Decentralized Autonomous Organization (DAO)

As you know, starting a business with someone that involves money requires a ton of trust, with DAOs you don’t need to trust anyone, just the DAO rules which are baked into codes and can 100% be verified by anyone.

So, in this chapter, I’m going to explain to you what a DAO is and what makes it different from a traditional organization.

Let’s get started.

A decentralized autonomous organization is an effective way to work with anyone with shared interests on the internet.

They’re an internet native business that is collectively owned and controlled by its community members.

Decisions are made through proposals and voting to ensure everyone has a voice in the organization.

There’s no dubious BOSS who can authorize spending based on their own whim, instead DAOs have built-in treasuries that no one has the authority to access without the approval of the group.

Everything is open and the rules around spending are baked into the DAO code.

This opens up so many opportunities for global work and collaboration.

Differences between traditional organization and DAOs

Traditional organization	DAOs
Activity is private and limited to the public	All activity is transparent and open to the public
Typically hierarchy	Fully flat and democratized
Changes can be demanded from a sole party	Voting are required from members to implement changes

Chapter 2

How do DAOs work?

There are three integral components of a decentralized autonomous organization.

Smart contract creation

The backbone of a DAO is its smart contract.

The contract defines the rules of the organization and holds the group treasury.

The rules of the DAO are established by a core team of community members through the smart contracts and programmed to run when certain actions take place.

They’re verifiable and publicly auditable so any potential member can fully understand how the protocol is to function as they lay out the foundational framework by which the DAO is to operate at every step.

This stage involves extensive testing of the code because it can only be changed through group voting once the DAO smart contract is deployed.

This is possible because smart contracts are tamper-proof, you can’t just edit the code(DAOs rules) without people noticing because everything is public.

Funding

At this stage the DAO needs to figure how

to receive funding and how best to bestow governance.

It’s here that people buy into the group if they support its mission.

Governance rules can also be established in this phase.

Launch

At this point, once the smart contract is deployed, it can no longer be changed by any other means other than a consensus reached through members voting.

Chapter 3

Types of DAO Membership

There are two different models for DAO membership.

Shared-based membership

Shared-based memberships are typically used for more close-knit, huma-centric organizations like charities, and investment clubs.

They can also govern protocol and token as well.

A famous example

MolochDAO: MolochDAO is focused on funding Ethereum projects, you can’t just buy access to the DAO on the open market.

Instead they require a proposal for membership so the group can assess whether you have the necessary expertise or capital to make informed decisions.

Token-based membership

This type of DAO membership is usually fully permissionless depending on the token used, it’s typically used to govern broad decentralized protocols and tokens.

Simply holding the token gives you voting rights.

A famous example

Uniswap: Uniswap’s token UNI is widely available on decentralized exchanges, so anyone can buy into having voting power on the Uniswap protocol’s future.

Chapter 4

Decentralized autonomous organization examples

Let’s kickoff this chapter with concrete example of DAOs:

Compound Finance

Compound is an algorithmic money market that allows you to borrow money by putting other money as collateral.

Where do DAOs come in?

Well, the compound protocol needs community consensus on which new market to add, how to issue COMP governance token to participants so they take part in the DAO as well, what parameters to change, and what to do with their billion dollar treasury.

Basically, by holding a COMP token there’s no step needed. No KYC, no overhead, no jurisdiction, just pure community consensus on what is best for the DAO.

Uniswap

Uniswap is a multi-chain automated maker (AMM) and one of the largest decentralized exchanges till date.

Uni holders govern the protocol through an on-chain governance process.

The Uniswap token enables community ownership and active stewardship of the protocol.

JennyDAO

JennyDAO is a decentralized autonomous organization in the NFT space.

The DAO provides fractional ownership of NFTs where the organization vault is controlled by smart contract as members oversee their purchase.

Jenny token holders have governance rights over key decisions made by the JennyDAO.

MakerDAO

MakerDAO is the issuer of the stablecoin DAI.

MakerDAO has a decentralized governance structure where stakeholders use the MKR token to cast their suggestions and vote on protocol changes.

Chapter 5

Decentralized autonomous organization use cases

The main driving force behind DAOs is their use cases which will significantly skyrocket as we make advancement in artificial intelligence, automation, blockchain, and Internet of things.

And in this chapter, I’m going to show you other emerging real life DAO use cases.

Let’s dive right in.

One of its most sought-out use cases is DACs.

They are decentralized autonomous companies that ditch the traditional organization hierarchy in favor of decentralization.

