Forward the Original Title‘【Web3.0|指南篇】DAO 的类型以及如何创建去中心化自治组织’

What is a DAO in cryptocurrency?

Legal definitions outline what different types of business entities can and cannot do. These governance rules may exist as private agreements, such as shareholder contracts between business owners. The law can enforce such agreements since, historically, businesses could only act through people or legal entities. However, enforcing these rules presents two fundamental problems: parties do not always follow the rules, and they do not always mutually agree before enforcing such regulations. So, who is most affected? Stakeholders with little power to participate in governance decisions or to identify issues are prone to experiencing financial mismanagement and fund loss. Is there a solution to this problem? Yes, there is a way to address these issues: Decentralized Autonomous Organizations (DAOs). But what is the purpose of a DAO? One of the advantages of a DAO is transparency, which helps solve the principal-agent problem (more on this later). But what exactly is a DAO? Distributed ledger technologies like blockchain and smart contracts are at the core of the DAO ecosystem. Here, governance rules are written, automated, and enforced through software, allowing participants to oversee contributed funds without third-party involvement. To become a member of a DAO, users typically must join by purchasing its native cryptocurrency. Examples of DAOs include DASH, Augur, MakerDAO, and virtual worlds like Decentraland. However, the virtual e-commerce network BitShares was the first successful DAO. BitShares, referred to as a Decentralized Autonomous Corporation (DAC), is a term coined by its founder, Dan Larimer. This guide will explain what DAOs are in the blockchain space, how they work, the different types of DAOs, why they are important, and how to create a DAO.

How do decentralized autonomous organizations work?

Smart contracts are used to establish the rules for a DAO, which are formulated by a core team of community members. These smart contracts are transparent, verifiable, and publicly auditable, forming the foundation for the DAO’s operations. They allow any potential member to fully understand how the protocol works at any time.

The next step for a DAO is to explore how to secure funding and manage governance once these rules are officially written onto the blockchain. This is typically achieved through a token issuance model, where the protocol sells tokens to raise capital and fund the DAO. In return for their investment, token holders gain voting rights, usually proportional to the number of tokens they hold.

Once the funding is secured, the DAO can be deployed. After the code is deployed into a live environment, it cannot be modified without a consensus reached through member voting. In other words, no specific entity has the authority to change the DAO’s rules—this is entirely up to the DAO’s token holders

How to start a DAO?

Follow these steps to create a DAO:

Build a solid foundation

The first step is to discuss with peers to determine why a DAO is needed, what role it will play, and how it will operate. Developing a DAO requires human decision-making to identify opportunities, potentially recruit collaborators, validate needs, and outline processes that can be automated and incorporated into smart contracts. It is crucial to establish clear goals with other DAO enthusiasts to avoid any disagreements over the DAO’s governance structure. Additionally, you need a crypto wallet for transactions and storage.

Before investing in any venture, investors or backers first consider the source of income. So, how do DAOs make money? Dividends are the primary source of income for DAOs. DAOs make investments that generate dividends. The creators of a DAO can also make money by convincing their peers to invest in the DAO based on their business idea.

Determine ownership

Once both parties agree on the purpose of the DAO, the next step is to establish ownership for DAO members, which helps in the growth and development of the Decentralized Autonomous Organization. DAOs can transfer ownership to their members in various ways, as ownership is typically tokenized. Two standard methods used by DAOs are “airdrops” and “rewards.” Through airdrops, tokens are distributed to members based on their contributions and behavior within the community. Rewards are bonuses paid to members who complete tasks and objectives. Members gain ownership by earning rewards in the form of native tokens. Tokens can also be purchased through decentralized exchanges like Uniswap.

Establish a governance structure

At this stage, decisions are made on how the DAO will operate once established. “Token-weighted voting” is the most commonly used method for decision-making rules. Voters are token holders, with each token representing one vote. Members submit ideas using tools like Snapshot and then vote based on other members’ preferences. The results are automatically executed through smart contracts.

Set rewards and incentives

Setting up rewards and incentives as benefits for DAO members and contributors can build trust. Native governance tokens are distributed to members and contributors who have previously used the considered DeFi protocol. These tokens represent ownership but have no market value.

