DAOs are made out to be a lot. How do we deliver on this promise?
While traditional Big Tech cos. have created (and distributed) a lot of value to people across the world, their rent-seeking nature threatens their long-term viability.
One may justify this in context of their initial investment, but that begs the question: for organisations wishing to impact society at the same scale, is a fair endgame (i.e. without value extraction from those served) even possible?
While DAOs have shown great promise in enabling true community ownership and not being extractory in nature, they are plagued with issues that threaten the realisation of these ideals.
In this article, we examine the hurdles that come up as DAOs move through their lifecycle and explore a Pareto solution in this regard. What are the challenges they face at each stage? What’s common between them? How to solve for as many with as little effort? These are a few questions we shall be tackling. Let’s begin!
Diversification
Over the past year, the number of DAOs and the participation of members within them has increased dramatically. The types of DAOs that have sprung up have diversified as well.
In addition to protocol DAOs (where control over the functioning of a DeFi protocol is handed over to the community) we now see other types of DAOs such as service DAOs (that provide some kind of service to their users), investment DAOs (where individuals pool funds to invest), Social DAOs (that aim to build and foster communities) and more.
While this diversification is a welcome step, it has raised a new set of challenges, primarily that of incentive alignment.
Most protocol DAOs and those involved in DeFi find it easier to align their owners and operators with the best interests of the community at large (owing to the direct connection between protocol fee and monetary benefit to members, for example).
However, in the case of Media DAOs, Collector DAOs and others with similar, deeper cultural and social elements, incentive alignment is tricky. This has underscored the need for fair and equitable processes in the DAO ecosystem (it is easy to imagine how such systems will benefit other types of DAOs like protocol DAOs or research DAOs as well).
DAO Lifecycle
Just like how startups develop their policies and processes as they grow into a big corporation, something similar happens as DAOs go from inception to growth to stability.
I. Inception
The primary goal of any community that organises itself as a DAO is the same as that of any community elsewhere—attract high-quality members to execute on the shared vision and find product-market fit, as soon as possible. To do so, communities must make some important (and consequential) decisions.
The most important decisions a community makes are those around governance and treasury structures. These must be thought through as it is tough to change them in the future (no amount of tooling can fix something that is broken from the beginning).
Then come decisions around choosing what platforms to use, what frameworks to use and how to go “on-chain” (i.e. from a group chat of a few people to a group having shared ownership of an asset or a treasury).
This is also where things get a little complex. For example, they may be some individuals that lack the relevant background or expertise to deal with the technicalities. They cannot be left out from decision-making. Fortunately, for the latter type of decisions, there do exist tools that make life easier.
Examples of such tools are Aragon or DAOhaus (for communities to get “on-chain”), tools such as Clarity or Tell.ie that enable token-gated workspaces, and many others.
Let’s assume now that a community manages to set itself up successfully. Now, they must spread the word and attract more supporters and contributors. How do they do this?
Contributors are naturally inclined to join larger, better established communities (due to several reasons such as financial incentives, growth prospectives, etc.) How do we make a particular, relatively smaller community attractive to them?
II. Growth
The second stage of a DAO starts after the community sees some semblance of product-market fit. By now, they have an active community around a shared goal, and a wider audience with sustained interest in the project. They must find a way to hold the attention of those that are looking and convert bystanders into evangelists. They must also solve for tyranny of structurelessness.
No matter how “flat” the DAO has hitherto been, some hierarchies would have naturally emerged as the community grew. How should one proactively manage the members in context of this unofficial hierarchy?
One answer to this question is forming sub-groups / sub-DAOs / pods / working groups / etc. This helps in increasing accountability and maintaining operational efficiency as the DAO scales. Another answer to this lies in effective governance.
While direct democracy style governance seems to work in small groups (where it is possible for each individual to stay up-to-date and take part in discussions) this is a little unfeasible and impratical in medium-to-large sized groups.
With more decisions to be made and more people to include in the conversation, how do we incorporate expert opinions while making everyone feel seen and heard? We are yet to see a successful solution to this dilemma in practice.
