Starting a DAO: The Basics – GMW3


If you’re at all invested in the Web3 space, you’ve doubtless come across the concept of DAOs, and are perhaps even interested in starting one yourself. The good news is that establishing a DAO is a relatively quick affair, with numerous solutions already in place to make the process easier and far less technical. But it’s vital that your DAO also has a plan and a reason to exist in the first place if you want to attract a community of fellow members.

What is a DAO?

Before we delve into the specifics, let’s make sure you’re on board with exactly what a DAO is (and what it is and isn’t good for). Simply put, a DAO (or decentralized autonomous organization) is a new form of distributed group controlled by its members, with its rules and activity recorded on blockchain technology

The autonomous part of the name refers to the fact that most of the work is carried out by smart contracts, programs stored on a blockchain that automatically execute when certain conditions are met, allowing transactions and other operations to happen without the involvement of an intermediary.

Most DAOs also make use of a governance token that confers voting power to holders based on how many tokens they hold. Combine that with smart contracts and DAOs remove a lot of the ambiguity that might be present in an organization run more conventionally, helping anonymous members to come together in an efficient and cheap manner.

Structure, Functionality, & Differences

A DAO can vary depending on a few different variables, similar to that of companies. Purpose, structure, and overall organization play a vital role in how a DAO is formed, what the DAO actually does, and how the DAO operates economically.

DAO Structure
A DAO structure example. Image credit: Redbeard

The main variables that influence a DAO are:

  • What the DAO’s actual function is
  • How the DAO reaches consensus
  • What the DAO utilizes as a governance or share system
  • How the community behind a DAO manages available funds

DAOs can have absolutely anything to serve as their overall function. Some have been created simply to bet on valuable goods or serve as investment funds. Others govern and allocate resources for decentralized apps or protocols.

The determination of how the DAO reaches consensus is what makes it truly unique to corporations. For instance, instead of shares, DAOs use governance tokens or a similar asset to give democratic voting rights to all members.

Including these main variables in some formation gives you the basis of a DAO. Within these variables are different types of DAOs due to how they are formed, operated, and managed.
Some notable types of DAOs include:

  • AMM DAOs – Known as automated market maker DAOs, these organizations leverage smart contracts for decentralized financial services. This includes MakerDAO.
  • Grant DAOs – These DAOs use grants for funding from the community. It allows for a form of crowdfunding to power decentralized applications. Aave is one of the most popular to use this type.
  • Collector / Investment DAOs – Both of these types of DAOs are formed with the purpose of combining funds to either purchase collectables or rare items or simply to form an investment fund.
  • Media, Social, Entertainment DAOs – These DAOs function to manage full communities, run publications, operate games, and more. They serve as decentralized counters to typical centralized companies like Twitter.

Use Cases and Purpose

Within those broad categories, there is a huge amount of differentiation. If you can dream it, a DAO probably exists to fulfil that niche. Because of that, there’s little chance of us exhaustively going through all the use cases for a DAO, but here are some of the highlights.

Among the more popular uses for DAOs are as governance organizations, whether that’s guiding a dapp or decentralized finance projects such as crypto exchanges or investment funds. Some are envisioning DAOs as a potential new form of organization for businesses, including venture capital firm Andreessen Horowitz (a16z), one of the largest Web3 investors. In its outline of Web3 policy, the firm suggests bringing in legislation to make DAOs a potential successor to corporations. 

More esoteric purposes have also been found for DAOs, however. ConstitutionDAO hit the headlines in 2021 after crowdfunding over $45mn worth of the Ethereum cryptocurrency to try and purchase a first printing of the United States Constitution at auction. Remarkably, the project managed to gather over 15,000 contributors in just seven days – although they were ultimately outbid and refunds (minus costs) were offered.

Along similar lines to that project is Krause House, a DAO launched in 2021 with the express purpose of buying an NBA team. Should the project succeed, it has said that members will be able to “participate in decisions affecting the operating procedures of a National Basketball Association (NBA) team including but not limited to general management, ticketing, merchandising and partnerships.”

Then there are the DAOs that serve as a kind of professional association for long-established professions. Taking great pains to state that they are not a law firm or offerers of legal advice, LexDAO consists of legal professionals who are working together on blockchain technology for legal processes and services. The group duly maintains a host of decentralized tools including escrow and arbitration systems. 

DAOs have also found a use as decentralized fan clubs. That was exactly how PleasrDAO came about, coming together to buy an NFT from the digital artist pplpleasr. Since then the DAO has evolved to become an investor in digital art, acquiring such pieces as the Wu-Tang Clan’s Once Upon a Time in Shaolin and an NFT of the Doge meme dog.

DAOs are also making their stamp on the metaverse. Decentraland has a decentralized governing body (The Decentraland DAO) that effectively functions as a planning committee for the Decentaland metaverse, allowing virtual landowners to vote on everything from what wearable items are allowed to how land is auctioned off.

Finally, there are a whole subcategory of DAOs functioning as a kind of successor to social clubs. Just one example is Friends With Benefits, which confers numerous perks to members based on how many FWB tokens they hold – such as a newsletter or access to community events and spaces in various cities.

Things to Bear in Mind

Despite their obvious utility, one should be wary of the potential pitfalls of DAOs before jumping in. By their very decentralized nature, creating a DAO means giving up total control over a project. Then there’s the need to make sure the DAO’s rules are very strictly codified, or else risk manipulation. That’s precisely what happened to DeFi project Beanstalk Farms recently when an attacker managed to drain around $182 million worth of cryptocurrency after using a “flash loan” to borrow large amounts of cryptocurrency, buy a majority voting stake, approve the transfer of funds to their own wallet, then repay the initial loan.