Types of decentralized autonomous organizations

Based on their operation, structure, and technology, DAOs can be categorized into several types, as follows:

Protocol DAO

When tokens serve as voting indicators for implementing any changes to a protocol, this governance structure represents a Protocol DAO. For example, MakerDAO has revolutionized the DeFi space with its DAI stablecoin. Other examples include decentralized exchanges (DEXs) like Uniswap, which reward liquidity pool contributors with native governance tokens. These tokens are used to vote on governance-related decisions for the DEX.

Collector DAO

Artists creating artwork using non-fungible tokens (NFTs) rely on collector DAOs to establish ownership of their art. Flamingo is an example of such a DAO. PleasrDAO is another example, which lowers barriers to NFT investment and serves as a collector DAO.

Operating system

Platforms that organizations can use to create DAOs, such as Colony, are referred to as “operating systems.”

Service DAO

Projects like MetaverseDAO are referred to as “Service DAOs.” They provide talent search services for individuals and institutions and support acquisition models.

Invest DAO

They are also known as Venture DAOs, which pool capital to democratize investment in various DeFi operations. Millennials support investment DAOs because they are transparent and open to anyone globally. Krause House is an example of a Venture DAO, managed by basketball fans to operate within the NBA.

Grant DAO

In a Grant DAO, the community contributes to a grant pool and votes on funding allocation and distribution decisions. Innovative DeFi projects use these DAOs to secure funding, demonstrating that decentralized communities can be more flexible with finances compared to traditional organizations. One of the most notable Grant DAOs is the Aave protocol, which uses its Grants infrastructure to nurture and grow its DeFi program community. With this protocol, those with surplus funds can lend money, while those in need can borrow from protocol members.

Entertainment DAO

Entertainment DAOs offer decentralized enjoyment, allowing creators to achieve their innovations through governance control. For example, Flufworld members can personalize 3D NFT Flufs (a collection of unique rabbits) and license them. The Bored Ape Yacht Club (BAYC) is also set to launch its entertainment DAO, enabling BAYC native token holders to vote on creative decisions.

Media DAO

Media DAOs allow content creators (i.e., readers) to contribute directly without involving advertisers, earning native tokens as rewards for their contributions. For example, Forefront provides numerous opportunities for DeFi enthusiasts, including a crypto education hub and growth options for incubation projects.

Social DAO

Social DAOs, like Blockster, are crypto-focused social networking and collaboration platforms. These platforms offer digital democracy, where everyone’s opinions are heard, and people can share their common interests.

The technical layer of DAO

The base layer consists of blockchain technology, on which various protocols (such as Dash, Cosmos, Colony, and Ethereum) are built. Companies like DAOstack and Aragon, which use Solidity, operate at the platform layer and are examples of the DAO Software-as-a-Service (DSaaS) model. DAOs created on Aragon and DAOstack are deployed at the application level. However, it’s not always necessary to use these platforms to develop a DAO, as you can fork existing DAOs to create one that meets your needs. For instance, DAOs are part of the Layer 2 ecosystem built on Ethereum.

In DAOs, cryptocurrencies and digital assets can be transferred directly through a feature known as composability (also referred to as “money Legos”). Due to composability, protocols and applications can be selected and built into various combinations.

How much does it cost to start a DAO?

Since there is no fixed cost for creating a DAO, the price depends on the network’s gas fees at the time you plan to create it. For example, if you choose to create a DAO on the Ethereum blockchain, you will incur gas fees, which are the costs for loading the smart contract onto the blockchain. This could be around 0.2 ETH, with an average gas fee of 30 gwei. Additionally, you must submit an annual report each year, which costs $60 or more, depending on your business operations.

DAOs tension triangle

In a DAO, the delicate balance between three unique but equally important components—voice, exit, and loyalty—can be seen as a tense triangle. The degree to which a DAO respects individual sovereignty is reflected in the extent to which it allows members to leave. Individuals have the freedom to participate in decision-making and can choose when to join and exit the DAO, as well as whether to engage in and vote on all other DAO decisions (i.e., exercising their voice). This corresponds to the concept of free will.

The DAO-specific design space related to voice is known as governance mechanisms. Governance involves participating in decisions related to the protocol and improving the DAO through participation. Strengthening governance requires enhancing voice and reducing exit incentives.

Governance (voice)

Governance rules encompass the legal structure for the organization’s existence and dissolution, membership, purpose, operations, and both on-chain and off-chain voting.

Personal (Exit)

Individuals who believe in autonomy and public interest and are willing to act independently are typically referred to as “persons.” However, they also wish for their individual rights to be respected. Registered or unregistered companies that operate under their territorial sovereignty and are legally recognized or classified as persons can also be included in this definition.

