The Complete Guide To Crypto DAOs

Decentralized autonomous organizations (DAOs) are a new type of organization making their mark in our world lately. Unlike traditional organizations, they have no central governing body but instead are controlled by the organization’s members who have proportional votes. This article explores crypto DAOS, including types, how they work, and how to create a DAO.

What Is A Decentralized Autonomous Organization (DAO)?

A decentralized autonomous organization is a type of organization with no central governing body and whose members have a common goal of acting in the organization's best interests. This type of organization involves token holders having voting power tied to the number of tokens they own, and they can cast votes on all the organization’s decisions. Decisions in a DAO flow from bottom to up, while those in a traditional organization flow from top to bottom.

The appeal of DAOs is having an organization where the focus is not solely on profits but also on the community, and where the members decide the strategy of the organization instead of appointed leaders. Though relatively new, we've seen many use cases for DAOs, including fundraising, investments, and charity, and this works without the help of an intermediary.

DAO

• No centralized governing body
• Decisions follow a button-up approach
• Rules are dictated by smart contracts
• No executive roles

Traditional Organization

• Centralized governing body
• Hierarchical – decisions flow from top to down
• Rules can be amended without votes and aren’t fully transparent
• Has executive roles, e.g., CEO

How To Create A DAO

DAOs are at the heart of today’s leading crypto projects.Uniswap has a DAO, as does Aave. Even blockchain networks like Abritrum have DAOs. The reason: decentralization. DAOs give governance back to the community rather than a centralized group of decision-makers.

To form a DAO for your project or initiative, there are some basic steps to follow. Some of these focus on defining your mission and building a community. Every success story starts with a plan.

Step 1: Define Your Goals

Just as in any organization, there has to be a mission statement for your DAO. Time to put your philosopher hat on. Why will your DAO exist? What are the goals?

Step 2: Start Building A Community In Your Niche

Where are the people who would be interested in your DAO? It’s time to find them and build a common place where you can all talk and discuss ideas, an informal world headquarters. Maybe that’s a Telegram group or a Discord server. But you’ll need to bring people in from other sources as well, like Twitter, Reddit, or online communities that fit your niche.

Describe the goals of the DAO and invite others to wherever you decide to call home, whether that’s Telegram, Discord, a Signal group, or someplace else.

Consider launching a website to describe your vision for the DAO. Sites like Notion or GitBook won’t be costly but give you a digital bulletin board where you can direct traffic and outline the goals of the DAO and invite others to join the community.

Now is also the time to think about a plan to realize those goals. DAOs are communities, democracy in action. But think of ways to simplify the goals. Who wants to participate in something they can’t even understand? Make it clear for yourself, so you can make it clear for others.

Step 3: Make The Rules (And Code) For The DAO

Now that you’ve found a group of people interested in forming a DAO community, it’s time to put a finer point on the details. Keep an open mind. You’ll be bringing people together from different backgrounds, and some may have specific experiences that can help you define the DAO's structure and how it can better achieve its goals.

When you’ve come up with a structure, it’s time to get it ready for the blockchain. Apps like Aragon can help you build a DAO smart contract without coding. You can even mint tokens for your DAO.

Note:You’ll need to deploy your smart contract prior to making an LLC for your DAO. More on that in a bit.

Step 4: Launch The DAO

Once you have your smart contract, it’s time to beat the bushes again. Leverage the community you’ve built to reach out to their networks and spread the word. No longer just an idea, you have a live smart contract and defined goals for the DAO. But it’ll need a vibrant community to keep going and keep growing.

Step 5: Create A DAO LLC

There are a number of reasons why you might want a Limited Liability Company (LLC) for your DAO. An LLC is a separate legal entity from the DAO’s founders. Taking this one step creates a barrier between you as an individual and the DAO you helped create. From a liability perspective, it’s a solid decision. And it’s not as expensive as you might think. Typically, the process costs less than $200. A company like doola can help you get set up and walk you through the process, answering your questions along the way. They've recently helped Meebits (owned by Yuga Labs) form a DAO LLC, and have helped Krause House DAO form a C-Corp.

doola

doola makes it easy to get set up and protect yourself and other DAO members from the legal liabilities of the DAO itself. You’ll get an LLC setup in crypto-friendly Wyoming. doola even includes registered agent service within Wyoming for 1 year — and a Mailing Address/ Virtual Mailbox.