A notable example of a traditional company that’s remolding itself as a DAO is ShapeShift, a Denver-based company that offers digital assets trading platform.

Another new use case for DAOs are DAVs-decentralized autonomous vehicles.

DAV imagines a future where smart contracts can be employed for everyday functions, such as ride-sharing, taxicabs, or programming cars to drive themselves while you just relax and read a book as the car takes you to your destination.

A blockchain based transportation protocol known as DAV is developing a decentralized transportation network using these principles.

Chapter 6

How to join / create decentralized autonomous organization

DAOs are nothing like traditional organizations, they run on a unique model that may sound a little far-fetched because decentralized autonomous organization (DAO) is a relatively new model.

Now how do you join/ create one?

Join a DAO

Whether joining a DAO is a good idea or not depends on its type, how its members run the organization, and what its core mission and goals are.

This is where you have to DYOR on the DAO wherever possible.

Create a DAO

To create a DAO follow these four steps below.

Step 1: Build a solid base

The first step is to talk about and decide with your pals why your organization should operate as a DAO, what part it will play, and how it will function.

Human decision making is needed to identify opportunities, recruit collaborators, and sketch out the rules that will govern the DAO through smart contracts.

The DAO members will need to thoroughly discuss and decide the set of rules that will govern the decentralized autonomous organization to eliminate any chances of disagreement in terms of DAO governance structure.

You will also need to decide how your DAO will make revenue because it’s the first question Investors look at before committing funds to any project.

It’s important to note that dividends are the primary source of income for DAOs, that’s why they make Investments that help them earn dividends.

Step 2: Establish ownership

The two standard method used by DAOs to decide ownership are “rewards” and “airdrops”

Rewards are bonuses paid to members who achieve duties and goals.

On the other hand, Airdrops are tokens distributed to community members based on their contributions and community behaviors.

Step 3: Decide a governance structure

At this stage, how decisions will be made once your DAO is set up are decided.

The popular method used to establish decision making rules are “Share based voting” or “Token weighted voting” where voters are token holders and each token represents one vote.

Members submit ideas using apps like Snapshot, then they vote based on the preference of other members and results are then executed automatically through smart contracts

Step 4: Structure rewards and incentives

Setting up incentives and rewards as the various benefits offered to DAO members boost confidence.

DAOs may also reward members with crypto like ETH, USDC, or even with titles and grades.

Chapter 7

How to use decentralized autonomous organization to automate governance

The act of managing collective decision making in order to optimize funds and operations in a DAO is known as governance, in which smart contracts enable participants to govern cooperatively.

Aragon allows you to create a DAO on Ethereum, Polygon, and Harmony

On the technical side, you’ll need a mechanism for handling proposals and votes.

So in this chapter, I’ll be explaining DAO governance and the tools you need to automate governance.

Let’s get started!

There are tons of open source solutions available to use to automate DAO governance, all of them will provide roughly the same structure but the way they do it differs much.

The exact one to choose largely depends on what you DAO deems important as some DAO governance systems work with on-chain governance pooling while others off-chain.

Tools to automate DAO governance

Aragon

Aragon allows you to create a DAO on Ethereum, Polygon, and Harmony.

The project itself is run via a DAO and has its own non-profit organization to manage Aragon’s funds.

You can find further informations in Aragon FAQ

Snapshots

Snapshots is a multi-chain customizable off-chain voting mechanism and uses digital signatures via wallets to cast votes based on a snapshot of token holders.

Keeping votes off-chain works well for multi-chain projects where users have governance tokens across different networks.

You can find full instructions on Snapshot docs.

DAOhaus

DAOhaus is a no code platform for launching internet communities.

You can discover, join existing DAOs, as well as launch your own decentralized autonomous organization.

Launching a DAO on the platform provides you with a landing page where others can pledge to join your DAO.

With the latest release, DAOs also get a Pokermol (mobile-friendly app for DAO proposal interaction) interface automatically.

Learn more on how to create a DAO with Daohaus.

DAOstack

DAOstack is an open source project focused on building decentralized autonomous governance frameworks.

The platform offers pre-built templates for launching decentralized autonomous organizations, autonomous models, where each business function is replaced by smart contract algorithms.

Coordinape

Coordinate is a platform for web3 DAOs to help contributors coordinate, manage tasks, payroll across teams, time zones, and pseudonymous identities.

DAO governance

Quantitative tools have emerged that let members of a DAO visualize the risks in the decentralized autonomous organization.

