“We control the world basically because we are the only animals that can cooperate flexibly in very large numbers. And if you examine any large-scale human cooperation, you will always find that it is based on some fiction like the nation, like money, like human rights.”

Yuval Noah Harari, Sapiens: A Brief History of Humankind

All of society runs on our ability to cooperate effectively in groups toward larger goals. From early hunter-gatherer tribes to modern corporations, people have always come together to do big things. For the first time in history we are not limited by physical proximity. The internet allows us to work with anyone, anywhere.

We may be at the frontier of a new paradigm in human coordination, one that is truly internet native and enabled by blockchain technology. DAOs might be the future of human collaboration.

Squads is a Solana based project that wants to make it easy to create and run DAOs. In this deep dive I’ll cover

• A primer on DAOs
  • History
  • Definition
  • DAOs vs traditional organizations
  • Types of DAOs
  • The state of DAO tooling
• Overview of Squads
  • Features
  • Product overview
• Funding and team
• Bull and bear case
• Conclusion

It’s a bit of a long read so feel free to skip around. Let’s dive in!

A primer on DAOs

History

Once the idea of Bitcoin as a money started picking up steam, Bitcoiners started discussing other applications of blockchain technology. Vitalik Buterin, the creator of Ethereum, was an avid participant in these discussions. The concept of “decentralized organizations” was often discussed in Bitcoin forums, but nothing came out of it as you couldn’t really build on top of Bitcoin.

Vitalik created Ethereum as the first general-purpose blockchain that you could build on top of using smart contracts. In the 2014 Ethereum whitepaper he mentions “Decentralized Autonomous Organizations” as one of the applications that could be built on top of Ethereum.

The first major DAO was created in April 2016. It was simply called “The DAO” and worked like a decentralized venture capital fund. It had a native token called $TheDAO that anyone could buy. Anyone could pitch their idea to The DAO. If you held the token you could vote on what the DAO should invest in. Investment returns would be split among token holders.

The DAO soon became the most successful project on Ethereum, locking in 12.7M ETH ($150M at the time, over $33B today). That was over 14% of all ETH in circulation. On June 17th 2016, The DAO was hacked. The hacker exploited a bug in The DAOs smart contract and stole over 3.5M ETH in a few hours. The fallout from the hack was so big that Ethereum had to hard fork- The original chain continued on as Ethereum classic, whereas in the forked Ethereum chain the stolen ETH was returned to the original wallet.

The hack scared a lot of people away from DAOs. There were a few years of DAO winter where very little happened in the space. However the DAO had proven that this model could work, bugs just needed to be ironed out. A few advocates (such as Rune Christensen from MakerDAO) built through the DAO winter. By 2020 DAO optimism was starting to pick up again.

What are DAOs

DAOs stand for Decentralized Autonomous Organizations. That’s a definition that everyone can agree upon but very few strictly follow. Most self-identifying DAOs today aren’t truly decentralized or autonomous.

A loose definition of a DAO is a group of people with a common goal (ie. the organization bit). They also usually have one or more of the following

• Gated access
• A shared treasury owned by members of the DAO
• A native token.
• Community governance. Decisions are made based on member consensus.

Decentralization

Decentralization exists in a spectrum for DAOs. A DAO is truly decentralized when there are no single points of failure and all decisions are taken by community consensus. This is often orchestrated using governance tokens. Fully decentralized DAOs, where all decisions need to be voted upon, work very well for digital public goods that don’t need to rapidly iterate. It’s a very democratic way of building. However, it can slow down teams that need to quickly ship products. Many product teams in web3 adopt a “progressive decentralization” approach, where initially the core team owns a majority of the tokens but passes it on to the community over time.

Autonomous

A DAO is truly autonomous if all actions are governed by smart contracts. Members submit proposals. If the majority of community members vote in favour of the proposal, the proposal is executed. No member can perform an action without community support, and no member can roll back a decision taken by the community. Rules are defined in smart contracts- code is law.

DAOs are still very early. We should get more clarity on what exactly a DAO is and isn’t over the next few years.

DAOs vs traditional organizations

Today the Private Limited Company model is seen as the best way to align groups of people to pursue a goal. This is a byproduct of the industrial revolution. Many of these companies have created immense value and improved the world, but this model has its shortcomings.

