The relevance of DAOs in web3 has risen almost as quickly as that of the NFT mania.
The late 2000s phrase, “There’s an app for that”, has now evolved into “There’s a DAO for that”.
According to Forbes, there are currently more than 4,000 DAOs in existence, and the rate at which they are established is only accelerating.
Not all DAOs are created equal, though, and the way they are structured will greatly influence your experience within them.
DAOs 101
A DAO (Decentralized Autonomous Organization) is an internet native organization that is collectively owned and managed by its members, powered by blockchain technology.
o Decentralized: DAOs are managed by its members, this means that there’s no one person that can make decisions on their own
o Autonomous: DAOs are powered and governed by smart contracts, which executes actions automatically once certain criteria are met
o Organization: A DAO is a group of people that are purpose-led toward a common goal
DAOs vs Traditional Corporations
The biggest difference between a DAO and the traditional corporate structure is the flattening of the organizational hierarchy.
In a DAO, it is much easier for a new member to make meaningful contribution in the decision making and growth of the organization. In a big corporation, it is unlikely that an entry-level employee’s proposal will make it past that department’s supervisor.
In a DAO, everyone’s voice is heard on a level playing field.
The Rule Book
At its heart, a DAO is a purpose-driven community, just like any other club, association, organization, or team.
What sets DAOs apart is the incorporation of smart contracts that drive contribution, incentivization and decision-making.
A smart contract is self-executing code that is activated when certain criteria are met.
The rules of DAOs are governed by smart contracts, which also acts as the DAOs treasury. Smart contracts can send and receive funds and once a pre-determined set of criteria are met, funds will be distributed to the contributor or organization that satisfied the requirements.
For example, if someone were to fulfill a “bounty”, or task, to recruit 20 new members to the DAO, the smart contract would automatically send the pre-determined amount of token to that member.
The code within a smart contract can of course be modified if it is voted upon by the member majority.
The First DAO
The term DAO was first mentioned in 1997 by German professor Werner Dilger, but it wasn’t until 2016 that the first DAO was created.
The original DAO was created by Slock.it to become the first decentralized venture capital firm. Powered by a smart contract built on Ethereum, the Slock.it DAO allowed members to exchange ETH for the DAO governance token, thus providing rights to vote on potential venture investments.
Unfortunately, a hacker discovered a bug in the systems coding, and was able to extract ~$60 million worth of ETH from the DAOs treasury. This led to the hard fork of Ethereum in 2016.
This was in the very early days of the Ethereum blockchain when it was not as battle tested as it is currently. Although this can still happen, it is less likely than at that time.
The Good, the Bad, and the Ugly
Not all organizations are created equal, especially in a decentralized world.
Everyone’s DAO experience is different depending on how the DAO is structured and what your personal goals are when joining.
Some DAO members may just join for the “vibes”, while others actively contribute towards the DAOs goals.
The structure of the DAO you are participating in will have a significant impact on your experience within it.
Let us explore the different DAO structures, how they compare, and what it means for your DAO experience.
Centralized Organizations
Centralized organizations are the companies that have been most frequently interacted with in web2 such as companies like Tesla, Meta, and Google. These organizations are typically led by a CEO and a team of executives with departments of employees underneath them.
This centralized hierarchy creates a single point of failure within the company, illustrated in the graphic below.
The centralized nature of these organizations do provide a number of advantages over decentralized organizations.
With good leaders and efficient decision making, organizations can move with speed and capitalize on fleeting opportunities. Brilliant minds such as Elon Musk and Mark Zuckerberg can generate great ideas that a decentralized organization may have trouble replicating.
The problem here is that a small group of people are responsible for almost all the decisions. Too much power in the wrong hands is not ideal. Bad actors as CEOs can drive a company into the ground and there are plenty of examples of executives using their organizations in nefarious ways.
These characteristics lead to an environment where it is very difficult for employees to make an impact, and where stakeholders can have trouble “steering the ship”.
Working in a centralized organization can sometimes feel like you’re just another cog in the system. Although this may sometimes feel like you’re not making much of a difference, there are still ways to quickly advance. It is also much more direct in the fact that your responsibilities and compensation are clear and transparent, whereas this isn’t always true in other structures.
Decentralized Organization
Fully decentralized organization are typically seen in the larger DAOs that have become efficient enough to function autonomously. Examples of these can be seen in protocol DAOs like Uniswap or Aave.
In a decentralized organization, nobody can make decisions by themselves, even if they are the original founder. Every decision made in a DAO must be voted upon by the group majority. This ensures that the direction the organization is headed is fully determined by its members, and not just directed by the CEO.
Fully decentralized organizations typically have larger treasuries which provides them more avenues to accomplish their goals.
The DAO that governs the decentralized exchange, Uniswap, has a treasury with $2 billion. There are north of 300,000 members within the DAO that can participate in governance decisions, but there are only 2,800 members that actually take advantage of this. Across 17 proposals made in the 17, there were only about 3,100 votes tallied.
This presents one of the problems with larger, decentralized DAOs. There may be many members and substantial funding, but that does not lead to meaningful participation. The majority of the UNI token holders are seeking appreciation, not looking to actively participate or advance Uniswap.
Even when they do vote, they are not always the most qualified person to make decisions. There can be wealthy individuals that buy up large amounts of the governance token to increase their voting power, but they may not even completely understand how that project works, or care what they are trying to accomplish.