DAOs work best when the governance burden related to security, risks, and curation can be reduced faster than the natural increase in coordination costs.

That’s why it’s advisable for protocol builders to assess the real goals and mission of the organization when deciding to form a decentralized autonomous organization.

The governance areas that are common to all DAOs are:

Asset curation

From collateral for lending to collected artworks, all DAOs benefit from goals and process around curation.

Risks management

Price, volatility, and other market conditions necessitate continuous tracking.

Collective ownership

Where to allocate financial resources with considerations of assets, liabilities, income, and liquidity should function like a decentralized corporation with treasuries and balance sheets.

The key lesson here is that DAOs will need to add new skills and governance processes as their activities change.

Successful DAOs recognize shortcomings quickly and make adjustments.

Partition into Pods

Smart contracts can be used to explicitly split up a DAO into teams.

Partitioning a DAO into Pods that each operate independently and focus on specific tasks is another possible tactic that can help expand a DAO membership and scope.

You can do this by allowing certain sub-groups (known as sub-DAOs or pods) to operate each of these tasks independently and focus on specific tasks (development, marketing, etc.)

Yearn Finance is one of the first DAOs to partition its DAO into subgroups.

The platform’s rapid growth and constant product evolution led to a need to split up the team into sub-DAOs that independently handle tasks like frontend UX, or core protocol development and marketing

Once a DAO has a large enough assets and community, it’s extremely important to hire staff who can commit their expertise, and capital full-time towards administrative, communication, and maintenance tasks.

DAOs often can borrow from best practices of traditional organizations too.

Chapter 8

Types of decentralized autonomous organization

DAOs can be categorized into different types depending on structure, technology, and how it operates.

They’re as follows:

Protocol DAOs

Protocol DAOs serve as a voting metric for implementing changes in the protocol.

Notable example of protocol DAO is automated market maker Uniswap, which awards native governance tokens to liquidity providers which can be used to vote for the Dex governance decisions.

Collectors DAOs

Artists who use NFTs to create arts depend upon collector DAOs to establish ownership of their arts.

PleaserDAO is an example of one such DAO.

Operating system

Platforms like Colony that organization can use to create their DAOs are known as operating system

Service DAOs

Projects like Raidguild, which offers individuals and organizations a provision of talent hunting and support acquisition models are called service DAOs.

Grants DAOs

Innovative DeFi projects are funded using these DAOs.

The community contributes funds to the grant pool and votes on funds allocation distribution decisions in a grant DAO.

Entertainment DAOs

Entertainment DAOs offer open source fun allowing creators to bring their innovation to life with its decentralized governance framework.

Bored Ape Yacht Club (BAYC) says it will launch its own entertainment DAO, allowing holders of the BAYC token to vote on the creative decisions.

Media DAOs

This type of DAO allows content creators (readers) to contribute directly without involving advertisers and get tokens as reward for their contribution.

Social DAOs

Social DAOs are networking collaboration platforms in the crypto space.

Example of a social DAO is Seed Club.

They offer digital democracy where everyone has a fair voice, and everyone can share their common interests.

Investment DAO

Known also as venture DAO, they support capital pooling to democratize investing for various DeFi operations.

They are a more human centric community.

Krause House is an example of a venture DAO, which is governed by basketball fans.

Technology layer for DAOs

The blockchain technology is the base layer on which various protocols are built.

Technology layers for DAO are built by companies like Aragon and DAOstack which uses the Ethereum native language of solidity as DAO and SaaS model on the platform level.

It is not always required to develop DAOs with these platforms as you can fork existing DAOs to create the one serving your needs.

But here’s the rub

Building a successful DAO requires expertise. Navigating the technical complexity, crafting compelling proposals, and attracting the right community – it’s a delicate dance.

That’s where ihulabs steps in. We’re not just Blockchain SEO specialists, we’re DAO evangelists.

We guide you through every step, from concept to launch, ensuring your DAO attracts the right talent, secures funding, and thrives in the decentralized ecosystem using actionable web3 marketing strategies.

Ready to join the DAO revolution? Let’s chat!

Embrace the possibilities, unleash the power of collective intelligence, and join the DAO revolution. ihulabs – your trusted partner in navigating the decentralized future.

Now I’d like to hear from you

There you have it:

The definitive guide to DAO.

Which tip from today’s post are you ready to try first?

Are you going to create a DAO or join an existing DAO?

Or maybe you want to build a DAO project.

Either way, let me know by leaving a comment below right now.

What is a decentralized autonomous organization (DAO)?