Step-by-Step: How to Create Your Own DAO
What is a DAO?
A DAO(Decentralised Autonomous Organization) is a type of organization that runs on a blockchain, making it transparent, secure, and free from central control. It is governed by a set of rules encoded as smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. These smart contracts dictate how the organization functions, including how funds are managed, how decisions are made, and how members interact with each other.
One of the defining features of a DAO is its decentralized nature. Traditional organizations have a hierarchical structure with a central authority making decisions. In contrast, a DAO operates as a network of peers, with decisions made collectively by its members through voting mechanisms. Each member's voting power is often proportional to their stake or contribution to the DAO.
Benefits:
Transparency: All transactions and decisions within a DAO are recorded on the blockchain, providing a high level of transparency. This transparency helps build trust among members and stakeholders.
Decentralization: DAOs are decentralized by design, meaning that no single entity has control over the organization. Decision-making is distributed among members according to the rules encoded in the smart contracts.
Security: Because DAOs operate on a blockchain, they benefit from the security and immutability of the underlying technology. Transactions and data stored on the blockchain are tamper-proof and resistant to censorship.
Efficiency: With predefined rules and automated execution through smart contracts, DAOs can operate with greater efficiency. This reduces the need for intermediaries and streamlines processes.
Global Accessibility: DAOs can be accessed and participated in from anywhere in the world, as long as individuals have an internet connection. This global accessibility allows for a diverse range of perspectives and contributions.
Inclusivity: DAOs can lower barriers to entry for participation. Individuals who might not have access to traditional financial or organizational structures can join and contribute to a DAO.
Community Governance: Members of a DAO have a say in the organization's operations and direction. This community governance ensures that decisions reflect the collective will of the members.
Starting the DAO-First steps:
Setting the DAO - Choosing a platform:
The first step in creating a DAO is choosing the platform. Over the years more platforms emerged. Currently, the biggest and the most popular platforms are: Aragon, DAOhaus, DAOstack, Colony and MolochDAO.
Choosing the Governance Framework-Pros & Cons:
Direct DAO Governance:
In direct DAO governance, every member has the ability to directly participate in decision-making.
Voting Power: Each member gets voting rights based on how many tokens they have.
Advantages: Promotes fairness and prevents dominance by large token holders.
Challenges: Possibility of manipulation if participants create multiple identities to vote multiple times.
Representative DAO Governance:
Members elect representatives who vote on their behalf.
Voting Power: Representatives have voting power proportional to the number of members they represent.
Advantages: Allows for specialization and delegation of decision-making.
Challenges: Requires trust in elected representatives.
Liquid DAO Governance
Participants have a limited number of votes that they can allocate across multiple proposals.
Voting Power: Cost of additional votes increases quadratically, preventing domination by a few participants.
Advantages: Balances influence and prevents manipulation.
Challenges: Requires careful design to ensure fairness and prevent gaming the system.
On-Chain Governance
All governance processes are conducted on-chain using smart contracts.
Advantages: Transparency, security, and immutability of decisions.
Challenges: Potential for high transaction costs and slower decision-making due to blockchain limitations.
Tokenomics:
Tokens within a DAO play a crucial role in enhancing decentralized governance. These digital assets offer a practical mechanism for managing membership, determining voting power, and facilitating decision-making processes.
Financial Management:
In the decentralized world of DAOs, efficient finance management and strategic fundraising are essential for sustainable growth and success. Let's explore the core elements of finance management and fundraising strategies within DAOs:
Asset Handling
DAOs are responsible for managing a diverse range of assets, from cryptocurrencies to tokens. Proper allocation and utilization of these assets are vital for the DAO's day-to-day operations and long-term sustainability.
Budgeting and Expense Tracking
Budget creation and expense tracking are fundamental for DAOs to maintain transparency and financial health. Effective budgeting ensures that resources are allocated efficiently, optimizing the DAO's operations.
Transaction Records
Recording all transactions provides an audit trail and transparency within the DAO. This historical data allows stakeholders to understand past transfers and decisions, fostering trust and accountability.
Types of DAOs: A Brief Overview
DAOs come in a wide range of types, each tailored to serve specific purposes within the decentralized ecosystem. These various types of DAOs showcase a wide range of features and functions that allow you to create your organization exactly as you like.
Community / Protocol DAOs
These DAOs aim to unite communities around decentralized blockchain protocols.
Purpose: Motivate ecosystem contributors through token incentives like staking, yielding, and issuing grants.
Legal Form: Typically registered as Foundations / Non-Profit LLCs, focused on ecosystem development and grants.
Treasury Formation (Community / Protocol DAOs):
DAO Treasuries receive initial contributions from the community token pool and are replenished through on-chain transactions and DeFi protocol operations, operating autonomously via on-chain smart contracts and member proposals and voting.
Service DAOs
Service DAOs gather professionals to collaborate and provide services efficiently.
Purpose: Enable collaboration for larger projects, combining niche industry knowledge.
Legal Form: Often registered as For-profit LLPs / LLCs, with partnership agreements acting as the DAO Constitution.
Investment DAOs
These DAOs help pool assets for collective investments or crowdfunding.
Purpose: Provide opportunities for collective investment in assets or projects.
Legal Form: Investment DAOs often trigger VASP (Virtual Assets Service Providers) and financial market regulations, requiring authorizations and licenses.
Regulations:
DAOs should consider legal incorporation as it provides a necessary "legal wrapper" for interactions with investors, contractors, exchanges, and more, reducing risks for members.
The best entities for DAO incorporation are foundations, associations, and non-profit or for-profit LLCs, chosen based on the DAO type and business model. Foundations, especially for community and protocol DAOs, offer benefits like self-ownership and governance through a DAO Council.
Popular jurisdictions for DAO incorporation in 2024 are for example Marshall Islands, US (Wyoming), Switzerland, Cayman Islands, Liechtenstein, Singapore, Panama, British Virgin Islands, Gibraltar, and the Bahamas.
There are several factors to consider when choosing, such as profit distribution, decentralization level, feasibility of public token sales, and KYC requirements. Having a finalized White Paper, clear token status, and detailed Token Cap Table are crucial for successful incorporation.
Legal structuring must align with the DAO's White Paper, Token Cap Table, core team location, Council member appointments, and potential investor locations. Comparing these with various foundation criteria in different countries helps determine the optimal jurisdiction for your DAO incorporation.
Conclusions:
Wrapping up, starting a DAO is an exciting venture into the world of decentralized governance and collaboration. While it may seem complex, the steps outlined in this guide provide a roadmap for getting started. By setting clear objectives, choosing the right platform, designing smart contracts, and implementing effective voting mechanisms, you can create a DAO that reflects your values and goals.
References:
Nestor Dubnevych,DAO Types: Community DAO, Service DAO & Investment DAO and Regulatory Requirements For Each,https://legalnodes.com/article/dao-types
Nestor Dubnevych, The Best Entities and Countries for DAO Registration in 2023.
https://legalnodes.com/article/choose-a-crypto-friendly-country-for-dao
