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As a Mocaverse holder, I scored an exclusive spot in the Affinity.xyz Accelerator's 31-day Web3 Course. The lesson on "Creating a DAO" was especially helpful to me, so I took notes and wanted to share it with you.
In the lesson, Jonathon Burbank, aka Fuzzy Wisdom has led us to think about the questions when creating the DAO. As we went through the exercise, we started to think about the pros and cons of having a DAO, using a DAO, and whether or not in the future we’ll be able to look at a DAO and think to ourselves, "Does this make sense? Is this appropriate? Or was this team just trying to be Web3?
Let’s get started.
1️⃣ Structure
The very first step of setting up a DAO is thinking about the DAO structure. The structure, if you're building a DAO from nothing with no underlying existing platform to host it on, is the most important thing. Before you go talk to a dev team, or start reaching out to Ethereum developers, or looking at tools that you could potentially use to create this DAO, think about the structure of your DAO.
What questions would we need to answer? What is the purpose of the DAO? Why does it exist? Who are the people in it? It might seem obvious, but unlike a business or a hobby, a DAO doesn't turn on a dime. You can't just decide you want to pivot if something isn't working. That's kind of the idea behind the DAO, it's decentralised so everybody has a say. But the downside of that is that if everybody has a say it can take some time to get some movement and traction, and get people to agree on a specific trajectory or direction that this DAO should go. So a lot of thought should be given to the specifics of why this DAO is even being created to begin with. What decisions will your DAO make? Making decisions is the reason a DAO exists. So everybody has a say and everyone can determine those decisions. The level of decisions and how inclusive they are of the entire project or company is very important.
And this actually brings us to another thought, is your company ready to accept a company-focused decentralised ownership structure? In other words, is your company or project ready to have to listen to a group of members that get to have a say? They get to decide on the direction of that company or business? A decentralised approach isn't always a great fit for every business, or every industry, or project. Careful consideration should be given to whether it even makes sense or not. Is there a current difficulty in your industry that a DAO could solve? What in your business or industry could benefit from having a large group of decentralised decision makers? Is there something that maybe was a problem in the past and there is a solution now provided through traditional means, but maybe a DAO could offer a new solution or a new perspective to that? It's something to give some careful consideration to.
Could your community, consumers, or customers benefit from a DAO? It's important to note that just because you're building in crypto and Web3 doesn't mean that you need to form a DAO for your project. This is actually a mistake that some projects make. DAOs are not required for crypto. They are popular, and a lot of people choose to utilise them, but sometimes it's best to not use a DAO. It's best to go with a traditional means where you have a few people at the top making those decisions. So is a DAO actually beneficial for your business or industry? If you're building in Web3, are you ready to let your vision and project's future be determined by a DAO? And to what extent? These are things that it's really important to give a lot of thought to, and this all ties into the structure. All of these things can shape the way that we view Web3 and the way that we get involved in these projects and businesses.
2️⃣ Type
Dao is still evolving, and the regulations and rules around them are still catching up. So it's important to stay on top of those things if you're considering building a DAO.
So what type of DAO is it? What type of DAO are you building?
The first type of DAO that we most often see in our space is a protocol DAO. A protocol DAO is the type of DAO that focuses on the governance of decentralised protocols as the name would indicate. Since most DeFi services use smart contracts and are mostly made up of code and communities, there usually doesn't need to be any centralised management structure for them. DAOs make sense for a DeFi protocol where the users can determine which way the project will go. The most well known protocol DAOs are Uniswap, MakerDAO, and Yearn Finance.
The second type of DAO is an investment DAO or grant DAO. In investment DAOs participants join so that they can support new projects or startups, things like that. Or they could be formed just to make straight-up investments like purchasing a block of NFTs. They can be crypto related or maybe not. Maybe you're investing in traditional items. Usually in this type of DAO, the decision making for the investments are governed and enforced through smart contracts, so it may not work in every situation. Grant DAOs are similar to investment DAOs in that their objective is to support new initiatives, projects, companies. But giving a grant is with the expectation that there's no ROI. There's nothing that you're going to get as a return for that. So it's not really an expected investment so to speak.
Obviously the two most popular DAOs are the investment or grant DAO and the protocol DAO. But there's also social DAOs, collector DAOs, media DAOs, entertainment DAOs, philanthropy DAOs. A philanthropy DAO is pretty infrequently found. It's really dedicated to aiding projects that are focused on social responsibility of Web3.