In another cautionary tale, a DAO known simply as The DAO played a highly consequential role in the splintering of the Ethereum blockchain into Ethereum and Ethereum Classic. After users exploited a poorly secured smart contract to drain the investment group of funds, Ethereum hard forked in order to refund The DAO’s members – spurring the creation of Ethereum Classic by those who thought the actions of the smart contract should be final. The lesson is to be extremely considerate of how potential bad actors might want to abuse your DAO, and plan ahead to limit their routes of attack.

How to Form a DAO

Depending on the protocol and DAO structure that is chosen, there are many ways to form a DAO. After the initial organization is set, the purpose is determined, and all generic variables are considered, a DAO is ready to be formed.

Most DAOs are commonly formed first by acquiring an Ethereum Name Service (ENS) address or something similar. This also includes a method for handling voting and proposals, generally through the creation and release of a governance token. There are solutions to this depending on the protocol chosen to launch the DAO.

Two popular protocols to launch DAOs through are Aragon and Snapshot.

Aragon assists in the formation of a DAO organization on a few different blockchain networks, most notably Ethereum and Polygon. Funds are needed to purchase the ENS address, mint the DAO via a creation fee, and then link the ENS to the organization through Aragon.

This obviously has a cost to it (usually in ETH), so an appropriate amount of crypto must be raised to cover the fees of genesis.

Snapshot works in a very similar way, though has an off-chain voting mechanism versus Aragon’s on-chain. Snapshot simply uses digital signatures to facilitate voting and proposal creation.

Like Aragon, Snapshot requires an ENS address first and does require the DAO to be on Ethereum. For Snapshot, it is also required that the DAO has one thousand members and is able to verify this community outright.

Governance Examples

It’s worth exploring some examples of popular DAOs to see just how much they vary in the way they operate, despite largely sharing the same core principles of smart contracts and governance tokens.

Uniswap (UNI)

Uniswap, one of the world’s most popular decentralized cryptocurrency exchanges (DEX), is governed by a DAO, with voting rights conferred based on ownership of the UNI token. UNI coins were originally distributed to early adopters of the platform, as well as anyone who had interacted with the platform before a certain date.

Uniswap is a direct example of an AMM DAO. AMM stands for automated market maker, an algorithmic, price-adjusting protocol that creates liquidity pools between users. Uniswap users participating in the DAO receive voting power over how the protocol’s AMM functions work. As the leading DEX in the space, Uniswap has grown to over $7 billion in total value locked (TVL).

UNI - DeFi Llama
UNI – Image credit: DeFi Llama

MakerDAO (MKR)

Stablecoin cryptocurrency Dai is governed by the aforementioned MakerDAO DAO, a particularly interesting example owing to the path it took – as Rune Christensen, founder of MakerDAO, explained in 2021: “Maker has come a long way in a relatively short period of time,” said Christensen. “It’s gone from a DAO, created by myself and a few passionate developers, to a foundation tasked with bootstrapping an amazing project, and back to a DAO. While the Foundation played a specific and important role in the further development of the Maker Protocol and the growth of a global team, it was designed to exist only temporarily.”

MKR - DeFi Llama
MKR – Image credit: DeFi Llama

Compound (COMP)

Autonomous interest rate protocol Compound offers a governance token known as COMP, which allows holders to vote on the platform’s future direction. COMP tokens are distributed as rewards to lenders and borrowers on the platform, meaning that the more people use the platform the more influence in the DAO they can accrue. The DAO has said that only 10,000,000 COMP will ever exist.

COMP - DeFi Llama
COMP – Image credit: DeFi Llama

Aave (AAVE)

Next, there’s open-source liquidity protocol Aave (an example of a grant DAO we covered earlier), which transferred ownership rights from its core developers to AAVE token holders in 2020 – meaning all AAVE holders can propose and vote on changes to the protocol, or delegate those rights to others. As of the writing of the article, there are 108, 337 token holders leading the platform. The platform also maintains a related Aave Grants DAO which funds ideas submitted by the Aave community.

AAVE - DeFi Llama
AAVE – Image credit: DeFi Llama

Aragon (ANT)

As we’ve discussed, one of the heaviest hitters in the space is Aragon, which is particularly notable for this article as it specifically focuses on enabling the creation of other DAOs. Providing an open-source infrastructure for DAO creation, Aragon offers organizational templates for DAOs focusing on areas such as virtual worlds, and DeFi protocols. As of the writing of this article, 1,900 DAOs have been built on the platform, with over 60,000 members.

ANT Price Action - CoinMarketCap
ANT Price Action – Image credit: CoinMarketCap

Summary

DAOs are a prominent force within the cryptocurrency market. Many who use cryptocurrencies interact with DAOs virtually every single day and may not even realize it. There are DAOs to fit every niche within crypto, very similar to how companies fill out demand in the traditional economy.

We can only speculate as to how DAOs may influence or replace traditional corporations as of now. The important thing to note is that DAOs provide a highly democratized alternative that is easy to start, giving entrepreneurs a new option in which to launch a venture. 

Hopefully, you now have a better idea of the many potential uses of DAOs, as well as an understanding of how relatively simple it is to create your own community. Before you embark on the journey, however, perhaps the most important thing to bear in mind is that DAOs without a purpose stand little chance of prospering. Zero in on your project goals and potential community, however, and your DAO stands a good chance of prospering.

Starting a DAO: The Basics was co-authored by gmw3 writers William Smith and Zach Lorance.



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