Introduction
If you’ve been learning about web3 for a bit of time, you’ve probably seen the term “DAO” more than a couple of times. As you may have learned, DAOs, or Decentralized Autonomous Organizations, are pretty much everywhere in web3. These new decentralized, community-led entities are the coordination layer of web3 and have been touted as the future of work.
In case you’re still wondering what DAOs are, think of them as an organization led by the people working in them. The community of people has access to a shared fund for a specific purpose. The participants of that community can remain anonymous, the organization itself has no hierarchy and is fully democratic. Decisions require the approval of a majority of the group members. There is a voting process via governance tokens, making it automatic and without assistance from any central authority.
The DAO model is promising because it allows for better alignment of participants to contribute. And as mentioned, they are increasingly being adopted in cryptocurrency and DeFi projects like charity, investment, fundraising, borrowing & purchasing NFT, all without intermediaries.
So if a DAO is like a company run by its employees, then how does it get started and how is it managed? To answer that, you’ll need to know the five things that make a DAO function:
- A purpose
- A voting mechanism
- Governance tokens or a shared system
- A community
- Fund management
1. Purpose
Who are the community working for, and for what purpose?
A DAO is created as a governance body to organize certain projects or funds so figuring out what is the DAO's objective is the very first step in creating a DAO.
As members of a DAO will work towards a common goal, you need to make sure that the objective is clear and well understood by all participants.
Without a common north star, your DAO will not be function properly.
2. Voting mechanism
Voting is the medium through which members of a DAO will be able to make their voices heard and make decisions for the DAO.
Using governance tokens (tokens that participants of a DAO should get by participating and contributing), members of a DAO can propose decisions that are then voted on by others of the DAO with their tokens.
If the number of tokens is over a certain value, the proposal is passed, and the execution of the proposal happens.
To be secured, each DAO must finalize a voting mechanism, which may be via a third-party mechanism. A DAO can even vote to change the mechanism, but you have to start with a voting mechanism.
Figure out what your voting mechanism will be and what platform to use.
Voting Tools:
3. Governance tokens or a shared system
As mentioned in the previous section, DAO participants should have voting rights in order to take part in the decision-making process.
And in order to prove that they have voting rights, members need governance tokens. Without these tokens, the members can neither propose any change nor put forward their opinion on any proposal made by others.
Governance Tools:
4. Community
The true essence of a DAO is in its decentralization of governance.
A DAO becomes stronger when decision-making power is allocated to a number of distributed stakeholders rather than just to a centralized group of individuals.
The more people who join and participate in a DAO, the better the decentralization of opinion. No one person will be able to hold power over the DAO.
To build a DAO community, however, you first need to decide if your DAO should be large or small, exclusive or inclusive. Will your DAO be a select group of individuals or a large community with thousands of members?
How you decide depends on your objective. If it is a large endeavor such as onboarding the next million into web3, most likely you’ll need quite a bit of people. However, if for example, you simply want to start an exclusive social club that co-manages assets, then you might want to keep your members to a select few people only.
Community Tools:
5. Fund management
The majority of DAOs are responsible for managing their own treasury funds. Imagine having a shared account, but no member has exclusive access to it. This is the main benefit of web3 and what makes DAOs so valuable—shared ownership. A DAO’s community will coordinate and allocate capital to a treasury all in pursuit of accomplishing a DAO’s mission.
How your DAO will generate funds to bootstrap the treasury depends on the kind of DAO it is. A Protocol DAO is quite straightforward in that if can charge a fee to users of the protocol. DAOs that people gain access only from purchasing NFTs are the same where the initial capital is gotten from the sale of the NFTs. To this effect, you’ll want to try and raise as much initial capital as early as possible so that your DAO community has the funds to work with towards the mission.
Fund Management Tools:
But actually though…how do you build a DAO?
Now that you’ve understood the components of what makes up a DAO, we can dive into the technical aspects of building one.
Luckily, there are already several open-source solutions available on the market to help you kickstart the processes.
Aragon and Snapshot are 2 of the more popular frameworks you can choose to use. Both are similar in terms of structure, but their way of doing things may differ in some places. Some DAO systems work with on-chain polling and others off-chain and which one to use depends on what your DAO deems important.