Problems with traditional organizations

• Employees are incentivized to create value with wages. Wages give employees short term stability but do not give them exposure to any upside. In most companies, employees have little to no ownership. Not only does this prevent employees from accumulating wealth, it also misaligns incentives. If you don’t have a real stake in the company your goal is to do the minimum amount required to get your salary, not do what is best for your company. People still work hard to get promoted(to get higher wages) but ownership aligns incentives better. Many companies (particularly tech startups) have realized this and implemented ESOPs. However, these are usually very illiquid and often have a lot of red-tape associated with it.
• Traditional companies tend to get bloated with multiple layers of middle management over time. This reduces the compensation that employees that actually create value (which are typically close to the bottom of the pyramid) get.
• Traditional companies are usually more secretive. Public companies are subject to audits but even that is only a few times a year. Moreover, the general public usually has no way of getting to know what is going on behind the scenes.

How DAOs are different from traditional organizations

DAOs have a lot in common with traditional organizations but have some key differences.

• DAOs are more transparent than traditional organizations. Treasuries exist on public blockchains, and the code underlying governing smart contracts can be easily inspected.
• DAO structures are usually loose and fluid compared to the rigid hierarchies in traditional organizations. There probably won’t be multiple levels of middle management in a DAO.
• The community has the majority stake in the ownership of most DAOs.
• You can fork a DAO and make it your own.
• DAOs tend to be internet native and not tied to any physical location. Remote work without fixed time commitments is typically the default. It usually has lower barriers of entry than traditional organizations, both to create and work in.

Types of DAOs

DAOs come in all shapes and sizes. It ranges from a group chat of friends that call themselves a social DAO, to protocol DAOs that control billions of dollars. More types are popping up everyday. Some of the common types include

• Investment DAOs: Web3 native VC firms. Groups of people that pool their money together to invest in assets with the expectation of profits. Returns are divided amongst members, investment decisions are usually made through community consensus. eg: Metacartel Ventures, Neptune DAO, Flamingo DAO
• Grant/Charity DAOs: People that come together to give money for a cause without expectation of returns. Usually done to incentivize contributing to digital public goods, to kickstart development in an ecosystem, or for charity. eg: Gitcoin grants (transitioning into a DAO), Ukraine DAO
• Service DAOs: Web3 equivalent of agencies. Will work for tokens. eg: Raid Guild, Layer 3, Superteam DAO
• Protocol/Product DAOs: DAOs governing the development of a protocol/product. eg: ENS, Compound, Maker
• Creator communities: Communities that form around a creator/influencer, often orchestrated by the creator’s social token. eg: $RAC
• Social DAOs: Gated online communities that do not have any one particular purpose. Optimizes for vibes. eg: Friends with Benefits

The lines between different DAO types can be fuzzy. Many DAOs fall into multiple categories. Most DAOs have some social aspect. Moreover, DAOs can have subDAOs and affiliated DAOs that fall in adjacent categories.

The number of DAOs has exploded over the past few years. Pretty much every NFT project that drops has a DAO and a metaverse play in its roadmap. Most web3 protocols and products are already DAOs or have plans to progressively decentralize. There are currently over 4000 DAOs active across Ethereum and Solana.

The state of DAO tooling

DAOs need the right tools to succeed. However, since we are so early, we haven’t really fully understood what DAOs are. Everyone seems to be building for their own definition of a DAO

Today’s DAO stack is mostly a combination of web2 apps and Discord integrations. This is rapidly changing. We are starting to see web3 native DAO tools that are gaining real traction.

Most DAOs will require tools for some combination of these needs:

• Communication: Communication is the most important aspect of collaboration and forms the base layer for all DAOs. DAOs today typically use web2 chat apps like Discord, Discourse and Telegram. There are several new communication platforms currently being built with web3 use-cases in mind.
• Gated access: Most DAOs have distinct groups of members and non-members. Members are usually identified by on-chain credentials- they need to own x amount of a token or need to have NFTs of a particular collection in their wallet. DAOs today typically gate access using Discord integrations.
• Creating and airdropping tokens: Most DAOs are orchestrated using tokens. These may be generic tokens like ETH/SOL/USDC or DAO native tokens. DAOs may even have separate tokens for governance and incentivizing contribution.
• Treasury management: Most DAOs have a community treasury where digital assets are held. DAOs need secure tools to store and manage these assets.
• Contributor compensation: DAOs typically reward contributors. This may be in the form of tips, grants, bounties or recurring salaries.
• Governance: In DAOs that are on the higher end of the decentralization spectrum, decisions are made by the community. Typically anyone can raise a proposal and the community votes on whether to implement it. In some DAOs the weight of your vote depends on your stake in the DAO, ie. your vote counts for more if you hold more tokens. DAOs need tools that make managing governance easier.
• Knowledge management: DAOs, like traditional organizations, need to store information that can be accessed by members. This is typically done today using web2 tools such as Notion, Gitbook, Loom, Google Drive, etc.
• People ops: Everything required to keep contributors happy and maximize productivity. This includes processes such as member onboarding, highlighting contributions, etc. This also includes adjacent services such as perks, health insurance, etc.
• Domain-specific tools

