A Complete Guide to DAOs - what it is, tools, and how to create
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February 7th, 2022

Bob loves music, follows several local bands, goes to its shows, shares its music on social media, and sometimes even helps with some business connections.

He is more than a simple fan. He has been collaborating with each of these bands, and with the city’s musical/cultural local economy since the beginning. Bob is passionately helping to build this ecosystem.

One day one of the local bands’ songs goes viral. The band stands out, becomes famous, closes presentation deals, and gets very rich.

But, where is Bob’s share of the pie? How will he be rewarded for all initial work? How will he participate in the asset upside that he helped to build?

Welcome to the future of organizations, the DAOs - Decentralized Autonomous Organizations.

What are DAOs?

This new type of organization is a digital native community built around a specific goal (creating a product, raising money, buying some asset, funding research, and so on), whose governance and ownership are decentralized.

A kind of Digital Cooperative.

It’s a structure that brings innovative properties to an organization, like transparent and digital management, self-executed rules, seamless revenue sharing, open balance sheet, and long-term economic alignment incentives with all stakeholders; that are virtually impossible to implement in the current organizational structures (analog organizations).

All these news innovative attributes were made technologically possible by the new Internet Age, the Web3 (blockchains and crypto-assets).

But, before deep diving into details, let’s take a step back and review how the current organizations work.

Understanding Current Organizations Structure

Today, the two main social structures that we know are Companies and Governments.

Companies are for-profit legal entities incorporated through a social contract. Roughly speaking, the shareholders in the cap-table are the equity owners and make the company’s strategic decisions, and also have the right to receive yield based on their shareholding.

Sometimes, with public companies, you can buy their stocks (tokens), to earn yield, and, in some cases, even have voting rights on matters of corporate policy.

And although the top layer of this structure may be digital - i.e buying stocks online, digitally signing contracts, etc. - the entire infrastructure foundation is analog: countless contracts based on human language signed by stakeholders.

Governments are also legal structures but non-profit. The citizens are taxed to create a budget that will be used for public management. This administration is democratic, where each person votes for representatives who then influence policy initiatives and budget allocation.

So that citizens can vote is needed a token; some kind of Voter ID or official document.

Like companies, the government works with a few digital interfaces but all the operational infrastructure is analog, with signed contracts or implicit social agreements (you never signed a contract agreeing to pay taxes, for example).

So, with these two concepts in mind, we can say that DAOs are a merge between both in a native digital structure.

The main 3 features to highlight are the Rules, the Balance Sheet, and the Ownership Token.

The Rules are not social contracts enforced by a legal body. On DAOs the main rules are self-executing code in a blockchain (smart contracts).

The Balance Sheet is not composed of fiat money. The balance sheet is on a blockchain composed of cryptocurrencies and belongs to the organization, with many possible access restrictions.

The Ownership Token is not a legal document as social security number or company stock. In DAOs, tokens are digital (crypto assets) and issued by the organization, working similarly to a cryptocurrency.

So, let’s deep dive and understand each one of these technological primitives that enabled the rise of DAOs.

Self-Executing Rules and Shared Balance Sheet

Decentralized applications (dapps) on Blockchains enable many features that before would be impossible, such as immutable and self-executing contracts (smartcontracts) and native finance systems, like a balance sheet on-chain (a public address on a Blockchain, enabled to receive cryptocurrencies).

This allows the DAO's rules to be programmed to be self-executed, at least the most critical ones.

For example, there could be a smart contract rule that proportionally shares among all DAO members 10% of the revenue of a digital product sale. That is, whenever there is a new payment, automatically all members receive their share of 10%.

Once this application is on-chain, its source code (to share 10% of revenue among members) can be easily audited, thus, not needing a trusted third party to account for the amounts and send them to stakeholders.

The Shared Balance Sheet follows the same concept as Bitcoin. But, rather than the user having a public address, it is the application itself.

Of course, not everything that happens in a DAO is automated with on-chain rules, mainly in the beginning.

In the early days, a DAO is extremely centralized on its founders and in the initial core team. But, over time the DAO decentralizes in what is referred to as "progressive decentralization" with more important rules going to blockchain or at least opened to votation.

Ownership Token

Maybe you are wondering, how is member participation established?

In the current structures - governments and companies -, tokens are legal instruments, like company stocks or a social security card.

In the blockchain, this token is digital (cryptoasset) and issued by the founders of the DAO.

The token represents a piece of ownership of the organization. The member can use it to vote on important topics, receive payments, access exclusive token-gated channels and, of course, get exposure to the upside (exactly as happens to stocks).

Keep in mind that the token’s utility and governance rules are very early and under a lot of experimentation. There is no playbook to follow.

Right now, focus on understanding the new premises and all possibilities.

