The growing popularity of Decentralized Autonomous Organizations (DAOs) it reflects the growing trend towards creating community-focused projects within the Web3 ecosystem.
At its core, a DAO is an organizational structure that enables decentralized decision making within a community.
Currently, there are more than 4,000 of these projects, according to to DeepDAO log data. With new tools available to make DAOs easier than ever, quantity can easily trump quality within these communities and raises the question of what will make these projects relevant in the long run.
a basic ingredient
The basic structure of decentralized organizations seems to be similar to any other tech startup: it requires a value-added service or product, a user community, treasury, a business development plan, and marketing.
Speaking with Cointelegraph, Santiago Siri, founder of Proof-Of-Humanity DAO (PoH DAO), the issuer of the Universal Basic Income (UBI) token, shared his special ingredient in making DAOs sustainable: an engaged community:
“After building a participatory community, we can find funding mechanisms, alliances with other DAOs, governance and participation mechanisms, etc. But without a community, the DAO isn’t real.”
The community approach is repeated throughout the Web3 space, but having a group of people signed up to your project will not be enough for it to thrive.
As Siri explains, the real priority for a DAO is to give that community purpose from an early stage. “What often happens with a project without a soul or a purpose, is that a bunch of mercenaries are going to take the money without generating value,” she said.
The community as the basis of a decentralized structure also supports another rather important factor: financing.
How to fund a DAO
One step that DAOs commonly add to their economic plans for sustainability is tokenization.
Speaking to Cointelegraph, Mitch Oz, DAO Steward for Giveth, a non-profit organization and open source platform for decentralized projects, warned that tokenization is quite a dangerous step if done at the wrong time.
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“Usually when people come up with the idea of launching a token, it’s along the lines of launching an airdrop, building excitement. Having a token, a transferable token, is not a great idea to start with and I think that’s where a lot of DAOs fail,” he stated.
Based on his experience, Oz recommends starting small when it comes to creating a community token. “I think it’s very important to have some kind of token-weighted governance and start with a token that you can’t buy,” he said.
On the other hand, there is also external funding that DAOs can receive through grant programs and venture capital (VC) for tokenized projects.
Instead of the fine tightrope traditional start-ups used to walk to get their first funding approved, grant programs focused on supporting Web3 projects and their communities have now provided a new avenue for funding.
Speaking to Cointelegraph, Ashley Dávila, a venture capitalist at blockchain-focused venture capital firm Gumi Cryptos, explained that Web3 grants allow DAOs to remain financially independent when receiving external funding.
“Grants usually have no strings attached, so they are very attractive and can be seen as income. The general conclusion is that grants are not dilutive and VC funding is dilutive,” he said.
Christian Narváez, a venture partner at OP Crypto and founder of the Web3 Familia DAO, told Cointelegraph that Web3 projects should start getting external funding through grants before knocking on the doors of venture capital.
“I always recommend that Web3 projects being built apply for grants within the blockchain ecosystem. It is an effective way to raise capital without having to give up equity tokens from your project,” he said.
Narváez added that there is even a technique that allows Web3 projects to stay afloat before you are ready to take your project to a VC:
“It’s called grant farming, which basically applies to many different blockchain grants and raises capital in an equity-free way, allowing projects to hold ownership for as long as possible before trying to raise venture capital money. “.
While on the outside, a DAO may appear to run smoothly once it has built a community and received funding, achieving the decentralized dream is not as easy as idealists make it out to be.
dao drama
Despite all voting and funding processes being duly recorded on the blockchain, DAOs still struggle with transparency of funds and centralization of power.
Scandals surrounding these issues were a predominant theme at Devcon IV, an international event dedicated to the Ethereum community.
In one case, members of the Harmony protocol criticized the Blu3DAO board, claiming that they had observed suspicious fund management and a potential conflict of interest between the founding team and its main sponsor, the Harmony protocol itself.
The inconsistencies of the DAO information also raised alarms. Harmony’s forum also showed links between the organization and the MoneyBoss company, owned by the founders of Blu3DAO.
The response from the blockchain community was mixedwith support from Blu3DAO members and questions from users on Twitter.
Blu3DAO Founders managed these accusations shortly after they were published, versus more backlash from the blockchain community. the team too provided proof of your transactions on the blockchain one month after the event to debunk reports of mismanagement of funds and having carried out your operations.
Siri also dedicated a portion of her time on the event stage to clear up the so-called “DAO drama” that involved the alleged centralization of voting power in PoH DAO by its governing partner, the Kleros team.
Another example occurred in April when FEI/TRIBE DAO, a merger between the FEI protocol and Rari Capital DAO, hit the headlines with an $80 million hack. Uncertainty gripped the organizing community once the government launched a tumultuous voting process that went back and forth about the decision to cover the funds.
As the crypto personality Cobie explained in a Twitter thread, the vote was heavily influenced by the FEI’s own protocol, which voted against the return of funds in a second vote. FEI Founder Joey Santoro concluded that his case was an example of the current exploratory state of the DAO voting and confirmed the protocol separation of the DAO tribe.
So how do you get started on the right foot in this unfamiliar DAO territory?
dao from scratch
Many new DAOs are born from pre-existing communities, often without funds or a business plan. For this reason, founders and governors take different paths to get their projects off the ground.
Such is the case of Cryptonikas DAO, a new women-focused organization led by eight women from Latin America. According to its founder and director, Giselle Chacón, their key to staying the course has little to do with relying solely on Web3 tools, but rather with creating a solid foundation to be sustainable as a community and as a company.
Speaking with Cointelegraph, Chacón referenced her own experiences as part of a different DAO before starting Cryptonikas, which led her to take a rather traditional approach with her own community.
“Now that we are a strong community and we have people who want to finance us, we have proceeded to create a company in the United States,” he said.
According to Cryptonikas’ product manager, Rosa Jérez, registering the project as a C-Corp company is an effective way to ensure the legality of funding long before opting for a grant.
“AC Corp allows us to act as a private company, capable of generating income from our business activities,” he explained.
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Jeréz also added that this would be the preferred structure for the DAO “until there is mass adoption of the entire Web3 ecosystem.”
Currently, the ideal configuration for the majority of the Web3 community is total decentralization and betting exclusively on technological and financial resources within the ecosystem. As Chacón said, the struggle is to have realistic expectations and enter the DAO space with your eyes wide open:
“We don’t want to have a utopia. We want our DAO to be sustainable over time as a startup, so we did not idealize the process.”
