Since the beginning of Bitcoin, people have thought that blockchain technology could change the way that industries, corporations, organisations, and nonprofits usually work in big ways. But in the last few years, the decentralised autonomous organisation (DAO) is the only Web3 innovation that has made national news. It has caught the attention of investors, operators, and scientists alike.

DAOs have become the most popular type of organisation in Web3. They are used for everything from blockchain-based philanthropy to crowdsourcing efforts to collect culturally historical NFTs. But what makes these kinds of groups so different? In this guide, we’ll explain what a DAO is and lay out the steps for making one. We’ll also talk about important decisions to make and the best ways to run a DAO.

 

What’s a DAO?

What is a DAO, then? First, let’s talk about the basics. Based on the definitions in our NFT dictionary:

A decentralised autonomous organisation, or DAO, is a type of organisation that uses smart contracts to run on the blockchain. The rules for how the DAO works are written in the smart contracts, which are also used to carry out decisions. Unlike most businesses and organisations, which a small group of primary shareholders runs, DAOs are run by a group of people who own tokens. All people who own governance tokens in a DAO can vote and have a say in important decisions. If a proposal gets a certain number of votes, for example, it is accepted and carried out according to the smart contract rules.

DAOs have been made (and are still being made) for a wide range of uses. This includes funding digitally native projects (NFTs), managing grants (Aave Protocol), building communities (Friends With Benefits), buying cultural collectibles (ConstitutionDAO), private investing (Krause House), making media and content (Bankless), and more.

The problems with a DAO

In theory, DAOs should be a more honest and fair way for organisations to run. Not only do they eliminate the need for centralised, hierarchical decision-making, but they also do a good job of ensuring everyone’s incentives are aligned. This makes the people who use and give to the organisation into real investors and owners. By choosing community ownership, DAOs give people who work in the organisation a voice in important decisions about its future.

But it’s important to remember that all DAOs still have orders of power, even if successful DAOs do make a cyclical system where no one person has the final say. Most DAOs give governance tokens to people based on how much they contribute. Those who give the most money also have the most governance tokens and, therefore, the most voting power based on reputation.

Since DAOs are new, many are still working through problems with how they work. For a DAO to work well, decision-making must be done by the whole community, which takes time. It can be hard to agree on something. If too many people are involved in the early stages of a DAO, it can be hard even to get a proposal to the voting stage. Lauren Kacher, the founder of Alterrage, the first DAO-led fashion label, says that this difficulty comes with operational risk. In an interview with nft now, Kacher said,

“It’s important to know right away how much risk you’re willing to take.” “DAOs offer a lot of room for growth, but without the right foundations, you could lose control.”

Compared to corporations and other formal organisations, DAOs also pose big security risks. Web3 is still mostly a wild west, and even the most secure smart contracts have been broken into. So, before you can move forward with your DAO, you need a team of skilled developers and a number of ways to deal with risks.

How to start a DAO

Before making a DAO or switching to one, there are a number of things to think about. To start, people who want to organise should focus on two main areas: purpose and utility. It’s important to remember that DAOs are neither useful nor good for all use cases, and many things still need to be fixed.

If you want to make a DAO, you should ask yourself, “Does this goal need a DAO to be reached?” If the answer is yes, move on to the next question: “How would our organisation benefit from coordinating without trust on the blockchain and aligning incentives through a complex tokenomics system?”

when you say DAO you’re referring to a minimum of 27 different ideas

26 of em are not decentralized nor autonomous

shake the etch a sketch clean

start again

— chaim (@matthewchaim) March 24, 2022

 

After you’ve answered both questions, you should only think about the following areas for growth:

Also, read – Brush Up Your DAO’s Facts Before 2023

How to get a DAO going

Even just a year ago, it was harder to start a DAO than it is now. Due to the blockchain industry’s level of maturity and the growing acceptance of Web3 and blockchain technologies, the market now has a number of tools and platforms for creating DAOs. These range from all-in-one toolkits like Aragon to specific tools for creating a treasury and figuring out how to run it. But even though it’s easier to get in, there are still a lot of important decisions to make.

Putting together a founding team and making a community

A strong community is at the heart of every DAO that works well. And every strong community has a core DAO formation team at its centre. It’s important to take the time to find the right people to work with on this team. This group should do more than care a lot about the problem you want to solve. They should also be committed to seeing the project through to its fullest potential in the long run.

It’s best to choose people who have similar ideas but different skills that complement each other. You will need someone who knows how Web3 works to be a key member. Still, traditional fields like economics, marketing, operations, and community management are also important for a DAO’s long-term success. It’s important to remember that this guide is not meant to help you plan your finances or your business. Any successful DAO will probably tell you that you should talk to an attorney to make sure you meet all legal and financial requirements. This is especially important if you plan to issue a native DAO token.

Governance

Without community governance, it’s hard to have a real DAO. That’s why finding the right way or service for members to connect their wallets and suggest, review, and vote on treasury/protocol decisions is important. As gas prices go up, it can be expensive to vote on the blockchain, so some DAOs and well-known projects like Doodles use customizable off-chain governance tools like Snapshot to make governance proposals. In the end, the core DAO team decides whether voting will be done on-chain or off-chain.

Making tokens and giving them out

Once you’ve built a community, a way to make decisions, and the technical infrastructure for your DAO, it’s time to get strategic about how your tokens work. In many cases, the incentive structure will be built on top of tokenomics. But be careful: if tokenomics is used in the wrong way, it can hurt the integrity of a community or even the long-term success of a DAO.

