How Do DAOs Work? Common Characteristics of the Most Successful DAOs

Dan Smith
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3.21.22

The structure of a DAO is very different to that of a standard company, and to anyone who is new to the space, this can be overwhelming and confusing.

As the concept of a DAO is still early, the structure is rapidly changing, and it varies for the type and purpose of the DAO, but overall, there are many common elements that can be found in most of the successful DAOs.

Discord – The Home of the DAO

The first major difference is that for almost all DAO’s the central point of communication is Discord. The discord server is split up into topic-based channels, this helps to organise the workspace and focus discussions.

Discord is simply a tool to facilitate effective business communication, but this method feels like a much more scalable, replicable, and digitally native home for a company than traditional company ethernets etc.

Guilds - Teams Within a DAO

A common misconception is that everyone would be involved in every single decision, this is almost never the case, and if it was, it would be incredibly inefficient.

Instead, the DAO is split up into guilds, which you can think of as subsections or teams within the DAO. These all focus on different subjects or projects and allow those with the most experience within a sector to be the ones who make the decisions. This uses the general community as a ‘vibe check’ to ensure that they agree with all of the specific decisions and direction of progress. This allows progress in specific areas to be made very quickly and in an agile manner, and this is often seen in the form of rough consensus, thus allowing for optimum productivity.

It also means that members of the DAO will only be involved in sections and decisions that they want to be, resulting in everyone working on projects that they are passionate about and areas they specialise in.

The concept of allowing specific experts on a subject to make those specific decisions is very important for the efficiency of the DAO, and actually, even Socrates one of the great Greek philosophers agreed that everyone should not be involved in voting, instead, those who are in the best position to make the decision should be trusted to do so.

Community Treasury – Money Within a DAO

The concept of a community treasury is very similar, it is a place where almost all the money, tokens and assets created and owned by the DAO is stored, and this treasury helps to accrue value for all the community members involved in the project.

It is not owned by any single person, but instead, anyone can submit a proposal for a change or mini-project and if the majority of the community agree, they are able to access funds from this treasury. This helps to ensure a strong community buy-in as there is clear collective ownership and anyone can make a change or contribution, it is simply a matter of the quality of their idea.

Capital within the treasury is normally generated initially through a token sale, these tokens allow people to become part of the DAO, and because they have money invested in the project, it aligns all the member's common interest, thus incentivising them to increase the value of the token; everyone has ‘skin in the game’.

This has many benefits, including the fact that it causes a sustainable and flat pyramid scheme effect, whereby every token owner is self-marketing the project, and this provides the DAO with social capital as well as purely economic value. The token is usually used for governance, and therefore the number of tokens owned dictates the amount of voting power you have within the DAO, thus increasing your personal ownership.

Governance – Decision-making In The DAO

This is arguably the most unique and essential part of a DAO.

The usage of tokens as a form of ownership and voting rights is something that is not particularly novel, but at the same time acts as the DAO’s real power and differentiator from other types of companies.

The way decisions are made is highly dependent on the type of DAO and whether it is designed to be more of a social hub or a financially driven project. For those projects which are more community orientated, voting can often occur off-chain, in a more informal and slightly less traceable manner. Projects that involve large amounts of capital involve on-chain voting, whereby the governance tokens are used to vote on the blockchain, offering highly transparent and controlled voting protocols.

One common voting method adopted within DAOs is quadratic voting, this essentially means that there is more emphasis on the number of people who vote, rather than the number of tokens any specific voter has. This is because the amount of votes any specific person is entitled to is correlated to the square route of their token holdings; it is not a linear relationship.

This aims to help decentralise the decision-making system and make it easier for good decisions that the majority of the community agrees with to be passed.

Example of how quadratic voting works

Onboarding – Talent Acquisition In The DAO

Joining a DAO is quite a different process from joining a conventional company, and it is widely accepted that for the DAO structure to become more widely adopted, the onboarding process needs to drastically improve.

Currently, there are several channels when you join the discord which acts as the courtyard and helps direct you and help familiarize you with the purpose of the DAO. This is coupled with a message bot that provides a link to allow you to connect your wallet, thus allowing you to prove that you do indeed own the governance tokens for the respective DAO.

This is an onboarding method that is currently used by several large and successful DAOs, and some even provide you with a ‘first quest’ in order to further familiarise you with the structure of the DAO, despite this, it still feels unfamiliar to those who have never been in a DAO before, and for those who are not digitally native, this could definitely be a sticking point in DAO adoption.

Court – Fairness In The DAO

For any project with large amounts of people and capital involved, there must be rules and accountability to ensure fairness. This is something that has been recognised and developed by many of the more successful DAOs. With no absolute leader or board for the DAO there is no clear party who is responsible for keeping the members accountable, and this could leave the DAO open to exploitation, stagnation and unresolvable disputes between members.

One possible solution that has been utilised to solve this is a DAO ‘court’ system, this allows members to take each other to a ‘court’, where there is a jury of randomly selected community members and an unbiased judge and the members can argue their case, similarly to how the court system currently works.

Another system that is employed by most DAO’s is the idea of rage quitting; if a member is not happy with any decision that has been made or wants to pull out of the DAO for any other reason, then they are able to do so. This promotes personal accountability and freedom and allows any member to withdraw their funds at a time that they deem to be fit, i.e. if the DAO has diverged away from the original values it had when they joined.

Community- Heart of The DAO

Without a community, DAOs would have no value.

Their greatest strength is that they accumulate social capital as well as purely economic value,and the power of mutually incentivised members working towards a common goal cannot be underestimated.

The community members of DAOs will be the ones who are responsible for optimising and improving all of the other features mentioned above, and it is still early in the world of the DAO,therefore all these processes are improving at a rapid rate. The power and control lie with the people, and only time will tell as to how DAOs will progress and which will be the most successful in the future!