This is a guest post featuring Federico Daffina Minicucci, student at NYU Stern School of Business studying Computer Science and Finance.
Special thanks to @tmt_xyz, @CDTEliot, @Kristofer (Glasstempo.eth), @rafathebuilder for their comments and feedback. Follow me on Twitter or subscribe to Discovering the Future to join me on my journey getting deep into the weeds of all things crypto.
One of the first blockchain trends to gain momentum was the concept of Decentralized Autonomous Organizations (DAOs). Vitalik Buterin first wrote about them in 2014, before Ethereum’s launch in 2015. After a quiet five years since the DAO hack, DAOs are back in the spotlight, partly thanks to the development of blockchain infrastructure and the growth of DeFi and NFTs.
Today, according to analytics tool Deep DAO, there are over 100 DAOs with a total of ∼715k members managing ∼$9B in assets, and growing rapidly. Spinning up new DAOs is becoming increasingly easy, especially after the emergence of tools such as Gnosis Safe and Discord, which — when combined — allow anyone in the world to create a community with shared ownership of capital (e.g. a treasury) that collectively and trustlessly decides on where to allocate it.
However, there are still many challenges facing DAOs that must be solved to form resilient communities. As DAOs get larger and more decentralized over time, it becomes much harder to organize teamwork effectively, track accountability, measure contributions, and maintain the same dedication and drive from participants.
After outlining the current DAO tooling landscape, I will analyze some of the most important issues with DAO management and share my thoughts on the future. I’ll also explain why the most effective tooling will be built to enhance community interactions, coordination, and connections — thus prioritizing social cohesion.
Traditional organizations use bank accounts to manage funds and numerous enterprise software solutions to coordinate effectively (e.g. Slack, Zoom, Google Docs, Asana, DocuSign). Similarly, various tools have emerged to tackle different aspects of DAO management and ensure well-functioning communities.
The following are some DAO tools I’ve come across through my personal experience and research:
If you’re a visual learner, here is a great visualization of the DAO infrastructure stack by function:
Image: From Kevin Nielsen’s article on The Defiant
Although numerous tools have emerged to facilitate the creation and management of DAOs, there are still plenty of important challenges to address, which are similar to those faced by traditional organizations or political systems. In order to gain traction and resilience, DAOs will need better tools to support their tightly-knit communities.
DAOs can sometimes be hard to coordinate, and these coordination costs have been a growing pain. As more experimentation has happened, a large trade-off has emerged: DAOs live on a spectrum between organization and decentralization.
The DAO Dilemma is the reason why most projects start out with centralized governance — there are many decisions to be made at the start. Then, once a solid community is formed and some sort of DAO-market fit is found, some projects opt to decentralize over time. This is called “progressive decentralization”.
Although most DAOs have tried to improve this trade-off by creating smaller working groups or core units to split tasks more clearly and efficiently, a lot of the activity and conversations between members still happen on web2 tools such as GitHub, Discord, Discourse and Twitter. Being a member of a couple of DAOs myself, I’ve found it very time consuming to navigate these platforms and understand where I can provide the most value.
While stewards can help by pointing participants in the right direction, there is still a need for better social and organizational tooling to improve community interactions, information flow and social cohesion. For example, pods — “organizations that consist of a fixed number of member tokens each representing a single vote”, according to Orca Protocol — would be a great starting point to further improve project governance and community management.
When examining governance in politics, and in corporations more generally, three things are clear:
Delegation has emerged as a tool to pass on responsibility to more qualified and active members within these organizations. This system helps counter voter fatigue and improve decision-making quality and execution.
But with this comes accountability. Delegators want to make sure that their delegates align with their beliefs and that their actions reflect this. Tracking and managing “protocol politicians” is extremely important for the resilience of a project and its community (many existing political systems were built on these principals, such as representative democracy in the US or the UK).
Other tools have been created to incentivize smaller token holders to vote, such as the one released by Andre Cronje (founder of Yearn Finance), which allows DeFi protocols to offer token rewards to veCRV holders in exchange for their votes, effectively bribing them to achieve a greater allocation of CRV rewards and higher yields for their users. These new forms of “vote buying” could be used by dangerous attackers — a complex issue to solve with current token governance systems.
Communities need better tools to assess the accountability of individual participants who hold positions of power within them, put proper checks and balances in place, and move beyond coin voting governance.
DAOs have two main sources of capital they can use to achieve their goals: internal and external.
Internal capital is mostly financial and resides in a DAO’s treasury. This is possibly the most important component for a DAO to grow, since internal capital is used to encourage participation and to improve the core product or service.