Most DAOs use tokens to reward members, let them vote on proposals, give them access to other benefits, or a combination of all three. Before moving forward, you should think about what your tokens will do in your DAO. Will they be used to decide how the group moves forward? Will they have value on their own? Can they be staked more to get more yield?

Not only will you need the skills and knowledge of DAO members to make the token, but you will also need to think about how the token supply and allocation will affect things. Given that supply and demand have clear psychological effects on the prices of cryptocurrencies, finding this “sweet spot” is one of the hardest parts of starting a DAO. Both ENS and Uniswap have written about this.

📢 MODA has commenced a multi-day token buy-back plan in accordance with the snapshot-voted $MODA buy-back proposal. https://t.co/BR57ufpKVD

Further news this week on liquidity and token-related project developments.

— MODA (@MODA_DAO) February 5, 2023

Concerning allocation, finding the right balance between motivating and rewarding your community and having enough money in the community treasury to move towards bigger goals is important. Again, we can’t stress enough how important it is to talk to an attorney during the token creation process to make sure everything is safe and legal.

Treasury

Where you keep your treasury may be your DAO’s most important choice. Even though a DAO treasury works like a normal bank account, these funds will probably be the lifeblood of whatever goal your DAO has, so they should be kept as safe as possible. Most DAOs choose to make a multi-signature (multi-sig) wallet so bad actors can’t take over and no one person controls the funds.

Before a blockchain transaction can be done, it needs to be signed by more than one person in a multi-sig wallet. Gnosis Safe and SafeSnap have become the standard for this kind of thing. Gnosis also lets you store more than one token in a single wallet. For instance, Gnosis can hold both ETH and a DAO’s own social or governance token. Other tools for managing the DAO Treasury are Parcel and Llama.

What to do and what not to do with your DAO

Technically, it’s not too hard to make a DAO, but running one well is a completely different story. But the best people to learn about the ins and outs of DAO success are those who have done it themselves. We talked to a variety of DAO creators and core members to get their thoughts on the most important things to do and not to do when dealing with DAOs. We did this so that this guide would be both helpful and based on real-world experience.

Listen to what the pros say.

The first person to give advice was Commodore, a fake Web3 builder and co-founder of Krause House. He said that a DAO will never be able to work without a strong community. And he should know because the Krause House is a DAO with a global reach whose big goal is to own and run an NBA team.

“If a group of people act in a DAO-like way, it sends a very strong message that building a DAO is worth the time,” said Commodore. “I always tell people to find 100 people through Twitter, Discord, or a podcast to see if the idea is gaining traction. If there is, we should look into how to become a DAO as a group.”

 

Cooper Turley, the founder of Fire Eyes DAO and one of the most important people in Web3 music, said something similar. He said that a DAO won’t last long if it doesn’t match the needs of the market and that it’s important to find a niche that makes members want to come back every day. Turley made sure to keep things simple and real when he started Fire Eyes. “Think practically and focus on a small group of people,” he said as the best way to avoid making things too hard.

When thinking about a tokenomics structure, the same thing holds true. Even though adding features like staking, burning, and game theory can be fun, there’s no reason to launch things you don’t understand. Instead of trying to do everything at once, taking a slow and steady path to success is better.

But a DAO’s organisational structure can also have a slow, steady, and simple ethos. Even though all DAOs still have a hierarchy, it’s important to make sure that no single voice or authority can make important decisions. In fact, the founder of Alterrage, Kacher, says that her organization’s success is due to the fact that it has a simple and well-thought-out leadership structure. This is another reason why you shouldn’t tie your DAO to a single leader.

“At Alterrage, we don’t have one single leader. Instead, we have seven different spheres (like atelier, tech, web3 architecture, etc.) that focus on core parts of the business,” said Kacher.

“One “guide” runs each sphere, with help from three support leaders who are all trained the same way. Members of vague DAO communities are often lost and leave out of frustration if they don’t have training or a way to lead.

Simplify getting started and writing up the paperwork

In addition to the dos and don’ts that people who work with DAOs have laid out, there are a few other things that should be done. The first is accessibility, which means it should be easy for people to find out how your DAO works and what it wants to do.

This discovery and onboarding flow should be one of the first things the core team does since it’s so important for the DAO to grow. All rules and standards should be written down and linked to from a lot of different places. If this is a “serious” DAO with full-time paid contributors, it’s even more important to set very clear membership requirements and create documentation now to avoid disagreements in the future. Standards and procedures for dealing with conflicts should also be put in place since no organisation, including the DAO, is conflict-free.

Listen to the Neighborhood

Second, as people join your DAO, it’s important to make sure that your community always feels heard and understood. This need goes far beyond governance and voting proposals. It should also include feedback in person, discussions on Discord and Twitter, and more.

Start small and spend money on tools that will help you grow.

As most DAOs are global communities and growth is usually a top priority, founders should invest in communication platforms that can be scaled, are easy to use, and can support different languages and types of content. The only way to know for sure is to wait and see if DAOs will become popular organisations. But for now, Commodore thinks that the best thing to do for people who want to start a DAO and for the Web3 community as a whole is to just start.

“Part of the beauty of innovation and disruption is that new tools are made, and people use these tools for all kinds of different things in their lives,” said Commodore. “We’re still in the beginning stages of figuring out how to use this powerful new tool, so it’s still too early to know what works and what doesn’t. I’m just glad so many people are trying to make a DAO because we’ll make more progress as a group more quickly as we get wins.