So, how would Bob be rewarded with DAOs?

Let’s go back to Bob’s story, one of the city’s biggest musical enthusiasts and collaborators.

So, imagine that the local group of bands, that share the same style and musical values, decide to create the BANDAO.

The very first step would be to create the DAO.

There are several platforms to help in this process, like DaoStack and Aragon.

Over there, you can create a public balance sheet on-chain with Ethereum, where all musicians, DAO’s member fans can transfer crypto that will be used to start the project up, or even start a crowdfunding campaign with tools like Mirror (web3 toolkit for sharing and funding anything).

And, different from a conventional organization, this money will be public on a Blockchain and completely available to audit.

The second step is to create the DAO’s token that will be used to share community ownership, establishing who has voting rights and access to benefits.

On the same platforms used to create the DAO, mentioned earlier, you can easily create the token, setting the amount and other specific rules. For example, creating 1 million tokens $BAND and sharing part of them proportionally among the initial investors (members and/or crowdfunding supporters).

With Mirror, it is possible to automatically and proportionally share tokens for the crowdfunding supporters, which will be directly sent to the members’ digital wallets. However, the other platforms have similar features as well.

The $BAND token could be used on the growth strategy of the bands.

Members can summon up the community to help share youtube song links, and any other content that promotes the bands, and then token reward those who generate more engagement.

There are also platforms to automate this process, like Sourcecred e Coordinape.

Everyone who has been collaborating to build the project out, be full-time or just helping spread the songs part-time, for example, will be rewarded proportionally with tokens. They will be owners of the community, have access to several benefits set by the DAO, and of course be exposed to the potential upside.

There can be many benefits for $BAND holders.

They can vote about future decisions and community rules through voting platforms like Snapshot.

For example, they could vote on which city will host the next show or could participate in the creative process of some song, or even vote on future revenue shares rules.

Another benefit could be private channel access, like Discord or Telegram, to engage in internal meetings or exclusive content. With Collab.land you can set up a bot to automatically check if the user has the token in their digital wallet, allowing/blocking them to join the Telegram group or Discord channel.

Another example: if the member had more tokens than a pre-defined threshold, he could have free access to all shows of BANDAO.

And, of course, a part of DAO’s revenue could be shared among token holders, automatically.

Since, unlike a company, everyone can easily own a token, that is, own a piece of the community, all members share a win-win relationship.

So, in the case of one or more bands take off, Bob would be highly rewarded for being such a dedicated fan and so actively collaborator during the initial phases, after all, now he has a considerable amount of $BAND.

The (already outdated) DAO Landscape

In 2020/21, we saw an explosion of DAOs with many different goals.

Curated by Coopahtroopa
Curated by Coopahtroopa

One of the most interesting use cases is physical assets shared ownership, like Artwork and Sports Teams. Yeah, sports teams.

For example, Krausehouse.club is a DAO whose goal is to buy an NBA basket team. The ownership will be shared through tokens among all members.

They already raised 1000 ETH (+U$3 million).

Another example is the PleasrDAO (an experienced NFT collectors community) which bought Snowden’s NFT for U$ 5,4 million. After the acquisition, the DAO fragmented the asset with fractional.art in billions of tokens ($DOG) to share the art ownership with the whole community.

Another terrific experiment is CityDAO.

CityDAO is a decentralized organization building a network of parcels of land, on Blockchain, starting with one land in Wyoming.

Each parcel of land is an NFT that can be owned by the DAO or by one individual.

Btw, pretty soon, this model will be led to real cities, where all citizens that own a piece of land will be able to vote on the city governance using the underlying city token.

There are also Cultural, Investing, Scientific Research, Education, and Media DAOs. The list is endless.

Challenges and Future

Today, despite the surreal progress and growth of DAOs, the entire industry is on an initial and very experimental stage.

There is no playbook to follow, nor easy answers, just insights, a lot of problems, and a few good practices to consider.

The tooling is scarce, although we already have evolved a lot in the last years, as shown previously in this article.

One thing, though, is clear.

This is an ascending, powerful new social structure.

It will not just impact how economic structures organize themselves, but the political ones.

The new generations, digital and crypto natives, will never work for a company or live in a city which not share ownership of the asset among the members (employees/citizens) through tokens.

Just a few organized individuals will have the power and ability to negotiate and execute in the real world as never seen before in human history, on par with global institutions.

Individuals will have abundant access to the capital share of projects they work on, collaborate on, or simply use, like software; being able to receive multiple income flows (not just from a regular job).

Many already see DAOs and web3 technologies as the last piece to achieve the so dreamed UBI (universal basic income).

We do not know precisely which consequences, benefits, and harms, this new organizational paradigm will bring.

But one thing is clear: will be profoundly transformative.


Follow me at @bypeerbase

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