DAOs have a lot of the same needs as traditional organizations. However in DAOs, your identity is on chain. Your name, display image and access comes from tokens in your wallet. Web2 enterprise tools don’t work with wallets. People are rushing in to build web3 native DAO tools before popular web2 tools catch up. As a result we have seen an explosion of DAO tools.

All smart contract platforms can be used to build DAOs but most DAOs today mostly are either on Ethereum or Solana. The number of DAOs on Solana are growing extremely fast. The Ethereum DAO tooling landscape is starting to mature. However there are very few DAO tools for Solana based DAOs.

Introducing Squads

Squads is a web3 collaboration infrastructure for Solana-based teams. Squads helps web3-native teams organize, make decisions on-chain and manage digital assets together using codified membership, multi-signature wallets (multi-sigs) called “Vaults,” and tokenless, on-chain voting for governance.

Stepan*, cofounder of Squads*

Squads wants to make it easier to create and manage Solana based DAOs. It does so by solving for two major DAO needs- governance and treasury management.

Governance

Fully decentralized DAOs face issues similar to that of almost every democracy

• Asking the entire community to vote on every decision is very slow and noisy.
• Voter turnout is consistently quite low.
• The community may not have sufficient knowledge about the subject-matter of the proposal.
• Some DAOs allow you to delegate your vote (similar to how jurisdictions elect representatives to make decisions on their behalf). However, the same group of delegates have to vote for all decisions, not just the ones that come under their expertise.

The other extreme is to have a centralized DAO where decisions are taken by individuals behind closed doors (like traditional organizations).

According to the Squads philosophy, DAOs should create working groups or subDAOs to focus on specific areas of DAO development. Each individual subDAO is a squad. Squads act as the atomic unit of DAOs.

Let’s say you have a protocol DAO. You can have a dev squad, marketing squad, finance squad, etc. Each squad can have different permissions. For example, you can restrict access to the protocol treasury only to members of the finance squad. Decisions need to be made by the member of the responsible squad, not the entire DAO.

You can create two types of squads in Squads.

• Multisigs: In multisig squads, members control a multi-signature wallet. Actions will execute only if they have enough members that vote in favour of the proposal(needs to be more than the confirmation threshold). In a Multisig Squad, members are not minted tokens. Each member has one vote.
• Teams: Team squads have a few extra features. In team squads, members are minted tokens allocated by the creator of the team squad. When voting on a proposal, a user's vote weight is determined by the number of tokens they have in their wallet. The more tokens you have the more your weight counts. The tokens are governance tokens and are illiquid(for now).

Treasury management

Each squad has a corresponding treasury called the Vault. Vaults contain all the digital assets owned by the squad. This includes both fungible and non-fungible tokens. You can also diversify the vault using the inbuilt swap feature.

The Squads program is fully open source. it has been audited by Neodyme. A lot more features are in the pipeline. Squads is also building tools for NFT governance.

Product overview

When you open up the app you will be prompted to connect your wallet

Once you connect your wallet you will see all the squads that you are in. Squads works based on public-key whitelisting right now, ie. if your public key has been whitelisted by a squad you will see it in the dropdown. Token based whitelisting might be added in the future.

Creating a squad

Click on the create squad button on the top right. You will be asked to choose the squad type. For now we will stick to multisig. Team squads have a few more advanced features.

You will be prompted to enter a name, image and description for your Squad

You can add additional owners if required. This can also be done later.

You will then be asked to choose the confirmation threshold. This is the minimum number of confirmations(signatures) needed for a proposal to pass. This can be changed later.

You will then be asked to review your squad settings. Your squad type, name and description are immutable and can not be changed once the squad is deployed. Make sure that these are correct before clicking on the deploy button. It costs around 0.08 SOL to deploy a multisig squad. This is all network fees, Squads does not take a cut. The team is working on bringing the cost down.

