What are the benefits of DAOs, and why do so many people turn to them when they have a big idea?
It might seem like right now, there is a DAO for everything. A DAO to buy the Constitution, a DAO to buy a sports team, a DAO to run for president (kidding). But there is no escaping the fact that DAOs have sprung up in almost every industry as a new, Web3 way to run a project.
What are the benefits of DAOs, and why do so many people turn to them when they have a big idea?
Decentralized autonomous organizations, or DAOs, can provide a better way to coordinate groups of people who want to bring about change. DAOs allow people living in different parts of the world to work together trustlessly without intermediaries. DAOs enable businesses, charities and other organizations to source investment globally as soon as they launch.
Perhaps most importantly, DAOs are inherently democratic; their members receive a fair share of any profits and have a say in how their organization operates.
This guide explores what DAOs are, how they work and the costs and benefits associated with launching a DAO to jumpstart your big idea, instead of building a traditional organization.
At the end of this guide, we explain how to build your own DAO on two platforms: Aragon and DAOhaus,
What Is a DAO?
The fact that DAOs are decentralized autonomous organizations means that they can actually come in many different forms.
But at their base, a high-level definition of a DAO is an internet-native business that runs autonomously with help from smart contracts, which define its architecture and rules.
A DAO’s smart contract allows its members to send and receive funds without an intermediary: this is the whole key to the structure of a DAO.
Once a DAO’s smart contract goes live on a blockchain, nobody can change its content — including its members. This code-based security maintains each DAO’s underlying structure under all circumstances, allowing it to operate trustlessly and autonomously.
DAOs have built in treasuries that are collectively owned and managed by their members, who together decide how to spend their funds and run their organization. The members choose how to spend their funds through a voting mechanism which is coded into the DAO’s smart contract — this is one of the most important parts of how DAOs operate.
Voting mechanisms come in varying shapes and sizes, and each DAO can tailor its voting mechanism according to its members’ needs. Some mechanisms allow members to share new proposals every minute, whereas others only allow for one new proposal each day. A few voting mechanisms require a minimum share of the members to vote before a proposal is valid, whereas others don’t have turnout minimums.
As we said before, DAOs by nature will vary based on why they exist — no two DAOs need to be exactly alike.
Most DAOs use token-based quorum voting, relying on a mechanism that requires a minimum threshold of voters to be reached before a proposal is valid, called a quorum.
In simpler terms, if you are voting in a quorum-based vote, a proposal can only be passed if enough voters in the whole DAO actually participate. This can prevent measures being passed by a minority of users — if an issue gets a 100% approval vote, but only three people out of 100 voted…you can see the issues that could arise.
Once a quorum is reached in this type of voting, the proposal is either passed or defeated depending on how the members voted.
Another option for DAOs is permissioned relative majority voting, which works similarly to token-based quorum voting — only without the quorum requirement. One final voting mechanism that is native to Moloch DAOs is called “rage quitting.” As the name suggests, rage quitting allows a DAO member to quit the DAO and cash out their share of the treasury if they don’t agree with a proposal.
How Do DAOs Manage Their Membership?
There are three key membership models that determine how a DAO functions: token-based, share-based and reputation-based membership.
DAOs with token-based memberships are usually permissionless, which means that if you hold a DAO’s token, you can take part in its operations. It’s as simple as that. DAOs with this kind of membership typically manage a decentralized protocol, like DeFi DApps.
Share-based DAOs usually require prospective members to submit a proposal or token tribute before they can join the DAO, and are therefore comparatively more permissioned (a higher barrier to entry) than the above-mentioned token-based DAOs. Share-based membership models are mostly used by smaller DAOs like charities or micro-investment groups.
DAOs that use reputation-based membership ask prospective members to submit proposals to join the DAO. If they are accepted, they receive reputation or tokens in exchange for their contributions. You usually can’t buy your way into a reputation-based DAO — you have to earn your membership. This membership model is best suited for organizations like worker collectives, particularly those focused on decentralized development.
How Are DAOs Different or Better Than Typical Business Structures?
A typical business employs executives like CEOs, CFOs and board members to manage the business and decision-making process on behalf of the wider membership or work force. But DAOs don’t operate with a top-down hierarchy, which gives them a collaborative advantage over traditional businesses.
Instead of a few executives deciding on behalf of many, a DAO’s membership collectively decides how it should operate. This prevents any person or minority group from spending the DAOs funds or making decisions without approval from other members. It is this inherent fairness and equality that makes DAOs comparatively more democratic that typical organizational structures.
