DAOs have become the linchpin of Web3 world
In the last 5 years, Decentralized Autonomous Organizations or DAOs have generated highly valued cryptocurrencies on Ethereum and made headlines globally. Whether it is the infamous The DAO that was hacked and robbed of $60 million of ether, ConstitutionDAO that tried to buy the Constitution, or Klima DAO that is working to solve critical problems of the carbon markets, you must have come across the term once if you go online every day.
DAO is just a chatroom with a shared bank account, as Cooper Turley, a DAO investor and builder calls it. There is some truth in this statement but it barely does justice to what a DAO could achieve.
There are over 100 active DAOs in the world, and the top 20 alone are managing over $14B worth of digital assets as of writing this article. These numbers are enough to prove how running a DAO is serious business. Looking at this astounding growth and the promise of better work culture, forget about DAOs merely posing a threat to LLCs, they are on their way to becoming the new LLCs!
DAOs gained explosive momentum this year because of a burgeoning DAO ecosystem and emerged as a "new" blockchain concept to some. But they have been around and thriving for a while — what are they, and how do they contribute to the crypto space?
We'll get to what DAOs are in a bit but let's start with a little story, shall we?
Once upon a time, in the land of corporate dinosaurs and pre-historic management structures, there were two basic organizational forms - Hierarchy and Network.
At first, hierarchy appeared to be the perfect structure for getting things done. People had titles and a boss. As organizations grew, however, this structure started to break down: people couldn't effectively manage people they didn't talk to, decision-making was slow because it passed through so many hands, and importantly it isolated everyone: everyone apart from those at the top, of course.
People were unhappy with the workplace and being locked into a company. Traditional organizations had many problems: hierarchy, internal politics, unbalanced rewards, unfair/lack of feedback, historical precedents, etc. They were forced to adapt to the traditional working model. They wondered how much better it would be if there was no hierarchy at all with the complete decentralization of work. It was probably one of these people who worked on making it into a reality and thus, a DAO was born and birthed into existence.
A DAO is a self-governing, internet-native community. Entirely what a traditional company isn't. The community incorporates contributors with a shared bank account and a purpose: the creation of value through a set of rules enforced on a blockchain.
This set of rules, created by a DAO's elected members, governs the open-source blockchain protocol and acts automatically without the need for intermediaries. This is what we call a "Social Contract", which is an important piece of code unique to a DAO, but not the only characteristic that distinguishes it from other companies.
DAOs are not owned by a handful of founders and investors, rather the people who create value in them. Ownership, power, and control are spread across the community and each person has influence regardless of their "experience". They are flipping the idea of a single person or an entity "owning" an organization on its head.
This radical notion of an "Ownerless Ownership" works because everyone is a stakeholder and no one is the supreme holder of funds or a decision-maker. Everyone who works towards the growth and fulfillment of the shared mission of a DAO gets to be in an equal position.
All the actions and funding in the DAO are viewable by anyone since they're on the blockchain, making DAOs more transparent than traditional companies. This transparency significantly decreases the risk of corruption within the organization.
The decentralized structure allows for control of information to be taken away from the corporations that own the majority of said information. This open-source nature of information means that many people can help contribute to a project without permission from an outside source.
This transparent operational framework is the most important aspect of a DAO which also puts it at the center stage of the web3 revolution.
Since DAOs are decentralized and are not owned by a person or entity, they are also not governed the traditional way.
The governance and rules of each DAO are coded in the smart contracts on the blockchain and cannot be changed unless voted upon by the DAO’s members.
DAOs are democratizing the ecosystem by giving decision-making power to all its members on equal footing. Each and every decision within the DAO is proposed, discussed, voted on, and documented publicly, further adding to its transparency.
When people who have a shared purpose and a great passion for it come to work together, they ensure the best and efficient results.
Hierarchical structures can get in the way. Speed, effectiveness, and engagement can suffer when you have too many layers to navigate. And most importantly, it isolates everyone but those at the top. The blockchain network makes DAOs truly borderless which powers global collaboration. Since there are social contracts in place, all decisions and changes to the network get implemented automatically which is not possible in LLCs because of the hierarchy.
DAOs do not require or force you to keep your identity public.
A DAO is designed to allow investors to send money from anywhere in the world. Members can be more flexible and experimental with their funding decisions and investments since they remain anonymous on the network.
DAO is a complex topic, with lots of moving parts. However, at the end of the day, they are simply businesses run by teams of diverse individuals rather than a single leader. The rules and functions that govern a team may change over time, but the spirit in which this organization operates will always be the same. A DAO provides its members with a unique opportunity that simply isn’t available elsewhere in the marketplace: complete freedom.
What is a more passion-driven economy than a digital, decentralized space for like-minded people to come and work together for a shared vision? DAOs are fun and intriguing and there is more than just one way of perceiving them:
The DAOs that are currently active can be divided into two categories as put forward by The Generalist: technically-oriented and socially oriented.
Technically-oriented DAOs focus more on building in the crypto space and keeping their governance on-chain.