Managing your squad

The first screen in your squad’s dashboard is the transactions tab. You can see a list of all transactions executed/proposed by the squad.

All transaction data is stored on-chain. You can not modify the transaction history(although you can hide it in the squads view). You can see more details about any transaction by clicking on it. Once a transaction passes the confirmation threshold, anyone can execute the transaction.

If you switch over to the owners tab you can see all the members of your squad. Squads currently allows up to 150 owners per squad. You can also link your wallet to your Twitter handle (powered by Cardinal) and get names instead of wallet IDs. SNS support should also be added soon.

The vaults tab is the heart of Squads. Here you can see all the digital assets controlled by your squad(both fungible tokens and NFTs).

You currently can not directly send tokens to the vault address from most wallets. This is because the vault address is a PDA(Program Derived Address) of the Squads Vault program, and most wallets don’t allow users to send funds to PDAs. To deposit tokens into your vault you need to click on the “Deposit” button on the top right.

Clicking on an NFT shows you all of it’s details.

Once you have funds in your vault you can diversify your squad treasury by performing swaps in the vault itself. Squad swaps are powered by Raydium.

Executing actions

All actions in Squads are proposals. ie. you can not do anything (other than deposit funds) without raising a proposal. If the proposal passes the confirmation threshold it can be executed. Any owner can execute a proposal, it need not be the person who created it.

When you try to initiate an action (such as remove a member, send tokens out of the vault, perform a swap, etc ) you will get a popup asking you for the proposal details. You can enter a description and an expiry date. If the proposal does not get enough signs before the expiry date, it will lapse and can not be executed.

Funding and team

Squads came out of the Solana Season hackathon which happened in May 2021. Stepan, a corporate lawyer, jumped into the #build-team channel where he met Sean, a full stack web dev with close to 20 years of experience in tech. They assembled a team and set out to build a DAO generator. By September they were live on devnet and had raised a seed round of $1.5M led by Collab+Currency. In February they raised a $5M round led by Multicoin capital. Multicoin is one of the most prominent investors in crypto, and are OG backers of Solana. A lot of other prominent funds and angel investors also participated in this round. Squads went live on mainnet in early March. Today over 100 Squads are active on mainnet.

Squads currently does not have a token and does not operate as a DAO. They may decentralize in the future.

Bull case

DAOs have seen explosive growth over the past two years. Solana is seeing a lot of activity. By building for DAOs in Solana, Squads is riding on two tailwinds. Being the go-to DAO OS for Solana could be a huge opportunity.

The Squads team is currently working on a mobile app. It is expected to go live within 2 weeks. Most web3 mobile apps aren’t great. Having a polished mobile app would place Squads a cut above most other DAO tooling products in the market today.

The DAO market is huge today but the estimates for how big it can get are insane. If DAOs truly end up revolutionizing the way we work, A LOT of money will be parked in treasury management solutions like Squads. Even the most minimally extractive business models can be very lucrative.

There is a lot of regulatory uncertainty surrounding DAOs. However, there are positive changes happening in the space. Many jurisdictions are welcoming DAOs with open arms. Wyoming is leading the way for DAO laws in the US. Good news for DAOs is good news for Squads.

Bear case

There are a lot of companies trying to build “the operating system for DAOs”. Over the next few years most will die and a few big winners will emerge. Ethereum already has several established players. Right now they are highly specialized but will probably add more functionality soon. They may also decide to go multichain and support Solana. Trust is very important in treasury management. Established brands in Ethereum that already control a lot of assets may find it easy to find customers if they expand to Solana.

Crypto in general, and DAOs in particular, are subject to a lot of legal and regulatory scrutiny. A few laws that make it harder to build or work for DAOs might lead to a prolonged DAO winter. Although unlikely, this might also happen if a major DAO/DAO tool gets exploited like the DAO hack of 2016.

DAOs need to figure out a lot of stuff. The next few years will be crucial. If adoption and functionality do not catch up to hype, DAOs might die a slow death.

Conclusion

DAOs are a very exciting new frontier in human collaboration. However, there is a lot of stuff left to figure out. Squads is tackling the challenge head on and creating organization legos for teams building on Solana. They have a great team and are supported by some of the best investors in the space. They already have a lot of users for a product so early. Squads future looks very exciting.