to stick around and contribute. Those are the people that will be more involved in building the organization, creating processes, and getting things running.
Once the DAO has some momentum, it is time to launch the Token. The core team will pick the smart contract to be used, and will deploy it on a multisig wallet to maintain transparency, security, and the trust of the community.
This is a tokenomics example of a DAO building a technology product:
his token is then airdropped to the community based on the criteria predefined when the DAO was formed. This is a crucial point of the DAO creation, as it is another criteria people use to decide whether they want to join the DAO or not. The Tokenomics reflect how the core team is thinking about the DAO, the community, and its compensation model.
The community is savvy on these aspects and they understand the underlying messages of what is valued by the core team. A bad choice here and you won’t see any traction in your DAO.
For example, if you have a tokenomics where 51% of the tokens go back to the core team, obviously Decentralization is not going to be priority.
If you see a percentage of the tokens reserved for investors, it means that there are special interests behind the DAO -whales, VCs, you name it. Investors may have short term goals of profiting that conflict with the long term goals of the community. If they get a large slice of the pie, they will have a disproportionate sway in voting on proposals and can steer the DAO into short term thinking. That is the problem with the corporate world now.
Another thing to consider is the proposal threshold. This is the amount of tokens you need to have in order to propose something for on-chain voting -or even for off-chain voting. Recently, DAOs are (avoiding to share this and leave the proposal process in a more informal forum like their Discord.
Finally, you will need to take a look at the portion assigned as DAO reserve. This reserve will be used for both operating costs and future airdrops, so it is for future proofing and resiliency against long term risks.
Beware if there is any portion allocated to provide liquidity in exchanges. While this is a novel idea and helps bring value to the token once distributed, it also provides a very quick exit for the larger token holders, aka rug pull. If you see something like this in the tokenomics, check if the core team and investors have any form of lock period to exchange their tokens. A lock period, or vesting period aligns the long term interests of the team with the community. If there is no lock period, don’t even get in this DAO, the risk is too high!
Now that the token has been launched, the governance model kicks in. The core team has to arrive at consensus with the community and has less power to make decisions on the spot.
In this article we describe some of the most advanced models of DAO governance.
From here, it’s just like an engine that has been started successfully and needs a few revolutions to get warmed up and provide throughput. Rounds of proposals and voting expose and validate the true intentions of the community and the core team.
The answer is yes. The way VCs are investing in DAOs is by either injecting capital early on, when the DAO is being created, especially on technology products that need a big push to start, or when the airdrop is happening.
Some DAOs issue a token to raise capital. They use tools like mirror.xyz or Juicebox which allow users to exchange ETH for the DAO’s Token. This capital is raised towards a reserve based on the tokenomics described above.
Some funds like a16z take a position in these raises and can end up holding a large percentage of a DAOs token. As an example, a16z holds a big position in Uniswap as well as other protocols. They are trying to mitigate this concentration of voting power by assigning delegates which will theoretically decentralize their influence on these protocols.