How To Build a DAO
What is a DAO?
A DAO, or “Decentralized Autonomous Organization,” is a community-led network with no central authority. It is fully self-reliant and transparent: smart contracts lay the foundational regulations, conduct the agreed-upon decisions, and at any point, proposals, voting, and even the code itself can be publicly audited.
Eventually, a DAO is overseen entirely by its members who collectively make crucial decisions about the future of the project, such as technical upgrades and treasury allocations.
Typically speaking, community members create proposals about the future operations of the protocol and then come together to vote on each proposal. Proposals that acquire some predefined level of consensus are then obtained and implemented by the rules instantiated within the smart contract.
Standard hierarchical structures seen within large corporations give way to community associations under this framework. Each member of the DAO overlooks the protocol at some level.
Part of the classiness of this framework is the alignment of incentives. That is, it is in the individual’s best interest to be genuine in their voting and only to endorse proposals that serve the best interest of the protocol itself.
A wholesome, concentrated protocol will garner more usage, and in turn, increase the value of the tokens of which each DAO member is in occupancy. So as the protocol flourishes, so do the token holders.
How does a DAO Work?
The rules of the DAO are appointed by a core team of community members via the use of smart contracts. These smart contracts lay out the foundational framework by which the DAO is to employ. They are highly visual, verifiable, and publicly auditable so any potential member can fully comprehend how the protocol is to operate at every step.
Once these regulations are formally documented on the blockchain, the next step is around funding: the DAO needs to extrapolate out how to receive funding and how to contribute to governance.
This is naturally accomplished via token distribution, by which the protocol trades tokens to raise funds and fill the DAO treasury.
In return for their fiat, token holders are granted certain voting rights, usually proportionate to their holdings. Once funding is finalized, the DAO is ready for deployment.
At this point, once the code is moved into production, it can no longer be modified by any other means other than a consensus acquired through member voting. That is, no particular authority can revise the rules of the DAO; it is entirely up to the community of token holders to determine.
Types of DAOs
It’s essential to comprehend that DAO is an overall term that encloses a huge number of various types of groups and businesses. Two collectives can be vastly different, but at the end of the day, both are DAOs.
Here are a few instances of well-renowned DAOs:
- The PleasrDAO gathers various NFTs and invests in other assets.¹
- The HerStory DAO assembles and funds projects by Black women and non-binary artists.²
- The Komorebi Collective DAO finances women and non-binary crypto founders.³
- The Friends with Benefits DAO is an upmarket social club that you pay to join.⁴
- The MetaCartel Venture DAO is a for-profit enterprise that invests in early-stage decentralized applications.⁵
How to Get Involved in DAO?
Once you’ve found a project of interest, there are a few different ways to get instantly involved. It’s important to note that not all DAOs function with the same objective so the first step is extrapolating out the core function of each DAO.
For DAOs concentrated on technical governance, it’s essential to understand what kind of voting rights are awarded to token holders and what sort of proposals are at stake.
In some examples such as Uniswap, token holders can vote on allocating a portion of the fees that the protocol collects amongst themselves. In other protocols such as Compound, token holders can vote on allocating these protocol fees towards bug fixes and system upgrades.
This technique also allows freelancers and those generally interested in the project to be able to join ad hoc and receive a settlement for their work by way of DAO grant-funded tasks (DAOs regularly post these sorts of ad hoc projects on their Discord server).
For other DAOs, the focus is less on governance over the technical aspects of the protocol, but more so on treasury pooling and allocation.
SharkDAO, for example, exists especially to encourage the pooling of individual token holders’ funds as a means to obtain rare NFTs that would otherwise be too pricey for the common individual (in this case, the purpose is to acquire Nouns, which can sell for well over $250,000). This technique presents novel possibilities for individuals to leverage the capability of a collaborative pool of assets.
One of the key takeaways here is the clarity within a DAO. The components of each proposal are readily public, voting history is continually recorded, and even the voting records of particular token holders can be marked.
DAOs frequently call upon the community to build out fascinating ideas through grant-funded projects, and individuals with entrepreneurial minds can freely offer proposals to support and lead the future development of a protocol.
Levels of DAO participation alter. You can choose to exchange into governance tokens and pay attention to Snapshot votes; you can enter the DAO’s Discord and take on real projects where you’re reimbursed for your contribution; you can even finance in DAOs of interest by networking at seminars. You choose how diligent you want to be.
DAO Structure
Each DAO is structured differently, but usually, when entering a DAO, you consent to the code in place. It isn’t straightforward to modify that code, and any modifications typically require a vote between members.
“You don’t have to wait for a group of people or a sufficient number of individuals to vote to make a decision. It kind of runs and functions like the internet, via intimidating consensus. If there are more individuals that support a project, a decision is made.”
To acquire voting power or membership in a DAO, you normally purchase governance tokens, which are cryptocurrencies that are linked to a certain project. In some DAOs, governance tokens can only be received in structured funding rounds, and periodically, demand transcends the number of tokens public. By carrying these tokens, members are generally able to own equity in the DAO and assist shape the DAO’s fortune.
While it deviates from DAO to DAO, the significance of a member’s vote usually relies on the amount they contributed to the project.
If a DAO doesn’t use governance tokens, it may assume an investment of other forms, like in ether, the second-largest cryptocurrency by market worth, Wright demonstrates, since the Ethereum blockchain powers most DAOs. But, again, each DAO has its design.