Socially-oriented DAOs primarily aim at bringing like-minded people together and creating a community for them to easily interact and brainstorm. Governance is likely off-chain, or non-existent.
A set of rules is crucial to a DAO and Protocol DAOs exist to help you build one by providing a framework to issue a token that is owned and operated by the community.
Protocol DAOs introduced transferable ERC20 tokens with a secondary market value. These tokens are used to govern protocols. Token holders have the authority to propose ideas, vote on, and implement changes to the network.
Projects commonly vote on token distribution which opens the doors to liquidity mining, yield farming, fair launches, and more.
Social capital is often overlooked or undervalued in a world intensively focused on financial capital. Social DAOs are bridging the gap by prioritizing social capital.
Their goal is to create a powerful community of people with mutual interests along with the usual benefits of DAO like shared ownership and authority. Social DAOs aim to create digitally native tribes and are a challenge to the traditional social community setup.
While Protocol DAOs bring new tokens into the world, we need to have DAOs that focus primarily on investing in them. Unlike the Social DAOs, these Investment DAOs are mostly about financial returns.
The goal of these DAOs is to allow members to pool capital and invest in projects at their earliest stages. Decision-making is democratic with LPs voting on suitable opportunities, unlike traditional venture firms.
Grant DAOs seek to advance the broader ecosystem, support promising projects, and open pathways to new web3 contributors through grants.
Communities donate funds and determine how to allocate this capital to various contributors in the DAO in form of governance proposals.
A community with a surplus of talent needs to direct the creative energy towards the right idea. Service DAOs pull this human capital together and put it to use in certain projects.
Service DAOs are essentially crypto-native talent agencies. They create decentralized working groups for individuals to work for the open internet on projects they vote to work on.
These DAOs create funnels to contract web3 mercenaries. Efforts are often rewarded with ERC20 tokens - providing ownership over the value created for a network.
The Media DAOs produce public content, often collaboratively, and the rewards are shared across the group, keeping governance autonomous.
Media DAOs break down the process in which a writer, streamer, and reader engage with the content they put out into the world.
There are DAOs that unite contributors around certain assets, or collectibles, mostly NFTs. These entities are called the Collector DAOs.
Collector DAOs also act as curators for certain projects, mostly seeking to curate NFTs having long-term value.
Starting a DAO is like minting an NFT, it is easier said than done. Although the procedure is fairly handy and there are plenty of tools that help you build one, you do need to have some technical pre-requisites.
To get a general idea of how to bootstrap a DAO, Jess Sloss’ tweet outlining the whole process is a good place to start with.
Dropping a cool art collection and sharing it with cool people, gating a discord channel, and airdropping tokens sound fun until you actually sit down to execute them.
A DAO needs a well-built structure to function smoothly. There are four phases a DAO initially goes through that help in getting that structure right and ensure a hassle-free launch.
If you want to take a stab at creating your own DAO, there is one thing you must have: a crypto wallet. Get the wallet ready and look for people who share your vision for the DAO you're aiming to build.
Make your "call to adventure" solid and clear. Frame out collective goals and determine your DAO's set of rules with your peers. Establishing why your DAO exists, what it will do, and how it will work early on is the key to a strong foundation. You can build your community on top of it with little to no chances of it collapsing.
Once you have laid out your intentions for the DAO and gathered a group of individuals as excited about it as yourself, you need to distribute ownership. Ownership is usually tokenized and there are many ways DAOs can distribute ownership to their members.
Some DAOs do an “airdrop,” where tokens are distributed to members based on their contributions and actions within the community. Another approach is via “bounties” where a DAO issues bounties to members to complete tasks and achieve their goals. Members are rewarded with ownership by earning bounties that are denominated in a DAO’s native token. Some DAOs open up the purchase of tokens via decentralized exchanges, like Uniswap.
Well-distributed ownership is what helps in the further growth and evolution of a DAO.
Establishing a governance structure is the most important phase of the DAO setup process.
This is the part where you decide how to make decisions as a group once your DAO is up and running. The most common method of decision-making in these organizations is called “Token Weighted Voting.”
A token holder is a voter and one token represents exactly one vote. Members put their proposals on tools like Snapshot and get voted on according to what the other members' preferences are. The outcome is then executed automatically through smart contracts.
There are similar decision-making structures in place in other DAOs with slight adjustments according to their priorities. These governance structures often evolve over time.
A DAO grows as members put in collective efforts towards a collective goal and incentives drive that effort. A win for every individual member is a win for the community which is why incentivizing and rewarding their efforts is a must.
DAOs usually start off by giving out native governance tokens to early members and contributors. These tokens do not have any immediate market value, but they represent the shared ownership of DAO’s collective value. Some DAOs also reward contributors with ranks and titles and widely circulated currencies like USDC or ETH.
DAOs once conceptualized and materialized, have endless possibilities of improving lives and rewarding innovation like never before. We have just started to scratch the surface, but it is extremely exciting what could follow and new endeavors that can be started.
