In recent years, Decentralized Autonomous Organizations (DAOs) have become a popular way to manage smart contract projects and communities. Simply put, DAO is a digital organization based on smart contracts. Members in the organization can make different decisions according to the corresponding model structure. While the concept of a DAO is relatively simple and seems like the ideal type of organization for a crypto project, it is not easy to manage. Below, I will discuss with you the key stages and points that the project team should focus on when choosing the organizational structure of the DAO.
1. Phase 1: Define the goals and management structure of the DAO
When creating a DAO, our first consideration was its purpose. We can create DAOs for various reasons such as fundraising, investment, and asset management. In this regard, the project team needs to formulate the structure, management mechanism, and decision-making process of the DAO according to the organization's primary tasks.
Usually, the management structure of DAO can be democratic, meritocratic, or a combination of the two. in:
1. Democratic management structure means that each participant has equal voting rights in decision-making. Example: If 100 people participate in a DAO, then each person has one vote on any decision in it.
2. Elite management structure, with more token participants, they have greater weight in decision-making. Example: If 100 people participate in a DAO, and one participant owns 50% of the tokens, they will have greater voting weight than the other participants.
In a structure that combines democracy and meritocracy, we can establish a rule where each participant has one vote, but the participant with more tokens is awarded an additional vote.
In practice, Aragon Network is a typical example of a democratic DAO management structure, while MakerDAO is a typical example of an elitist DAO management structure.
Note that one governance structure may be more efficient and fair than another, depending on the specific circumstances and goals of the DAO. For example, when DAO participants need to reward those who have made greater contributions to the development of the project, then a meritocratic governance structure is often more practical. Of course, meritocracy often results in the concentration of power and resources in the hands of a small number of actors. This may be against the idea of "decentralization and equality".
2. In the second stage, choose the type of members suitable for DAO goals
Generally, a DAO can have two membership types: open and closed. in:
Open membership means that anyone can join the DAO and gain access to its features, such as voting on decisions. Among them, the most typical example is the DAO that develops those open source software.
Closed membership means that the DAO has certain joining criteria, such as education level, work experience, and financial ability requirements. For example, we use DAO to create a startup company and require its members to have a certain level to participate.
Here is a typical example of a DAO with closed membership:
MetaCartel Ventures is an early stage project built on the Ethereum blockchain. To join the DAO, you must be invited by an existing member, or complete an approval process.
LAO is a startup investing in the blockchain and cryptocurrency space. To join the DAO, you must fill out an application form and get approval from existing members.
Flamingo DAO invests in NFT collections and infrastructure. New members must purchase a certain amount of tokens, known as FLM, to gain access to other members of the group.
We need to determine which type of DAO membership mechanism to adopt by examining the goals of the organization. In general, open membership is suitable for projects that promote social functioning by attracting the largest number of participants. Closed membership is suitable for attracting qualified and experienced participants who can contribute to the development of the project.
3. The third stage: determine the future token economy of the project
To put it simply, the token economy means that DAO uses tokens for economic activities such as voting rights, pledges, and means of exchange. When choosing a strategy for a token economy, aspects we should consider include: how tokens will be distributed among participants, how voting will be managed, what privileges token holders have, how tokens will be issued, etc. Here are some possible uses of tokens in a DAO:
1. Utility tokens - can be used not only to pay for products or services provided by DAO, but also to pay for various expenses within the organization or blockchain.
2. Security tokens – including digital equivalents of securities such as stocks or bonds. With these tokens, investors receive dividends and can participate in voting on important decisions within the community.
3. Voting tokens - can be used to vote on those decisions related to the management of the DAO. Among them, each token represents a vote. As we mentioned earlier, in some types of DAOs, the more tokens an investor owns, the more influence they have over the decision.
4. Governance Tokens – With these tokens, investors can vote on changes to the DAO’s rules, as well as the appointment of new administrators.
5. Stablecoins – tokens pegged to fiat currencies or other stable assets such as gold. These tokens allow investors to reserve their funds in a stable currency and use them to purchase goods and services within the DAO.
The above is only an incomplete list of token types in The DAO. Of course, we don't need to create a separate token for each use case, in fact, only one token that combines multiple functions is enough.
4. Risks and challenges of managing DAOs
By creating your own DAO on the blockchain, you can often obtain benefits such as: high transparency, high efficiency, and low cost. However, similar to other projects on the blockchain, I also need to consider and manage the risks and challenges of DAO. These include:
safety
DAOs can be targeted by hackers, scammers, and other malicious actors. They can lead to theft of your funds, broken smart contracts, and other issues that can damage the reputation of the DAO, and its participants. Therefore, to protect an organization from malicious attacks, we often need a reliable infrastructure, as well as a team of experienced and competent developers.
regulatory issues. Currently, blockchain and cryptocurrencies remain in a gray area in many countries. In some jurisdictions, the activities of DAOs could be subject to regulatory bans, fines, or other negative consequences. To this end, it is necessary for us to carefully study the legal environment of the corresponding jurisdiction and obtain relevant legal advice to reduce risks.
weak governance structure
Since DAOs lack centralized governance, they create potential problems with decision making and conflict resolution among participants. That is, if community members mistrust each other and delay voting on important organizational issues, it will compromise the efficiency and success of the DAO.
Funding and Token Economics Issues
An ineffective token economy can lead to price volatility, low liquidity, centralized voting, lack of incentives for community members, and more. Some lack of well-thought-out DAO token economics may even lead to the failure of the entire project.
Market and Price Risk
The cryptocurrency market is unstable and unpredictable. Fluctuations in the value of DAO tokens will affect the day-to-day operations of the DAO and its ability to achieve its goals. In addition, since DAOs are vulnerable to market manipulation and price speculation, DAOs and their members may suffer financial losses.
5. Create effective DAO ground rules
In summary, DAOs are a unique form of organization that allow members to make joint decisions and manage projects without intermediaries or central authorities. DAOs are very practical and effective solutions for many projects and organizations. However, we need to manage the significant risks of security and reliability brought about by hacking and manipulation when creating and managing DAOs and their technical infrastructure, by adopting the correct methods to control them.
To avoid these risks, it is necessary for us to carefully consider each stage of creating and managing a DAO. These include: choosing a reliable blockchain platform, defining the governance structure, and planning the token economy of the project. At the same time, we can use advanced technology and algorithms to implement regular audits and inspections to ensure a high level of security and reliability.