Decentralized autonomous organizations (DAO) are changing the way communities organize and operate in Web3. The term refers to a group with a shared goal that is governed without a traditional centralized leadership structure. Essentially, members of a DAO vote on important issues related to the organization, such as how to allocate money or build new products.
This blockchain-based structure is designed to provide projects, businesses and communities with a more democratic management process, fostering better coordination among creators, developers and investors. But groups don’t necessarily need to start out as DAOs, and there are ways to integrate these concepts into an existing community structure.
Finding inspiration: DAO success stories
Since the first DAO (aptly named The DAO) was formed in 2016, the concept has expanded across industries, including finance, fashion, journalism and more. DAOs rely on smart contracts to automatically execute tasks when certain conditions are met, eliminating the need for intermediaries.
Several successful DAOs have sprung up in recent years, showcasing a variety of use cases.
Metaverse platform Decentraland, for example, created the Decentraland DAO to govern its native cryptocurrency MANA and virtual real estate parcels called LAND. Members of the DAO can bring forward and vote on proposals, allowing the community to shape the platform’s future collaboratively. The virtual world even threw away the private key that controlled the smart contract for MANA, fully decentralizing its governance token.
Other DAOs form decentralized community fundraisers around a shared goal. ConstitutionDAO, for example, sought to buy a copy of the U.S. Constitution at auction. LinksDAO, which is focused on building the world’s greatest golf and leisure club, sold memberships to its future club as non-fungible tokens (NFT), netting millions of dollars without even owning a golf course.
Begin building your DAO
Understanding how DAOs work and modeling your structure after other DAOs can help you shift your existing community into Web3.
Aligning your DAO identity
The first step is setting your DAO’s purpose. This is your mission statement and unites your community around a common interest or goal. Work closely with your founding team to build a community where people want to be, and prioritize engagement over growth.
In line with having a common goal, DAO creation and management tool Aragon suggests that creating a distinct brand identity will help define your purpose. This is how you visually represent your ideas and it is key to developing your community, your user base, the amount of media coverage you receive and building your reputation in Web3.
Select the best blockchain for your needs
Choosing which blockchain to use is important in determining the direction of your organization. Because DAOs have no central leadership and voting on proposals often occurs on-chain, blockchain ledgers help keep the inner workings of the organization transparent and immutable.
Define your governance process
Next, define how your DAO will make decisions and who can make those decisions. Creating an effective structure will determine how engaged your community is and how efficient and safe the process will be.
There’s no right or wrong way to structure your governance. Currently, DAOs allow members to vote based on the number of tokens they hold or via their crypto wallets.
Tokens are an effective way to create weighted voting – meaning, the more tokens a member holds the more weighted their vote. Wallet-based voting, on the other hand, gives each member one vote per wallet, minimizing the ability to simply purchase voting power.
According to Aragon, many DAOs start off with wallet-based voting before they create a governance token and evolve their process.
Mint and manage DAO governance tokens
If you decide to use a token-based voting system, you’ll need to mint and manage your tokens. Some projects choose to sell non-fungible tokens to allocate membership, while others choose to create a native token to simplify the process.
Once you decide on a name for your tokens, you’ll need to determine how many tokens you want to mint. This could be in the form of a fixed supply of tokens or a variable supply that can fluctuate over time. You’ll also need to consider the maximum supply of tokens that will be minted and the number of tokens currently in circulation, or the circulating supply.
Once minted, the tokens can be given to specific people or can be bought and sold on either a primary or secondary exchange. Funds raised by the community are often managed by a community treasury.
It’s important to note that in some parts of the world, your tokens may be deemed a security and may be subject to local regulation and taxes. It’s important to consider the legal implications of token-based voting before going down that route.
Creating a forum and proposal
A DAO proposal is an idea that a community or DAO member wants the DAO to consider. It usually consists of a document outlining an idea, how it will be put into practice and the necessary funds needed.
Proposals should be fully formed ideas that have moved beyond the brainstorming phase and are ready for the community to evaluate. These proposals should go on a forum where open discussion is encouraged for those who get to vote.
DAOs need to set a minimum participation of voters to be present for a vote to be valid, sometimes called a quorum, along with a pass rate, or the number of affirmative votes needed to pass a proposal. There should also be a voting period, or an amount of time where a vote is live, in order to fairly determine the result.
Determine DAO tools
The software, applications and smart contracts a DAO uses to run are referred to as DAO tooling. Your community won't be able to communicate, send money, pay contributors or organize legal documents without it.
There are a variety of tools available for different processes – for example, Discord is a tool commonly used for discussion and community management, while a Gnosis Safe is sometimes used as a multisig wallet for moving group funds.
Simply put, DAO tooling is how you manage your organization.
Coordination is key
Now that you’ve made major decisions for your DAO, it’s time to work with your community to achieve your common goal. Voting on important decisions will only grow more difficult as your community grows, so it’s important to organize and adapt strategies early.
If you're seeking more information on how to build your DAO, there exists a vast ecosystem of communities that can share tips and tools.