Decentralization (Loyalty)

Decentralization is a fusion of technical and political elements aimed at creating a belief system that defines the characteristics of those who choose to join a DAO. When all other conditions are equal, the choice of DAO participants to either voice their opinions or exit depends on their loyalty. The level of decentralization and the personnel and motivations behind a DAO are significant variables affecting the project’s credibility. Additionally, the degree of decentralization varies for each DAO, depending on its capabilities, objectives, and participation costs.

Why do companies need governance?

The principal-agent dilemma arises when one person or central entity (the agent) makes decisions and executes plans on behalf of another person or entity (the principal), as seen in traditional organizations. Moral hazard issues arise when the agent acts in a way that maximizes their own benefit, potentially contrary to their principles. An example of this behavior is the recent widespread stock buybacks by publicly traded companies, where incentives disproportionately enrich agents at the expense of the company’s long-term health.

Therefore, DAOs must be organized in a way that management is appropriately incentivized to act in the long-term interests of the DAO and all its stakeholders. Otherwise, they risk perpetuating principal-agent problems, which are common in many businesses. Governance is thus aimed at serving the public interest! Even if record-keeping through digital ledgers using blockchain technology is the only function of DAO governance, it represents a significant advancement in the openness of traditional infrastructure. Nonetheless, if advisory services are provided directly to individual investors and oracles are used for smart contracts (for smart voting) to automate personal voting, individual voting decisions in company affairs can be executed more effectively.

DAOs and traditional organizations

The following table outlines the differences between DAOs and traditional organizations:

What challenges does DAO governance face?

DAOs often encounter various issues. The following sections explain the most common problems:

Governance system

All DAOs must have a decentralized governance mechanism where decisions are made collectively by thousands or even millions of people. Therefore, managing information and ensuring effective dissemination and communication to all members is a crucial issue for DAOs.

Masternode empowers centralization

The individuals with the most tokens are known as primary nodes and have greater weight in governance decisions. In principle, this addresses the loyalty issue, as those with the most staked tokens or nodes stand to lose more from poor governance decisions. However, a large portion of the network remains underrepresented, leading to increased centralization and disproportionate decision-making power held by a minority.

To address this issue, two voting systems are designed: secondary voting and conviction voting. Secondary voting is a community decision-making method where participants can not only vote for or against a proposal but also express their level of conviction about it. Similarly, conviction voting is a revolutionary decision-making mechanism that funds ideas based on the overall preferences of the community, which are expressed in real-time.

Shadow voting

Token holders without economic stakes in the protocol may engage in shadow voting by borrowing governance tokens to vote and then returning them to the lender, which undermines the resilience of the DAO. For example, an attacker might create a flash loan with no interest payments or capital costs, illustrating shadow voting. Other examples include decentralized cartels or dark web DAOs that manipulate governance mechanisms through opaque on-chain voting purchases.

In the best-case scenario, attackers are forced to pay long-term interest, capital holding costs, or penalties on their collateral. Since the protocol does not control secondary market interest rates, it can influence “governance costs” by adjusting the time required to complete the voting process. Any system that uses tokens to control governance may face conspiracies and bribery around key decisions. This is one of the most critical attack vectors in DAOs. Therefore, to ensure a successful, well-functioning, and robust DAO, similar cartel-like behaviors must be addressed in the rules from the outset.

The future of DAO

In the future, it is unlikely that ordinary people will work for companies in the traditional sense. Instead, individuals will earn income through unconventional means, such as learning new skills, creating art, playing video games, or organizing information. Networks emerging around crypto protocols are developing new ways to coordinate, quantify, implement, and reward contributions, shaping this novel work future. This shift is already opening up passive income opportunities for individuals and is leading to a transfer of value from corporations to individuals participating in crypto networks, such as DAOs. DAOs are poised to replace traditional governance methods.

Although DAOs are still in their early stages, they are no longer just an optimistic concept. DAOs are transparent entities managing billions of dollars in assets and inventing new ways for contributors and network participants to earn. DAOs are becoming increasingly common, making it an exciting time for industry and organizational experts to address this emerging phenomenon with new theories and empirical research. Additionally, brands must keep up with current developments, as this may impact their interactions with customers, and vice versa. While DAOs are not yet widespread, they seem to be attracting many optimistic creators.

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