Price: $197 and up

Registered Agent Service:Yes, 1 year included

Virtual Mailbox: Yes

Main Features

• Newbie-friendly setup: If this is your first time forming an LLC, don’t worry. doola is newbie friendly and walks you through the process.
• No-surprise pricing: Business formation services are notorious for add-ons. doola knows what most LLCs need and includes common services like a registered agent in the price.
• Customer approved: A TrustPilot score of 4.9 out of five is unheard of — and certainly within the business formation sector.

Why We Like It

If you’ve ever formed an LLC before, you probably already have an opinion on business formation services as an industry — and it probably isn’t very flattering. doola includes many of the services you’ll need to finish the job without taxing you with add-ons. For example, you’ll need a registered agent for your LLC in Wyoming. Other services charge nearly $250 for this “add-on” service (and you can’t form an LLC without one). doola includes a registered agent for one year in the price (about $200 to get started).

How Does A Crypto DAO Work?

DAOs rely on smart contracts for their operations. The code dictating the decisions is based on an underlying blockchain, and changes can only be made if the majority of members authorize it via a vote. For example, the code can be tweaked to increase the supply of a token only after the members authorize the change.

The voting process for a DAO is hosted on a blockchain, and members must often choose between mutually-exclusive options. Voting power is determined based on the number of tokens each member holds. For instance, a member with300 tokens will have triple the voting power of a member with100 tokens.

The appeal of a DAO is that members are monetarily invested in the organization, so they're incentivized to act in the entity's best interests. A member may vote for a decision that doesn’t favor the organization, but they’ll be jeopardizing the value of their tokens in the process.

DAOs usually have treasuries containing tokens that can be issued in exchange for fiat from new members of the organization. Existing members can vote on how to use the fiat the organization receives, e.g., to buy an NFT or invest in a specific cryptocurrency.

Types of DAOs

There are different types of DAOs, including:

1. Protocol DAO

This type of DAO is built to govern a decentralized protocol such as an exchange or a lending application. An example of this type of DAO is theYearn DAO, which governs the crypto investment platform Yearn Finance by delegating funds to different investment strategies.

2. Philanthropy DAO

This type of DAO forms around a specific philanthropic cause. The members pool funding and decide which organizations related to that cause to donate to based on votes. An example of this type of DAO is theUkraineDAO, which raised over $3 million in ETH for Ukrainian soldiers following the Russian invasion.

3. Grant DAO

A Grant DAO is similar to a philanthropy DAO. Members of the DAO pool their funds, call for applicants and decide which ideas to fund based on votes. An example of this type of DAO is theAave Grants DAO, which funds ideas aimed at developing the Aave decentralized protocol.

4. Collector DAO

A collector DAO pools funds from members to invest in specific assets and distribute profits proportionally after a specific period. An example of this type of DAO is theConstitutionDAO, which raised $47 million in ETH from over17,000 members to buy an original copy of the U.S. constitution but lost the bid in the end.

5. Social DAO

A social DAO is focused on bringing together like-minded individuals under a single umbrella. They usually have a barrier to entry like owning a specific amount of tokens or a particular NFT. An example is theDeveloper DAO, a collective of crypto developers whose membership requirement is owning a Genesis NFT.

6. DAO

A venture DAO pools funds to invest in assets not available in the traditional finance sector, e.g., artwork, rare metals, and artifacts. An example is theKrause House DAO, which is raising funds to buy an NBA team but hasn’t succeeded so far.

Largest & Most-Funded DAOs

1. Constitution DAO

The Constitution DAO was formed in 2021 when an interesting asset emerged for sale: an original copy of the U.S. Constitution. The organization raised$47 million in ETH by selling a token called PEOPLE and participated in the auction of the rare item. However, it lost the bid to another moneyed buyer. It shut down in 2021, with members able to redeem their PEOPLE tokens for ETH.

