A decentralized autonomous organization (DAO) is a group organized around a specific mission that coordinates through a shared set of rules enforced on a blockchain. DAOs themselves are just organizational structures that control shared economic resources and/or protocol rules, and each DAO can be different in how it operates. Some DAOs are private and others are open for anyone to join and contribute. For some DAOs, active contributors can get paid by the DAO for their work.
DAOs have been one of my favorite spaces in crypto to spend time in. The ability for people all over the world to come together to build towards a shared mission is exciting, especially when that same group could never have been formed under a traditional company due to various arbitrary barriers (e.g. location, age, part-time, non-traditional education/work experience). For more info on the potential of DAOs, please see my beginner’s guide to DAOs.
This post covers some of my key takeaways from working with DAOs. Most of my experience has been as a delegate for Gitcoin DAO but I’ve also participated in and observed many others. There’s no perfect DAO structure and each one has its own culture so what works for one DAO won’t necessarily work for another. The following reflects my personal experience and perspective and other people might have a different one. The entire space is also constantly iterating to find out what works and what doesn’t.
When initially starting a DAO:
Establish a clear mission. This is critical to keep a diverse and ever-evolving community aligned over time and guide decision-making. If someone comes to the DAO with a funding proposal that is out of scope, it should be an easy no. If the DAO’s priorities aren’t clear, it will be much more challenging to keep the group focused on progressing toward the mission.
Consider progressive decentralization. While the intention of many DAOs is to fully decentralize operations and decision-making, dropping a community into a DAO structure without guidance or leadership will often result in a lack of effective coordination. The founding team almost always has the most context and will ideally set the course for the DAO to progressively empower the broader community over time.
For example, the newly formed Optimism Collective has a working constitution that defines the Optimism Foundation’s role as a steward early on and how the Foundation will help guide the collective with plans to increasingly decentralize its role over time.
Smaller working groups are more efficient. It should not be the case that all DAO members vote on every decision needed in the DAO. It’s impossible to try to keep up with everything and it’s not the best use of everyone’s time, especially as the DAO scales. For this reason, I like the delegate model as seen with DAOs like Gitcoin and ENS, which allow token holders to delegate their votes to a person or group that is able to dedicate the time needed to make informed decisions.
Similarly, delegates don’t need to be involved in all aspects of day-to-day DAO operations either. Delegates won’t be an expert in every topic from finance to technical development to economic design and might not care about reviewing highly specific details. It is more efficient to establish smaller specialized groups that can focus on a specific area.
For example, each quarter in Gitcoin DAO, working groups share what they accomplished in the past quarter and the budget they need for the next quarter to then be voted on by delegates. ENS DAO has been working with Orca which is a DAO implementation that specifically focuses on enabling small working groups called pods. Another example is Aave V3 which lets whitelisted addresses update parameters without having to go through a governance vote. However, governance will have the ability to revoke these whitelisted addresses or add new ones.
Explore ways to establish accountability. It is important to account for how involved each delegate and working group contributor is. In Gitcoin DAO, one attempt to measure delegate engagement is with Steward Health Cards which measure things like voting activity and forum participation. Gitcoin DAO is in the process of building Workstream Health Cards and has also started quantifying DAO contributions so that some of the workstream contributors can work their way into becoming top delegates through engagement and participation in the DAO. These metrics should be refined over time so that it’s not gameable and doesn’t encourage the wrong behavior such as voting just for the sake of voting regardless of knowledge or expertise.
Delegate metrics can be helpful for members who are deciding where to delegate their votes. Sometimes people might just delegate to someone they recognize but that might not actually be an active delegate. I’m also very open to the idea of delegate election cycles which can be a way for people to phase out of the DAO when it’s no longer something they want to work on and keeps delegates thinking about if the DAO is something they want to continue to commit their time to.
- Discuss compensation structures. There should be an open discussion regarding compensation structures when a significant work commitment is required from members or delegates. Not everyone can afford to work part-time on a DAO for free so they should be compensated for their work. In a delegate model, I believe all major delegates should be compensated for the gas they spend on voting and submitting on-chain proposals, at a minimum. This gives every delegate an equal opportunity to participate. Ideally, the DAO would also work towards standardizing compensation so that the DAO is not drastically underpaying or overpaying.
- Set the DAO up for long-term sustainability. Consider diversifying the DAO treasury whether it’s a public round or private movement of funds into more stable assets like USDC or DAI (example of Forefront’s public treasury diversification round). Crypto is a volatile space and, no different than a company, it’s important to make sure that the DAO can operate for the long run. Be stringent on what expenses are paid from the DAO especially if it’s a recurring expense and there is no clear replenishment of funds.
- Foster a culture of being comfortable saying no and having tough conversations. Since there is no CEO who is the ultimate decision-maker and is able to quickly say no to things that don’t align with the company goals, DAO members and delegates are responsible for protecting the DAO’s resources (time, attention, treasury). When a DAO treasury is openly available for anyone to make funding proposals, it can quickly get out of control. When you are potentially working with a lot of friends and people you respect, it can be difficult to say no and have tough conversations when requesting resources for certain projects that aren’t in the best interest of the DAO. Help foster a culture early on where everyone knows decisions are being made in the best interest of the DAO and that a no is not personal.
- Establish structures so members can take breaks. Crypto being 24/7 and a DAO having async communication from people all over the world, with no break or time off standards, can be exhausting and lead to burnout. Set up ways for members to let others know they are taking time off. For example, Forefront even has a DAO-bbatical (sabbatical) as part of their compensation so that after 3 years full-time with Forefront, contributors get a paid leave of up to 6 months for rest, travel, research and/or acquisition of new skills or training. In a delegate model, it would be ideal if there was liquid voting so that delegates themselves could delegate votes to others if they are not active for a period of time (or if it’s just not their expertise and wouldn’t be the best use of their time). This is no different than having a colleague take over someone’s work at a company while they are on vacation.
- Experiment early on. Experiment with different systems and processes to see what works well for the DAO and what doesn’t. Early on it’s okay to experiment as long as it’s communicated transparently. The larger the DAO gets, the more difficult it is to experiment, change or introduce processes. One area which might be interesting to explore is the governance legos from Element voting vaults which enable use cases such as giving voting power to Github contributors or allowing members to vote who are staking or providing liquidity on their tokens.
Disclaimer: Scalar Capital is an investor in Gitcoin, Element, Optimism, Forefront, and Orca. This post is not investment advice.