Knowing what it takes to build a DAO is the first step to building a DAO, really. Since you're already one step in, you should get familiar with the most used and important DAO tools in the space right now.
DAO tools, built on web3, allow you to manage assets, make governance easier by providing a user-friendly voting platform, reward contributors, look up other DAOs, and more.
Here is one DAO tool per category that helps your community soar in different ways:
DAOstack - Open-source software stack designed to build and support a DAO.
Gnosis Safe - Multisig wallet used to manage a DAO's digital assets on Ethereum.
Proof of Humanity - A social identity verification system for humans on Ethereum.
Snapshot - Off-chain voting tool based on the IPFS decentralized storage system, used by DAOs to poll their user bases.
Discord - Channels commonly used to share ideas and discuss governance proposals.
CollabLand- Bots provide token-gated access and tips to community channels/chat groups on Discord or telegram.
Coordinape - Scales communities with tools to reward contributors, incentivize participation and manage resources.
SourceCred - A tool for communities to measure and reward value creation.
Mirror - A publishing platform that allows financing creative projects through tokenized crowdfunds.
Tally - Empowers governance through real-time research and analysis, governance tooling, and educational content
DAOs of today are crypto-oriented in their missions and purposes. They share a treasury, and all the decision-making revolves around how to invest or spend those funds. The space is self-referential for now, but not limited to only using crypto to govern crypto. DAOs can be used to create almost any kind of organization, from organizations that are more effectively run by the AI (rather than humans) and those whose governance is more directly controlled by its members. The rise of DAOs could lead to a future where much of the global economy does not rely on nation-states for law enforcement or property rights.
As of now, we can be confident in saying that DAOs have the potential to supersede the LLC model for building midsized companies in the future. But well-established large corporate entities will not be able to fully transition into a DAO, albeit adopt some of the features to have a more democratized management structure.
A DAO prides itself on being more transparent and autonomous than traditional organizations. This effective model has the potential to replace many other business models beyond cryptocurrency and investing. According to a lecture presented at Stanford's BioE60 Beyond Bitcoin course, there are a few ways in which the current DAO mechanism can be implemented in other sectors.
Imagine your favorite social media, food delivery, or transport apps being user-owned! The idea here is to DAOify traditional web2 companies like Facebook, Amazon, or Uber.
For example, the current Uber model requires all users to agree to their terms. Since Uber owns the platform, it takes a cut from both drivers and passengers.
Re-imagine Uber as an application created by a community of users who will use it. Both drivers and users co-govern the way it works and evolves. The application is co-owned by them and not by a single person or company. Everybody earns their fair share without an intermediary taking a hefty cut and most importantly, your data is secure.
Big companies can either switch to a more DAO-native model in the future or end up being the odd ones out in a crowd of DAO-governed companies that-
A shared purpose and coordination are what drive a DAO, making them essentially coordination tools. Hence, the DAO model applies well to not just companies but movements.
Most movements die down because of disorganization, insufficient funds, or lack of civic engagement. People organizing a protest or a boycott can benefit from a DAO model for better organization and results as:
DAOs rely on co-op governance which is made more effective via web 3.0. The working crowd of today is already leaning towards this idea and it wouldn't be a surprise if new startups adopt the DAO model and reject the traditional one.
There are numerous ways in which DAOs influence the startup world:
DAOs are growing in popularity and will continue treading the same path as web3 gains more momentum. NFTs have taken over the internet as some amazing NFT collections have caught the attention of big names in the tech and music industry and even sportswear giant Adidas. This massive NFT explosion has fueled interest in DAOs as more people come together to pool funds to invest in these digital assets.
Prominent names are entering the web3 space with a revolutionary idea and creating a DAO for the execution like Kimbal Musk's philanthropic DAO that will address food inequality. We’ll soon start to see more such organizations forming as DAOs to have better governance and come up with exciting solutions for creating value. This is only the beginning for DAOs, which means that more interesting use cases for this model are yet to be discovered and that alone should get you excited for the future of DAO and the future of work.
DAOs are perhaps one of the most exciting thing at the intersection of economics x culture x technology. DAOs represent a fascinating new way in which we can organize together, creating an entirely new model for humanity to push forward. The new DAO paradigm represents a massive shift in how we think of organizations and how they operate. We’re on the cusp of a major change in how our systems work, and it’s going to be fascinating to watch things develop over the coming years.
I believe that the next wave of business is not about a single company or industry, but about building economies – which I see as a series of interactions between different entities. These future economies will be powered by the collaborative work of many individuals, companies, and organizations, who will each gain from their participation.
In the future, you will no longer work for a company. You will enter into contracts with various DAOs, and these organizations will become your new employers, clients, partners, etc. A boatload of opportunities will arise as the technology lowers barriers involved in traditional business structures, with countless opportunities for individuals to bootstrap their career, get economical freedom and finally do something they absolutely love.
Leaving you with some insightful resources that might take you down the DAO rabbit hole, but trust me, it's a nice one.
WAGMI frens 🌈 paulfinneyx.eth 🪄 @paulfinneyx