The growing popularity of Decentralized Autonomous Organizations (DAOs) reflects the growing trend of 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 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 ultimately make these projects relevant in the long run.
a basic ingredient
The basic structure of decentralized organizations seems to be similar to that of any other technology startup: It requires a service or product with added value, a community of users, treasury, a business development plan and marketing.
Speaking to Cointelegraph, Santiago Siri, founder of Proof-Of-Humanity DAO (PoH DAO) – the issuer of the Universal Basic Income (UBI) token – shared his special ingredient for 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 is not real.”
The community approach is repeated throughout the Web3 space, but just having a group of people signed up to your project will not be enough for your project to thrive.
As Siri explains, the real priority for a DAO is to give that community purpose from an early stage. “What usually happens with a project without a soul or purpose, is that a group of mercenaries are going to take the money without generating value,” she says.
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 often add to their economic sustainability plans is tokenization.
Speaking to Cointelegraph, Mitch Oz, DAO Steward at 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.
“Usually when people come up with the idea to launch a token it’s along the lines of airdropping, building a hype. Having a token, a transferable token, is not a great idea to start with and I think that’s where they fail. many DAOs,” he said.
Based on his experience, Oz recommends starting small when 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 and venture capital (VC) programs for tokenized projects.
Instead of the fine tightrope that first-time entrepreneurs 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 VC investor at blockchain-focused VC firm Gumi Cryptos, explained that Web3 grants allow DAOs to remain financially independent when receiving external funding.
“Grants generally have no strings attached, so they are very attractive and can be seen as income. The general bottom line is that grants are not dilutive and VC funding is dilutive,” he said.
Christian Narváez, venture partner at OP Crypto and founder of the Web3 Familia DAO, told Cointelegraph that Web3 projects should begin their 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’s an efficient way to raise capital without having to give out equity tokens from your project,” he said.
Narváez added that there is even a technique that allows Web3 projects to stay afloat before they are ready to take their project to a VC:
“It’s called grant farming, which is basically applying to lots of different blockchain grants and raising capital in an equity-free way, allowing projects to hold ownership for as long as possible before trying to raise VC 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.
The DAO drama
Even when all voting and funding processes are duly recorded on the blockchain, DAOs still struggle with transparency of funds and centralization of power.
Scandals surrounding these issues were a frequent topic at Devcon IV, an international event dedicated to the Ethereum community.
In one case, members of the Harmony protocol leveled their criticisms at Blu3DAO’s board, claiming that they had observed suspicious fund management and a potential conflict of interest within the founding team and its main sponsor, the Harmony protocol itself.
The inconsistencies in the information from the DAO also set off alarm bells. Harmony’s forum also showed links between the organization and the MoneyBoss company, which is owned by the founders of Blu3DAO.
The response from the blockchain community was mixed, with support from Blu3DAO members and questions from users on Twitter.
The founders of Blu3DAO they responded to these accusations shortly after their publication, confronting to more reactions from the blockchain community. The team too provided proof of their transactions on the blockchain a month after the event to debunk reports of mismanagement of funds and have continued their operations.
In addition, Siri spent some of her time on the event stage clearing up the so-called “DAO drama” involving the alleged centralization of voting power in the PoH DAO by its governance partner, the Kleros team.
Another example occurred in April, when the DAO FEI/TRIBE—a merger between the FEI protocol and the DAO Rari Capital—made headlines with an $80 million hack. Uncertainty gripped the organization community once governance began a tumultuous back-and-forth voting process over the decision to cover the funds.
What explained personality Cobie in a Twitter thread, the vote was heavily influenced by the FEI’s own protocol, which voted against returning the funds in a second vote. FEI founder Joey Santoro concluded that his case was an example of the current exploratory state of DAO voting and confirmed the separation of the Tribe DAO protocol.
So how do you get started on the right foot in this uncharted territory of DAOs?
DAOs from the base
Many new DAOs are born from pre-existing communities, often without funds or a business plan. For this reason, the founders and rulers take different paths to get their projects off the ground.
Such is the case with Cryptonikas DAO, a new women-focused organization led by eight women from Latin America. According to its founder and director, Giselle Chacón, the key to staying on course does not have much to do with relying solely on Web3 tools, but with creating a solid foundation to be sustainable as a community and as a company.
Speaking to Cointelegraph, Chacón referred to her own experiences as part of another 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 the funding long before opting for the grant money.
“A C Corp allows us to act as a private company, capable of generating income from our business activities,” he explained.
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 most of the Web3 community is that of total decentralization and that of betting exclusively on technological and financial resources within the ecosystem. As Chacón stated, 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 don’t idealize the process.”
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.