The way in which DAOs operate is somewhat similar to how cooperative businesses run. For those unaware, cooperatives are enterprises entirely owned, controlled and run by their members — but they aren’t decentralized, autonomous or digital-native. Despite these differences, it’s possible that by comparing how cooperatives perform versus top-down businesses, we might glean some insight into how DAOs will fare in the years to come.
Numerous academic studies have found that people who work for cooperatives are generally happier compared to those working for conventional businesses. People working for cooperatives have also been found to quit less often, and have a higher level of job satisfaction, and greater confidence in their management team. And finally, cooperative businesses are, on the whole, at least as successful as their top-down counterparts.
Take Sunkist, for instance, a cooperative of more than 6,000 fruit growers spread out over California and Arizona. Since its founding in 1893, its members have grown the company into one of the largest landowners in California. A similarly successful cooperative called Mondragon now consists of 95 separate, self-governing cooperatives that collectively employ more than 80,000 people in Spain. The United States’ first cooperative — an insurance company for the Philadelphia area — was founded in 1752 by none other than Benjamin Franklin, and is still in operation today.
Even though it’s early days for DAOs, there’s good reason to think that DAOs could grow into competitive, global enterprises. However, keep in mind that starting a DAO won’t automatically build a community overnight or kick-start a poorly thought-out business. You still need a reason to start an organization as a DAO instead of traditional business in the first place; which leads us to an important question: should you create a DAO?
Should You Create a DAO?
Whether or not you should create a DAO really depends on the type of project you intend to launch. A DAO is only preferable to a traditional business if a DAO’s unique characteristics would benefit you or your project.
Say, for instance, you want to launch a charity to help fund medical research on a specific disease. In this case, starting a DAO could be a successful route to take, because you can win funding and donations, as well as hire fundraising staff, from across the world from day one. There is a common goal shared by people globally, and it could be possible to create a community based on the goal.
On the other hand, if your charity was funding flood prevention equipment for one specific river, you probably wouldn’t be able to attract funds from foreign citizens, and you wouldn’t need to hire people from other countries. In this case, starting a DAO wouldn’t be suitable — it would be like putting a round peg into a square hole
Of course, to state the obvious, many other brick and mortar businesses like cafés and restaurants aren’t exactly suitable to a DAO structure either, as they require certain business licenses to operate that require a traditional business structure.
But if you don’t know whether to start a DAO because you haven’t settled on an idea yet, rest assured there are tons of interesting use cases for DAOs. Uniswap, for instance, is a decentralized exchange that’s managed by a DAO. Other crypto projects like MakerDAO, which manages the DAI stablecoin, are also managed by DAOs. There are also investment DAOs, like BitDAO, which manage crypto investments, and hundreds of grants DAOs that support the development of new businesses.
Preparing to Launch Your DAO
DAOs are inherently flexible, in that you can design them however you want — within reason. As such, it would be prudent to first plan some essential elements before launching a DAO, otherwise you run the risk of needing to start a new DAO from scratch later on. This section assumes you already know your DAO’s purpose.
Before you start planning your DAO, there’s one question that must be addressed first: does a DAO with a similar purpose already exist? If so, you might consider joining that DAO rather than starting your own, especially considering you’ll have to compete with a community that’s already established.
To begin creating a DAO, you need to either find or create a community of people who share your vision and goals, preferably online. It is this community that will help grow your project and realize your vision. If you don’t know where to begin, there’s probably a subreddit full of people fascinated by your area of interest. As soon as you start meeting people, set up a Discord channel to keep all your communications in one place.
Together with your community, your next job is to work out how much funding your DAO needs to realize your goals, including whether any ongoing funding is necessary, and from where you will procure this funding. Your community also needs to decide how much of your future revenue to give up in exchange for any investment or venture capital. Depending on how large your DAO’s community is at this point, you could assign these duties to one or two people who would act as a single point of contact for outside funders and investors.
Once your DAO’s community has established its direction and funding sources, you then need to consider how your DAO’s members will be rewarded for their contributions. Your rewards structure will naturally differ depending on your DAO’s goals — be they profit, networking, fun, community or charity.
You should also consider how your DAO’s members will incorporate new members: will one member decide on everybody’s behalf? Can anybody join whenever they like? Or will the membership collectively vote all new members into the DAO?
And finally, we need to create the DAO itself.
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How to Create a DAO?
There’s more than one way — and more than one platform — to create your DAO. We explain how a few of these platforms work below, but we still recommend you research each option by yourself. After all, DYOR is one of the crypto community’s favorite acronyms for a reason!
How to Create a DAO Using Aragon
Aragon is a platform where you can build your own DAO or join a number of established DAOs on Ethereum. Aragon is a no-code platform, so there is no need to learn Solidity or any other programming language to build your DAO here.