Things can get messy in the communications of these DAOs. With so many people on their platform, ideas can quickly get lost in the shuffle if not managed well by the members. Proposals and action take much longer when you have to wait for everyone to vote, whereas with a centralized organization, leaders can take advantage of opportunity as soon as it is identified.
Working within one of these organizations can be hectic, but it is certainly a level playing field. Everyone has equal opportunity to make an impact. It can be hard to figure how to add value initially, but bounties and job opportunities provide direct avenues for which one can contribute.
Progressive Decentralization
Most DAOs do not start as a decentralized entity. Typically, there is a founding team that outlines the goals, vision, and strategies of the DAO. As the community grows, they become increasingly decentralized.
The combination of smart contract infrastructure, community contribution, and strong leadership provides a number of benefits in comparison with fully decentralized organizations. They can move quickly when making strategic decisions, similar to centralized organizations, but still benefit from community voting, crowdsourcing and crowdfunding.
This combination may seem powerful, but if the leaders of the organization are not up for the tasks, the prospect of the DAOs advancement can quickly sour. Depending on how far developed the DAO is, there may not even be a governance token, which means the founding team is still making all the decisions.
The experience with a progressively decentralized DAO early in their life provides an opportunity to contribute to building something special from the ground level. The communities are smaller, but this leads to more personal connection between members.
Value-weighted Organization
A unique approach to DAOs, a value-weighted organization is structure such that the more an individual contributes, the more power they have within the organization. Essentially implementing membership-levels, this DAO structure helps to weed out those that join DAOs for token appreciation and curves the whales that buy up the governance tokens.
Higher level members are the ones that have spent the most time and provided the most value to the organization. This results in projects that are led by the best candidates. The most qualified have the most voting power. Together this leads to the most valuable contributions while remaining decentralized.
This can discourage those that just want to join and observe, as these organizations tend to be more focused. You cannot just buy the token, hop on the discord, and start making a difference. You have to commit to the organization and their goals.
These DAOs are for those that are aligned with the DAOs goals and want to achieve the objective for the sake of achieving the objective, not just for the financial benefit.
In this structure you truly get out what you put in.
How to Maximize your Experience
Regardless of the DAOs structure, there are some things you can focus on to maximize your experience.
Engage the Community
Spend time in the discords and engage in interesting conversation. Find a channel or niche and become a volunteer community manager. Reach out to members and make friends. The more you know and engage with others in the community, the more you will feel at home.
DAO Goal Alignment
Joining DAOs that have a vision and goal that you align with make the experience much more fulfilling.
Aligning yourself with a community in which you are passionate about the vision they are trying to achieve is infinitely more rewarding than joining DAOs where you only care about token appreciation.
Contribute
The fastest way to get compensated by a DAO is to make meaningful contributions for free. Your efforts will not go unnoticed, and DAOs like to compensate those who have already proved they can add value.
Create written content, tutorial videos, or brand designs and present them to the community and leadership team.
Engaging with the community is one thing, but really contributing is how you add value and progress the organization.
Problems with DAOs
We have seen the tremendous opportunity and benefits that DAOs provide, but current practices raise a few issues.
Uncertain Legal Environment
An important aspect of DAOs is that they are currently unregulated, which allows them to operate without legal scrutinization, but this poses a large problem regarding making plans for the future.
Without knowing how DAOs may or may not be regulated in the future means that DAOs must be very thoughtful in their approach, as regulation may have a big impact on them if they are not careful.
Financially Motivated Members
One of the biggest problems with DAOs is that there are many that join DAOs just to participate in the appreciation of their token.
This is a completely acceptable strategy, but these types of members do not add anything to the organization other than maybe additional funds. Since these members motives are strictly financial, the funds are not as sticky as those that are aligned with the goals.
Speed
As we explored previously, the problem with large, decentralized entities is the speed at which they make decisions. There may be great ideas that are crowdsourced from members of the community, but it can take too long to implement them, or they may even just get lost in the shuffle.
Conclusion
Regardless of the DAO structure, your experience within them can be as exciting as you desire.
With so many different DAOs striving for such a wide variety of goals, there really is a home somewhere for everyone.
No DAO will operate the same, and they all have unique characteristics. So, find something you are passionate about, embrace the community, and strive to build something great.
Never stop innovating,
Jake
Follow me on Twitter (@chefsteff_) for more insights into the Web3 world.
Additional Insights:
Progressive Decentralization Playbook (a16z) - https://a16z.com/2020/01/09/progressive-decentralization-crypto-product-management/
15 ways the world is being transformed by DAOs (Aragon) - https://blog.aragon.org/15-ways-the-world-is-being-transformed-by-daos/
Rethinking the DAO Contributor Funnel (Justice Conder) - https://justiceconder.medium.com/rethinking-the-dao-contributor-funnel-f9d314fd7c1f
What are DAOs (Ethereum) - https://ethereum.org/en/dao/#:~:text=Further%20reading-,What%20are%20DAOs%3F,the%20approval%20of%20the%20group.
Understanding DAOs: Decentralized Autonomous Organizations explained (Monolith) - https://medium.com/monolith/understanding-daos-decentralised-autonomous-organisations-explained-23793570540f
Its gotta be tough running a company or anything entirely by committee but I'm sure this will evolve into something that is unimaginable now. Thanks for the intro, nice job