III. Stability
Once a community successfully manages its transition to a large entity, the nature of its problems change. By now, there is some sense of stability in terms of contributors, both that have been around for a while and others that show their interest in sticking around.
But also, with so many people there are so many interpretations of the DAO’s mission. There may also be a distinction between internal stakeholders (i.e. the core team and early members) and external stakeholders (i.e. the customers or users, and the general community at large).
How do we align these stakeholders? How do we make it so that minority perspectives hold equal weightage as popular ones? And how do we manage this difference of opinion? Is exiting the community or forking the project easy to do?
A Pareto Solution
There are no panaceas. We must acknowledge this before we begin ideating.
Listed above are few questions and challenges that DAOs are expected to face as long as they grow (the questions might be slightly different on the type of DAO, but they are directionally the same). By identifying the common thread among these challenges though, we will be able to target as many with as little effort as possible.
In our conversations with more than a hundred DAOs (most of which are in the inception or growth stage), we learnt that most of their problems can be categorised in one of the challenges mentioned above. We restate these below:
How does a DAO attract high quality contributors?
To do so, they must provide a contributor experience worthy of high quality contributors. How do they do this?
How do they manage unofficial structures and consciously form new ones as they grow?
How do they ensure maximum community involvement, especially by the minority and experts in the community?
As of today, DAOs approach these problems in more or less the same way. First, they find ways to incentivise to-be-contributors in non-financial ways, as they cannot always reward contributors financially (also, this is tough in the beginning as a treasury is small, and this risks attracting those inspired by money instead of those inspired by the mission).
Second, smaller DAOs give their contributors the opportunity to have a disproportionate impact than what they would have in a larger DAO (for example, creating and owning a feature e2e as opposed to maintaining the same).
Third, they do so by legitimising things as they go ahead (for example, if a particular non-financial incentive works well, they scale this; or, if a particular structure to streamline operations works well, then they formalise this, and so on).
Incentives and Involvement
Attracting high quality contributors requires incentivising them in non-trivial ways. Simply giving some kind of tokens (that are divorced from the context of their work) doesn’t work. In addition to relevant rewards, the contributors must also feel that their efforts have significant impact on the community. Also, as we go ahead in time and need to decide on structures / leaders, doing so in a fair and equitable manner goes miles in fostering community involvement and trust.
At rep3, we feel that DAOs can amply address the above by a having a robust on-chain credentialing strategy.
Such credentials, first and foremost, would incentivise contributors to join nascent communities. A membership schema that shows contributors a clear pathway to becoming a core contributor motivates them to hop in and give their best.
Then, tracking all member activity through on-chain credentials helps members visualise the value they create and, more importantly, enables them to “take this reputation” with them. In this way, contributors that try to get into big communities but go unheard “build their reputation” by contributing to several small communities. This is a win-win for all—communities get work done and contributors build their reputation (which opens the door to leadership position here or opportunities in other communities).
Lastly, having a system that tracks members involvement in the community enables egalitarian decision-making in the later stages of a DAO (when we must formalise structures and appoint delegates and / or leaders).
By having on-chain proofs of members’ contributions, the task of forming structures, selecting leaders and electing delegates becomes transparent and fair. It enables true meritocracy, where members’ proof-of-work speaks more for them than anything else.
Lastly, it also helps us move beyond one-token-one-vote style governance structures and move towards one-person-one-vote style structures with stronger Sybil resistance (since a person, their membership and their contributions are much harder to “game” or “fake” than the alternatives of other structures).
Conclusion
DAOs face several challenges as they go from an idea to a thriving decentralised community. As individuals who have been involved with DAOs, we have seen or felt the above problems first-hand. That is why we set out to build rep3, because we felt on-chain credentials could tangibly improve the state of all DAOs today.
Through our credentialing protocol, we aim to help communities solve a large subset of the challenges discussed above. We continue to tweak and develop this as and when we speak with more communities and get new insights.
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