At the time of writing, setting up a DAO with Aragon requires at least 0.2ETH. As such, Ethereum’s price at the point in time you set up your DAO will impact your startup costs.
If, however, you want to try before you buy, it’s possible to experiment with Aragon for free using a test environment rather than launching your DAO on the Ethereum blockchain. We explain how to do this below; but first, here’s a quick step-by-step guide to setting up a fully functional DAO using Aragon.
1. Buy some ETH – you’ll need at least 0.2 ETH.
2. Send your ETH to a Web3 wallet – MetaMask is easy to use if you aren’t familiar with Web3 wallets.
3. Head to the Aragon website and click the blue “Create your DAO” button.
4. On the new page, click on “Create an organization.”
5. Pick the DAO template that best suits your project.
6. Input your DAO’s name.
7. Choose a vote duration threshold, then click “Next.”
8. Input a name for your DAO’s native token
9. You can now review all your DAO’s settings. When finished, click “Launch your Organization.”
10. Finally, you’ll be prompted to sign a transaction on whichever Web3 wallet you use. Once that’s signed, your DAO will go live.
If you want to try launching a test DAO on Aragon, follow the steps below. At the moment, you can use either the Rinkeby or Goerli testnets. You will be advised to use Goerli, given that Rinkeby is set to shut down soon due to the upcoming Ethereum merge. We’ve used Goerli throughout the instructions below.
1. Head to the Goerli Testnet site.
2. Follow the instructions to acquire some free test ETH (which won’t work on the Ethereum mainnet).
3. Go to the Aragon Testnet site.
4. Choose the Testnet you want to launch on from the drop-down menu (again, we’re using Goerli.)
5. Connect the Web3 wallet with your test ETH to Aragon. Ensure your wallet is connected to the correct network (in this case, Goerli).
(From here, the instructions are the same as above)
6. Click “Create an organization.”
7. Choose the template for your DAO that would best suit your project.
8. Choose a name for your DAO
9. Pick a vote duration threshold, and then click “Next.”
10. Choose a name for your DAO’s native token.
11. You can now review all your DAO’s settings. When finished, click “Launch your Organization.”
12. Finally, you’ll be prompted to sign a transaction on whichever Web3 wallet you use. Once that’s signed, your Testnet DAO will go live.
How to Create a DAO Using DAO Haus
DAOhaus is, as its name suggests, a house of DAOs that let you create DAOS. Through DAOhaus, you can either create your own DAO or join a selection of established DAOs. Keep in mind that if you create your DAO through DAOhaus, it will be a Moloch DAO.
For those unfamiliar, Moloch is an open source and simple-to-use DAO framework best known for its “ragequit” feature (discussed above), which lets members exit the DAO and receive their share of the treasury’s assets whenever they want. Moloch DAOs don’t have much code and are therefore considered secure as well as easy modify according to your specific needs.
All Moloch DAOs share four key characteristics; permissioned membership, which means the DAOs members vote in all new members; weighted voting, which gives each member varying voting power; non-transferable governance power, which prevents voting and economic rights being sold or liquidated; and ragequit, allowing each member to quit the DAO in exchange for a proportional amount of the DAO’s assets.
Plenty of popular DAOs use the Moloch framework. MetaCartel, an investment DAO aiming to establish a “cartel” of creators for the metaverse and Web3 ecosystem, uses the Moloch framework with great success.
To reiterate, the reason you need to understand Moloch is that all DAOhaus DAOs are Moloch DAOs; if you feel that the Moloch framework would be unsuitable for creating your DAO, then you would be best served by building your DAO through a different framework or platform, like Aragon.
But if a Moloch DAO suits your purposes, follow the steps below to create your DAO.
1. Open your Web3 wallet and choose the network on which you want to launch your DAO. Most DAOs are built on Ethereum, but other networks like Polygon and Arbitrum can host DAOs as well.
2. Go to https://app.daohaus.club/summon
3. Read through the options available and choose which type of DAO you want to build. When you click through the various options you will see how the DAO’s framework changes. Club DAOs, for instance, allow for one new proposal every minute, whereas Venture DAOs only grant one new proposal per day. If you want to choose entirely unique settings, click the orange “Hard Mode” button. Remember: these settings cannot be changed after your DAO goes live.
4. Double check your settings, then click “Summon.” If you want to launch your DAO with multiple members right away, click “Add Multiple Summoners,” which will save you voting in all of your founding members after your DAO goes live.
5. DAOhaus will prompt you to sign a transaction through your Web3 wallet, which will require you to pay fees of varying amounts depending on which network you launch on.
6. Once your transaction goes through, head over to the DAOhaus Hub to register the metadata and officially launch your DAO.
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