3️⃣ Tokenomics
The DAO token is a very, very important part of the DAO structure and function. It's really imperative that this is designed correctly. You have to decide how many tokens there will be. What are the incentives, rewards or perks for the token? What's the reason why people hold the token? And how does the token affect the DAO voting or governance of the project?
Having the right balance of use cases and rewards is really important to the DAO. And the allocation is also very important because early adopters and supporters of the project, they're going to expect higher rewards since they're taking more risk by jumping on board early. So make sure you have enough supply to be able to reward properly as time passes and the project grows.
Axie Infinity was a project that took off in 2021. It got national headlines, and it was really the main catalyst for the gaming boom that happened in late 2021. However, the project very quickly saw hyperinflation of its tokens, and eventually the entire economy crashed, and much of the player base disappeared. Even though Axie Infinity ultimately didn't have the success that everybody had hoped it would, it did have success, and it did get the minds of people in this space thinking about how gaming could really be the catalyst that brings mass adoption.
4️⃣ Creating Tools
There's always this option of creating a DAO from scratch, but now there's actually several tools on the market that can help and do most of the heavy lifting for us. There's also tools available that can help us create the legal structure and the DAO token and minting process for it. Additionally, you're going to have to name your DAO, and build teams, and find members for the DAO.
On the Ethereum chain, Aragon, Colony, Syndicate, OpenLaw, DAOstack, and Orca, are a few that you could go check out and read up on and see what they have to offer. There's lots of different options and tools available for us to be able to create a DAO without having to hire a bunch of Ethereum developers. So take the time to go and read up on them and see what is available and see what benefits they may bring to your project and the DAO that you're trying to create.
5️⃣ Security, Treasury and Governance
So now you've built your DAO, successfully launched, and released the token. Security and treasury are the next items to tackle. If you've raised funds for this DAO, you really need to protect them, and security is everything in Web3. There's popular DAO treasury tools that are available. One of those tools is the Gnosis Safe. Platforms like Gnosis Safe help to secure DAO treasury through multi-signature wallet solutions. Since its inception in 2017, Gnosis Safe has been safeguarding projects within the Ethereum ecosystem. The multi-sig features require that several people need to sign transactions before they're executed. This ensures that no one person has control over the treasury and no one scammer can trick one person into signing transactions that relinquish funds or control over the treasury. This is one of the best ways to ensure safety and security of your treasury for your DAO.
Governance is the way that the decisions are made within the DAO and is one of the main utilities of DAO tokens. Some tools to mention are Commonwealth, Paladin, Snapshot, Boardroom, and Tally. These products can offer different tools and structures on which to build the governance platform of your DAO.
6️⃣ Community
Building a community is one of the main pillars of a strong DAO system. The expansion and adoption of a DAO among people, markets, or industries is very closely tied to the community that supports it. So when creating and encouraging the growth of your DAO community, think about how you're going to keep them engaged, how to make processes and decisions interactive, how to maintain interest as the goal of the DAO is to continue to expand. How do we encourage people to do that? Your DAO's success relies almost entirely on the members that are part of it and whether they stick with it or not. So spend lots of time on this.
One of the problems with DAOs is that initially people might get excited and they might jump in and buy the tokens and might want to participate in the governance structure, but after a period of time life takes over and they lose interest. And now you have a very small group of people making all the decisions for the DAO in which many members are holders. We want to try to avoid that. How do we continually try to keep engagement high and limit the attrition of our DAO? Once again, this is something we want to spend a lot of time on and talk to different people to get other people's insights and what is considered best practices, what works, what doesn't work in this space.
End
So that's it. If you followed along with all of these steps, you have successfully created your DAO. Congratulations. These things cannot just help you to build a DAO, but can also help you to evaluate whether or not a DAO has been well-built. DAOs are an integral part of Web3, and you're bound to see them to continue to grow and be adopted as this space grows. Stay safe out there, and remember to choose your community wisely.
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Disclaimer: The information presented in this research is solely for educational and informational purposes and should not be construed as investment advice. All analysis and comments are the opinions of the author and do not represent any recommendations or endorsements of any particular investment, security, or strategy. Crypto and NFT investments involve high levels of risk, and investors should conduct their own research and due diligence before making any investment decisions. The author assumes no responsibility for any losses or damages that may result from any reliance on the information contained in this blog.