External capital is made up of the humans that reside at the edges. While rewards are a great tool to incentivize the contributors who provide the most value, proper mechanisms to do this haven’t been entirely figured out yet (the most common approach I’ve seen so far is to enter the work you’ve done into a spreadsheet so that it can be tracked and assessed). Gitcoin, Coordinape and SourceCred are working on interesting ideas to capture and quantify contributions.
To enable meaningful work and retain top talent in the long-term, it will be critical for DAOs to have more user-friendly tools that distribute ownership to smaller working groups with specialized objectives and use KPIs to evaluate their progress.
Like the wider crypto industry, regulatory clarity for DAOs and implementing effective forms of taxation will be a fulcrum for community adoption and participation. Core contributors and engineers worry about the legal risks when it comes to working for a DAO because there is high uncertainty on possible repercussions. While some progress has been made in legal efforts like the Wyoming DAO law, which legally recognizes DAOs as LLCs (the first state to do so in the US), there is still a lot of work to do.
Some ideas have been proposed for DAOs to work together on the technical layer. Since most DAOs are trying to figure out the same issues, legal or not, there are numerous opportunities to collaborate on the social layer and reach conclusions that will be mutually beneficial. We have started to see this in DeFi with projects such as the DeFi Education Fund, which is on a “mission to educate policymakers about the benefits of decentralized finance and to achieve regulatory clarity for the DeFi ecosystem.”
DAOs still have many problems to solve from an operational and managerial perspective, which will require a lot of innovation in DAO tooling. Focusing on building out the means that will help DAOs achieve their goals is the priority.
Various tools are being built to ensure effective governance and voting, which has facilitated a lot of good ideas and proposals by the community. But there’s a lack of people actually implementing them. It can take weeks, if not months, depending on the proposal. Implementation tooling must be emphasized to facilitate the continual evolution and improvement of DAOs.
Today, DAOs face many managerial, organizational and legal challenges. Although many tools are being built out, spanning from analytics to voting platforms to multi-signature accounts, there are still plenty of areas of opportunity.
Compound’s Autonomous Proposals, which allow members to delegate votes to ideas instead of just people, give us a glimpse into the future. Establishing processes to carry out outcomes without having to rely on humans to carry out the will of the community (moving towards automation) will make DAOs extremely powerful. This is particularly important for protocol DAOs to scale, as they could reduce the need for governance and achieve greater network effects through automation.
It is particularly hard to anticipate how DAOs will evolve and which use cases will be sought after by participants. Therefore, using a combination of developer platforms and composable tools — such as bridging your Gnosis Safe multi-signature account to the Snapshot voting platform — will allow DAOs to develop their own specialized tools to achieve their goals and solve for design-project fit. This is particularly important to keep experimenting with different organizational structures and practices tailored to fulfil the diverse purposes DAOs are built for.
Emphasis must be placed on economic rewards allocation and distribution tools to improve stakeholder participation and community building. Incentivizing intrinsically motivated participants who will provide long-term value from the start, such as builders and active community members, rather than speculators, is foundational for success. Other than skin-in-the-game mechanisms such as token vesting, limited transferability and early contributor rewards, there must be more experimentation with different tools to onboard smaller token holders and encourage them to contribute significantly, even though they may not have large economic stakes in a project to begin with. Perhaps this could be done by creating tools that allow participants to exercise power and governance through reputation rather than token ownership.
It is important to keep in mind that the most successful projects have a core team that focuses on building out their community around their core mission and actively participates with members, motivating them by making them feel part of something real. Tools that facilitate coordination and social interactions on a more human level will enable stronger relationships to be formed amongst participants, improving the quality of the community. This is extremely important as a community’s success is defined by the bonds between its members and the strength of their mutual beliefs.
Current DAO tools have played an incredible role in fueling the explosive growth of DAOs and their communities by reducing many technical and operational frictions. It will be interesting to witness how these tools will evolve to overcome current and future challenges, especially those related to social cohesion.
In the end, it is a DAO’s community that drives its success. What matters most is that the community keeps caring about their shared mission. The best DAO tools will be those built to optimize for a well-functioning community and ensure the community is happy and aligned long-term.
Given that the DAO revolution has just started, and the speed of innovation in the space shows no signs of slowing down, I’m confident that exciting, new tools will be built to help shape and support these communities, redefining the way we collaborate online. Perhaps, as virtual reality develops further, it will emerge as one of the most important tools for DAOs to improve interactions, coordination, and connections amongst community members.
List of resources I used in researching this piece:
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