Above voting power, members can also function for their DAO. There are normally several internal jobs, including positions in token allocation and treasury administration.
How to Create Your Own DAO with Aragon?
Aragon⁶ is an Ethereum dApp that happens to be really easy to launch a DAO; the open-source project is directed by the foundation team Aragon one.⁷
In order to make your own DAO with the Ethereum dApps like Aragon, You need to have a cryptocurrency carrier wallet i.e. MetaMask.
Booting an Ethereum Node and Setting up MetaMask Wallet
We will deploy our DAO on the Rinkeby Testnet and use a QuickNode Rinkeby Node for quicker transactions. You can get a free trial Rinkeby Node8 from QuickNode and set it up in MetaMask.
Follow this guide to configure your MetaMask to use QuickNode.9
Now we will have to do some test ETH to make transactions. Head over to the Rinkeby faucet10, observe instructions and get yourself some test ETH.
Creating our own DAO
Head over to the Aragon dApp and follow these steps:
Step 1: Choose your QuickNode Rinkeby Node in your MetaMask wallet (You should have test ETH in your wallet at this point, at least 0.2 test ETH is a must roll).
Step 2: Click on the ‘Connect account’ button and choose ‘MetaMask’ and authorize the request from MetaMask.
Step 3: Choose ‘Ethereum Testnet (Rinkeby)’.
Step 4: Click on ‘Create an organization.
Now select a template for your organization; we are utilizing the ‘Company’ template in this example.
Choose the template and click on ‘Use this template, then enter the name of your DAO.
Now set the following.
Support percentage: This is the percentage of tokens needed to endorse the voting in favor of a yes; for example, if the support percentage is set to 50%, more than 50% of votes from the comprehensive votes have to be yes to get the proposal passed.
Minimum approval percentage: This is the percentage of yes votes needed to approve the proposal from the remaining pool of tokens.
Vote duration: This is the time period within which the participating members can vote.
Set up these values according to your will, or refer to the image below for example values. Go to the next step to set up the token.
Enter a preferred name and symbol for your token. Then enter the token holders/members of DAO and distribute tokens to them. Check information and hit ‘Launch your organization.
At this point, the MetaMask window will pop up for transaction authorization, ensure the transaction (2 in total), and you should be ready to go.
Note: Don’t choose the speed-up option in MetaMask during the transaction processing, and do not refresh the window.
Once both the transactions are authorized, you should be introduced to a window similar to this:
Click on get started, and now let us assemble our first proposal question to initiate the voting approach.
Click on ‘Voting’ from the left menu and then click on ‘New vote’, initiate a new proposal question, and open it for voting (this will be estimated as a transaction as it is a write operation).
Once the proposal is live, members can vote yes or no, and the voting window will be open for the time duration set in the earlier steps. In our case, it is 14 days
Just like the method shown above for Aragon, You can create your own DAOs with the help of Juicebox (It is a programmable funding protocol), DAOstack Alchemy (A decentralized application for budgeting, collaboration, and DAO management), XDAO (DAO Ecosystem Built for a Decentralized Future), DAODAO (Web3 Social Platform).
Challenges and Unknowns
Despite their growing popularity, DAOs have a long way to push before reaching full mainstream adoption.
It’s always feasible that the governance token value for a DAO may shoot at zero. Potential investors should do their homework first and only consume what they can afford to lose.
DAOs will also need to overpower many potential regulatory and legal challenges, particularly in the U.S. There are several unknowns concerning how potential legal frameworks across the U.S. could influence DAOs and how they function.
Looking Ahead
Despite the unknowns, those in the space think that DAOs will be disruptive to conventional structures of business.
“I presume DAOs are the new LLCs,” Turley states while talking about Crypto on Blockworks Macro¹². “I presume in five to six years, enterprises won’t be interested in equity anymore but rather own their own DAO. They’ll have tokens, and they’ll be depicted as DAOs.”
Billionaire investor Mark Cuban has also said that he witnesses value in DAOs. “The future of enterprises could be very different as DAOs take on legacy businesses,” he tweeted in May ¹³. “Entrepreneurs that foster DAOs can make money. If the community excels at governance, everyone stakes in the upside.”
Cuban acknowledged that DAOs “won’t be a fit for every type of venture,” but, in his view, ”[t]here are so many features and procedures in any given organization that can be more efficient and effective using a decentralized, trustless procedure.”
The contemporary wave of the mainstream, institutional investment¹⁴ in DAOs is also a sign of development for the industry. It also shows the potential for more across-the-board adoption, leading to probable prominent competition with traditional businesses and communities.
Turley signifies that the mega-popular and successful establishments of the future may be DAOs. “I believe that the next Facebook-like company will be assembled as a DAO rather than an LLC,” he expresses.
Conclusion
Congratulations on learning about DAO and being sovereign and creating your decentralized autonomous organization! In this guide, we learned about DAOs, How do they work, how to set up a node in MetaMask, and how to get test ETH; last but definitely not least, we learned how to create a DAO on Aragon and how to vote in a DAO, as well as the challenges faced by the Web3 Community.
🚀 Need help building your DAO? Check out https://guavatech.io/
Contributing writer: Abhishek P F
Endnotes
1. PleasrDAO
2. HerStory
6. Aragon
9. guide to configuring your MetaMask to use QuickNode
10. Rinkeby faucet
11. FingerprintsDAO
12. Blockworks Macro
