The current call for change is met with a growing interest in decentralized autonomous organizations (DAOs). Their potential to drive user adoption in Web3, promote collective ownership, and increase accessibility is expanding. If adopted at scale, DAOs’ democratization potential could have powerful effects on digital life. But DAOs are not the right choice for every project, and those that do choose to integrate them must structure them with the intention of streamlining governance and driving user adoption.
DAO Point 1: Getting down to brass tacks
In response to the flaws in hierarchical intermediaries and hand-shake deals, DAOs create community-led groups with a leaderless governance structure. They encourage collective ownership, where groups are self-governing. By holding a token linked to the DAO, members obtain voting power and affect and dictate what a DAO does. These decisions lay down the rules of the organization and rely on smart contracts to automate and enforce these decisions when predetermined criteria are met.
The objective of many DAOs is to raise funds for a common goal or product. Determine what your organization’s unique use cases are and consider whether you need a DAO to achieve your goal. Think about how you’ll service communities in new ways. Research the different types of DAOs that are already making waves. Trust is key to effectively managing a DAO, as the DAO code is verifiable by any member. This allows you to measure how to collaborate in a safe and transparent way. So decide whether your project needs the layer of trust that is embedded in blockchain technology and smart contracts.
Point 2: Understand that the path isn’t smooth
A DAO is an attractive alternative to the traditional corporate model for Web3 startups. But it is not an ideal fit for a huge number of projects that would be better served and executed as centralized entities. As a DAO, you’ll need to manage hundreds or thousands of mutual decisions and invest in streamlined communication platforms that are scalable, accessible, and support diverse languages. Coordinating through messaging platforms also takes a lot of time and isn’t frictionless.
Think about how full-time members will feel about their pay being decided by other contributors. Does this say something about the level of privilege of existing DAO members working on these projects? Rewarding members that hold more tokens might solve loyalty issues but can also result in the network leaning toward centralization.
Manipulation and low voter turnout are issues. Technology may not be able to address low voter turnout, but it can streamline the voting process and speed it up. Off-chain votes can take a long time for a proposal to eventually push through. The persistence of hackers exploiting vulnerable code means proper security measures should be in place. Most importantly, the challenges of scalability and your DAO’s degree of decentralization are something you’ll need to address and uphold. It’s critical to determine the mission and goals of the project and understand if a DAO is the right choice.
DAO Point 3: Establish a team and the overarching need
Every DAO needs a strong core team to construct the organization’s smart contract. Whether you need to find this team or you bring together a group of friends, ask yourself if each person on your team is passionate about the mission they’re setting out on. Everyone should be invested – literally – and in it for the long haul. Discuss with your team why a DAO is needed, validate the need for the project and its community, and discuss how it will work and why a DAO will encourage community formation more than an organization with a central authority.
Disagreement when clarifying the goal and pain points is a red flag as this could affect your governance structure later on, so select members with similar views but complimentary skills. Technical complexity may be present even with an entire developer team. You’ll need to consider using existing frameworks to start your DAO without technical know-how.
Point 4: Set up the right governance structure
Be clear about community governance and decision-making processes. Is there a desire to automate decision-making via smart contracts or a preference for top-to-bottom governance and decisions based on seniority and leadership?
Many DAOs still offer “centralized decision-making” – 1% of the token holders actually hold 90% of the decision-making power – which can discourage new members from joining the project. The core DAO team should determine their key membership and governance principles to equally distribute the voting power. Off-chain voting has become more attractive where decisions are the result of online forums and meetings. DAOs that offer off-chain voting rely on tools like Snapshot, and outcomes are executed automatically. On-chain voting is where voters need the DAO token to participate, and the weight of a member’s vote is often based on the number of tokens they hold.
Whether you decide to operate on a one-token-one-vote basis, delegate voting power in a representative way, or opt for a weighted voting system, base your choice on the mechanism that makes it easy for members to connect to a multi-signature wallet, vote on proposals, and review them. When you envision your Web3 project, does it need this extent of collaboration to succeed? Do you need some degree of centralization or are communal interpretations vital?
DAO Point 5: Determine the standards for community ownership and value
The process of joining a DAO can be time-consuming. If you wish to form a DAO, you have to determine how to expand your community, as well as how to let new members join and prove their right to an opinion in the DAO. DAOs can be invite-only, automatically open to all token holders, or they can accept applications. This is a key decision related to the governance structure and needs to be considered first. Some DAOs enforce a minimum ownership amount for different members to avoid loyalty issues. Others now require members to own a specific NFT, which functions similarly to a membership card. Establishing thresholds and participation requirements is crucial in determining what will work for your organization.
Make it easy for any potential contributors to join and understand what your project is about. Provide online portals to all rules and standards. DAOs with paid contributors on a full-time basis will want to see the specific requirements. It’s a sure-fire way to avoid disputes down the road. Outline processes for conflict resolution. After all, decentralization doesn’t mean friction-free.
Point 6: Treasury and tokenenomics
In DAOs, tokens serve the purpose of rewarding members, voting on proposals, and unlocking further benefits. It’s up to you if your token will be used to vote on the organization’s direction, hold additional value, or offer opportunities for yield. Ensure long-term support from investors by creating vesting contracts with them. This decreases the chance of investors supporting your project long enough to make a profit off their shares and risking your community support. Unreleased tokens can also be used to bootstrap members and act as an incentive for long-term loyalty.
How you plan to allocate these tokens should create a balance between incentivizing your community and having enough reserve in your treasury to achieve larger goals and progress as an organization. Get ahead of legal complexity and compliance by liaising with an attorney. Uphold regular external audits and take advantage of the governance tools available to you, such as treasury management, which allocates funds based on collective decisions. Additionally, you could consider offering your team corporate card programs linked to multi-signature wallets that eliminate the hassle of converting crypto to fiat.
DAO Point 6: Address the scalability and transparency issues
Scalability can cause problems for DAOs and needs to be considered during their formation. Decentralization slows down decision-making, which is a problem for startups looking to move quickly. You should address how your DAO and various members will handle decision-making – and which decisions will be up for a vote. Assigning different committees or enforcing different voting thresholds can help scale in this case. Such strategies ensure that DAOs maintain decentralized decision-making and remain at least partially democratic.
For your DAO to grow, you need to maintain a high level of transparency. The data is public, but tracking token distribution is a long, drawn-out process. Get a clear picture of how your native token is distributed by using platforms with real-time insights. Publicize revenue metrics and the health of your treasury so members have all the facts when making decisions in this area.
Point 7: Thinking long-term
If a DAO is a useful tool for your organization, it’s not enough to just consider governance, collective ownership, trust, and scalability. Community communication, new user outreach, and continual auditing of governance principles are essential, particularly as you scale. Most DAOs fail because they cannot assess the long-term vision and involvement of their community. Or they cannot see the social complexity that comes with openness and co-creation from all members. Design your DAO with flexibility, a long-term vision, a willingness to take control when needed, and transparency toward your members and contributors. The success of your DAO depends on it.
About the author
Tahem Verma is the Co-Founder and CEO of Mesha, the all-in-one smart management tool for Web3 startups and DAOs. He’s a serial entrepreneur and previously founded the English-learning app Enguru. He received his BA at the University of Pennsylvania and MBA at Cornell Tech.
The information provided in independent research represents the author’s view and does not constitute investment, trading, or financial advice. BeInCrypto doesn’t recommend buying, selling, trading, holding, or investing in any cryptocurrencies