DAOs

Blockchain companies

A DAO is an organization in which:

• decisions are governed by collective proposals and voting - decentralization

• voting power is proportional to the amount of governance tokens owned - governance

• participants collectively manage a treasury denominated in cryptocurrency - treasury

• rules of operation are encoded in a smart contract deployed on a blockchain - autonomy

Some concise definitions of a DAO I've found are the following (some are taken from David Phelps' post on Twitter):

1. A collectively-owned, blockchain-governed organization working towards a shared mission

2. A community-led entity with no central authority that is governed by computer code

3. An internet-native business that's collectively owned and managed by its members

4. A group chat with a bank account

5. A crypto co-op, giving a wider group of people the opportunity to own a piece, participate in management and share in the potential upside

6. A financial flash mob, often organizing seemingly overnight in pursuit of an idea

7. A powerful term that captures many of the hopes and dreams that people have put into the crypto space to build more democratic, resilient and efficient forms of governance

8. A state, with governance systems, autonomous currencies, and treasuries to manage monetary policy

9. A commune, where friends support friends

10. A game, with incentive models for gaining power through contributions with opportunities for continual failure. You win by collaborating and coordinating with those around you through positive-sum reinforcement

11. A jam band. An improvisational creation protocol. Everyone in a DAO is a creator, and their creation is what draws community

12. A sports team. Some DAOs will use treasuries to recruit top talent to play on their team. Others will use classes to develop talent over time. DAOs mint stars

13. A cell. The building blocks for new planets

DAO and traditional companies

DAOs differ from traditional companies in many ways.

Image from Linda Xie post on Mirror

A DAO can be defined as a crypto co-op. Indeed, DAOs and co-ops are in principle quite overlapping. The following Rochdale Principles define the identity of a co-operative:

1. Voluntary open membership

2. Democratic member control

3. Member economic participation

4. Autonomy and independence

5. Education, training, and information

6. Cooperation among cooperatives

7. Concern for community

At this principle level, the only discrepancy between a co-op and a DAO is about democratic member control, the second Rochdale axiom. The voting method in a DAO is rarely democratic (one person one vote); it is instead a function of the amount of owned governance tokens (one token one vote or more elaborated voting methods like quadratic voting).

Limitations of DAOs

DAOs have also a number of drawbacks:

• Legal. The regulatory environment surrounding DAOs is still very uncertain as most jurisdictions haven’t yet defined their approach to this novel type of entities. A continuously uncertain legal status could become a significant barrier to the adoption of DAOs

• Coordinated attacks. The desirable properties of DAOs (decentralization, immutability, trustlessness) inherently carry some performance and security risks. The example of The DAO demonstrated that this new organizational form can introduce novel risks that are not present in traditional entities
• Efficiency. It can be argued that decentralization isn’t a state, but rather a range, in which each level is suitable for a different type of use case. In some cases, full autonomy or decentralization might not even be possible or make sense. Centralized organizations can operate at a much higher efficiency – but abandon the benefits of open participation

• Education. Similar to the issue of efficiency, a DAO has the responsibility of educating a lot more people. A single CEO is much easier to keep comprised of company developments, while token holders of a DAO may have ranging educational backgrounds. A common challenge of DAOs is that while they bring a diverse set of people together, that diverse set of people must learn how to grow, strategize, and communicate as a single unit

• Voter apathy and lobbying. Not all members will want to vote or are even best qualified to vote on all changes. In this case there will likely be voters delegating to members that can be more informed and active. We might have the emergence of protocol delegated lobbying groups that try to influence the decisions

Build a DAO

You can use DAO builders such as:

• Aragon
• Colony
• DAOHaus

Or you can build an in-house DAO as follows:

1. most importantly, you need a motivated group of people and a goal for the DAO

2. you need a (soulbound) governance token as well as governance rules, such as the voting method or how to collect new governance tokens; a smart contract for fungible SBTs is Karma (GitHub, EtherScan) which inherits from ERC-4974 (an interface for assigning and managing numerical ratings for blockchain applications)
3. you need a treasury associated with a multisig wallet, such as Safe
4. you need a forum to discuss proposals, such as a Telegram or Discord group

5. you need a platform to vote proposals using the governance token, such as Snapshot
6. you might want to write smart contracts to automate your decisions onchain (they can be integrated with Snapshot)