Building a DAO on Aragon
Aragon allows you to create a DAO organization on Ethereum, Polygon, etc, and involves several steps:
- First, connect your web3 wallet to the Aragon dApp. This is the wallet that you will use to manage your DAO and interact with the Aragon platform.
- Once your wallet is connected, click on the "Create an organization" button to start the process of building your DAO.
- On the next screen, you will be presented with a selection of templates to choose from. These templates are pre-configured sets of rules and governance structures that you can use to quickly set up your DAO. Select the template that best fits the needs of your organization.
- After selecting a template, you will need to link your ENS (Ethereum Name Service) domain name to your DAO. This will be used to access your DAO so don’t forget it.
- Next, you will need to configure the selected template’s voting parameters to suit your needs. This may include:
a. Setting the support percentage (the percent of tokens required to support a proposal)
b. Setting the minimum approval percentage (the percent of yes tokens required for a proposal to pass)
c. Setting the vote duration (the length of time that voting will remain open for participation) - Once the template is configured, you will need to configure your token. Choose a name and symbol for your DAO's tokens, as well as the wallet address that will be used to issue the tokens.
- Finally, review all the settings and information to make sure everything is correct, and then launch your DAO. After launching, your DAO will be live on the Ethereum blockchain and ready for use.
Building a DAO on Snapshot
Unlike Aragon, Snapshot provides a customizable off-chain voting mechanism. This means that voting and other decision-making processes within the DAO do not take place on the blockchain, but rather on Snapshot's own platform.
The way snapshot's voting mechanism works is that it uses digital signatures via wallets to cast votes as snapshots of the wallet owner, hence the name.
The snapshot of token owners allows it to determine who is eligible to vote. This helps to prevent users from purchasing additional tokens in order to influence the outcome of a vote, as the snapshot ensures that only those who held tokens at the time the snapshot was taken are eligible to vote.
To build a DAO on Snapshot, follow these steps:
- Same as Aragon, you will need to own an ENS (Ethereum Name Service) domain. Link your ENS domain to Snapshot. Alternatively, Snapshot allows you to register for one directly.
- Once your ENS domain is linked to Snapshot, you will need to confirm that you are allowing ENS text records to point to your Snapshot Space. You can change the default controller address to another wallet address that you would like to set as the space controller and click "Set controller".
- Once again, you’ll need to give your DAO a name and symbol for its token. You’ll as be prompted to add a description, select a category, and provide some other details. These settings can be changed later in your space settings on Snapshot.
- Next, you will need to configure your space’s settings. Here you can define the voting strategies that will be used. Strategies are JavaScript function that defines how the voting power is calculated and each space can have up to 8 multiple strategies at once as well as use custom-written strategies.
- You’ll also need to configure the terms and conditions for participation, such as the Admins’ and authors’ addresses, as well as proposal validation and voting calculations.
- (Optional Step) You can also choose to verify your DAO on the official Snapshot list. The requirements for becoming verified are:
a. an avatar image,
b. setting a minimum threshold for proposal validation,
c. have at least 5 closed proposals,
d. Links to the project website, Github, or Twitter as proof of ownership.
e. Ask to be verified by an admin in the #helpdesk channel on Snapshot’s Discord to complete the verification process.
If you are looking for inspiration for the rules and set-up of your DAO, you may want to take a look at some established DAOs that are successful. Many different DAOs out there have created incredibly detailed and open structures that function like large corporations.
Examples to consider:
- MakerDAO - decentralized finance (DeFi) platform that uses smart contracts to issue a stablecoin called DAI.
- Aave - a decentralized lending and borrowing platform built on the Ethereum blockchain.
- Uniswap - decentralized exchange that allows users to trade Ethereum-based tokens without the need for a central intermediary.
By taking a look at how they operate, hopefully, you’ll get an idea of the rules and setup of your own DAO.
Conclusion
Building a DAO is technically easy as there are plenty of tools available out there.
However, the execution of a DAO community is the challenging part as it requires careful planning and consideration in order to align people.
The key to a successful DAO is in the objective of the DAO as well as the community involved.
A clear and well-defined objective will help to guide the development of the DAO and ensure that all decisions and actions are aligned with the organization's goals, and a strong and engaged community will provide the support and participation necessary to make the organization function effectively.