2. MakerDAO

MakerDAO is the decentralized autonomous organization that governs DAI, a stablecoin with a market capitalization of nearly$6 billion, according to CoinMarketCap. It organizes governance through the MKR token, so holders can vote on important decisions regarding DAI such as the circulating supply and the types of acceptable collateral for lending.

MakerDAO has tens of thousands of members worldwide and over $8 billion of assets locked in its smart contracts.

3. BitDAO

BitDAO is a venture DAO that invests in DeFi assets on its members’ behalf. The organization currently has over$1.6 billion worth of tokens in its treasury and has allocated hundreds of millions of dollars to various DeFi projects. It’s governed by holders of the BIT token.

DAO Governance

Governance is the most critical aspect of a DAO, and there are three main governance models for a DAO:

• Delegation: Some members are assigned as delegates to implement changes on the blockchain after a successful vote from all members.
• Automatic transaction governance: This model involves using smart contracts that automatically execute a transaction once there are sufficient votes or prevent it if there are insufficient votes.
• Multi-Sig Governance: This model distributes the governance power among multiple wallet holders. The wallet holders with decision-making power usually comprises a committee assigned by the DAO members.

DAO Membership

A DAO member is anyone who can vote on decisions regarding the organization. There are three main models of DAO membership:

• Token-based: Here, you can become a DAO member by acquiring the membership tokens on any exchange.
• Share-based: You can become a member by offering some value to the DAO through work or tokens, and you'll be granted shares that represent direct voting power.
• Reputation-based: Here, users earn reputation scores by participating in DAOs. The more you participate, the higher your reputation score, which corresponds to your voting power.

History of DAOs

2016: The DAO

In 2016, the first-ever DAO aptly namedThe DAO was created. It was a venture capital fund whose investments were decided by members voting on the Ethereum blockchain. However, in the same year it launched, some users exploited a vulnerability in the DAO's code to siphon over$60 million worth of ETH from its treasury to another account. The theft led the developers behind The DAO to shut it down and return the remaining funds to members.

2021: Constitution DAO

In November 2021, the Constitution DAO was created to raise funds to acquire an original copy of the U.S. Constitution. It successfully raised$47 million in ETH but lost out to a $43 million bid from an American hedge fund tycoon — despite having a higher bid. The auction house was likely concerned with the volatility of ETH, so went with the slightly smaller cash offer.

Although the Constitution DAO didn’t fulfill its intended purpose, its existence brought a lot of attention to DAOs and how they constitute a viable crowdfunding tool.

2021: Legality Milestone

A major problem with DAOs is that they aren’t recognized as legal entities in most jurisdictions, so participants may not have the backing of the legal system if things go wrong. But, in 2021, the DAO sector achieved a major win when Wyoming, a U.S. state, legally recognized the American CryptoFed DAO. This milestone paved a way for more jurisdictions to recognize DAOs in the future.

2022: Olympus DAO Hack

In 2022, a hacker exploited a bug in the code of the Olympus DAO to withdraw tokens worth$300,000 from its treasury. But, for unclear reasons, the hacker returned the tokens hours after withdrawing them. This case highlighted the security risks with DAOs and how members can lose their funds if the developers behind a DAO make mistakes in their code.

The Future of DAOs

DAOs are a fairly new phenomenon representing an attempt to improve human coordination. The idea is to give members of every organization, both for-profit and nonprofit, a say in how their firm is run. Hypothetically, democratization will improve the governance of organizations by ensuring they implement decisions that benefit their members in the long term instead of making short-sighted decisions.

We’ll likely see a proliferation of DAOs as time goes on, especially as more jurisdictions begin to recognize them as legal entities. Expect to see some organizations that you know becoming DAOs at one point or the other.

To Sum it Up

DAOs are one of the most important innovations to emerge from the blockchain industry. They enable groups of people with shared interests to pool their resources to achieve desired goals. Unlike traditional organizations, every member of a DAO has a say in the decisions governing their organization. We think many DAO corporations will emerge in the future once they become legally recognized in more jurisdictions.

Frequently Asked Questions