While some see DAOs as a utopian revolution in the making, for others it’s just a silly fad that’ll never be legitimized by regulators. As with most things, the truth falls somewhere in the middle.
DAOs aren’t an instant solution to all the problems of traditional businesses. But they do solve some issues while opening up possibilities that were unfathomable before.
After giving you a high-level overview of what DAOs (Decentralized Autonomous Organizations) are, how they work, and their benefits, we’ll discuss if you should consider starting one and give you two use cases of DAOs for small and midsize businesses (SMBs).
TL;DR — Key Takeaways: What are DAOs?
- DAOs are community-led entities that operate without central leadership.
- These organizations use smart contracts to automate operations and ensure transparency, immutability, and trust.
- Governance models shape how a DAO operates by establishing roles, responsibilities, a voting system, and more.
- Some advantages of DAOs include fast and efficient operations, transparency and trust, community collaboration, and a low entry barrier.
- Communicating effectively and cooperating with several people — potentially strangers — is the biggest challenge when starting a DAO.
- You should consider starting a DAO if you want to pool funding, increase transparency, trust, and collaboration with other businesses, or incentivize customer loyalty and engagement.
DAO Meaning: What Is a Decentralized Autonomous Organization (DAO)?
A decentralized autonomous organization (DAO) is a community-led entity without central leadership.
People come together to build a DAO around a shared goal. Members collectively own, manage, and make decisions to achieve that pre-determined objective.
Theoretically, all organizations, including investment, consulting, and engineering companies, could be built as DAOs — but reality is always more complex than theory.
How Are DAOs Formed?
Before we get into the inner workings of these organizations, here’s an overview of how DAOs are created:
- Define the goal of the DAO and write the mission statement
- Build a community
- Define your toolstack
- Define the ownership model
- Define the governance model
- Get funding
- Keep iterating: experiment, take feedback, adapt, and evolve
Note that the steps don’t need to be completed in this specific order (apart from steps #1 and #7). Some might be done concurrently.
How Does a DAO Work?
DAOs work by using smart contracts on a blockchain. These contracts are basically chunks of code that automatically execute operations when certain criteria are met.
They’re built by a core team of community members and lay out the foundational framework that governs the DAO (steps #1 to #5). Smart contracts are public, meaning any member can fully audit, verify, and understand how the DAO works.
How Are DAOs Managed?
DAOs use bottom-up management instead of hierarchical structures. Every member of a DAO is on the same level and has a voice. They all vote with the best interest of the organization in mind because:
- Everyone has active stakes in the organization
- Each participant can be held accountable for their votes since they’re public
There are various voting systems. But, in most cases, the weight of a member’s vote is proportional to the number of tokens they hold. Usually, DAOs are funded by issuing and selling tokens and that’s what eventually determines voting weight.
Non-fungible tokens (NFTs) can also be used to fund a DAO and define voting power. Smart contracts can be coded to allocate a percentage of NFT sales to fund the DAO, for example.
Also, NFT holders can stake their tokens in the vault, which generates value for them while supporting the project’s goals. Voting rights are then based on how many tokens each person staked.
After the DAO is launched, no single person or group can change the smart contract code governing the organization. To make changes, a consensus needs to be reached through voting. The same goes for treasury allocation and all other proposals.
What About DAO Governance?
DAO governance is like an instruction manual — it’ll guide how a DAO works and how its members should act. Here’s everything a DAO governance model defines:
- Roles and responsibilities: ‘Who does what,’ why those roles are needed, the toolstack, and the skills each person should have.
- Expectations: How independent members are, how often they’ll work together, and how much time each person is expected to dedicate to the DAO.
- Conflict resolution: How conflict will be resolved when it inevitably arises.
- Voting system: Examples include token-weighed voting, reputation-based voting, or share-based voting. Other details that need to be defined include who can submit voting motions, how long the voting is open for, and more.
- Rewards, incentives, and compensation: What do contributors get? Tokens, crypto, NFTs, fiat currencies, or something else?
Your smart contract will be built based on the answers to these questions. It might take you months to create the best governance model and smart contract possible. But the success of your DAO rests on how much attention and foresight you put into this step.
7 Benefits of Decentralized Autonomous Organizations (DAOs)
DAOs have multiple benefits over traditional organizations, including being:
- Decentralized and online: No individual controls the community. All decisions are made democratically and collectively — from anywhere, at any time.
- Fast and efficient: Smart contracts are tamper-proof and self-executing, which speeds up operations.
- Transparent and trustless: Members don’t need to know each other since blockchain is immutable, safe, transparent, and open-source; everyone acts with the collective interest in mind because they all have active stakes in the DAO and votes are public. Plus, nothing goes through without a majority vote.
- Community-based: Members come together and agree on a goal to build the DAO around. Everyone contributes with funds and has the same rights and privileges.
Other advantages of this type of organization include:
- Having a low entry barrier: The rules and procedures are coded in a smart contract, removing the legal mumbo-jumbo that often gatekeeps ‘regular’ people from business.
- Giving members a sense of ownership: Since innovation increases financial reward, everyone is incentivized to participate and innovate. In essence, more people having active stakes leads to more progress.
- Handing over power to consumers: DAOs allow customers to control and take part in the decision-making process by partially owning the organizations that serve them.
Should You Start a DAO?
DAOs are a great concept and will likely be huge in the future. But the reality is that, for now, not many business owners need to go out of their way to create or take part in one.
Still, there are a few instances where you could consider starting a DAO, including:
- Fostering a deeper level of engagement or involvement with your community of customers, supporters, and stakeholders.
- Pooling in decentralized funding from alternative sources.
- Materializing your values of transparency and accountability by using a DAO as a framework for transparent governance.
- Increasing collaboration with other businesses.
- Incentivize customer loyalty with tokenized incentives and programs.
Up next, we’ll go into more detail about two of these DAO use cases.
Decentralized Autonomous Organization Examples
There are several DAO examples, such as FamilyDAO, BakeryDAO, and NounsDAO, and use cases, including decentralized governance, insurance pools, fractional real estate ownership, and many more.
We can’t go over all of them so we’ll focus on two use cases that SMB owners can benefit from.
1. Decentralized Funding
Business owners can create a DAO to raise funds from a community of investors or supporters as an alternative to traditional funding from banks or venture capital.
By issuing tokens that represent ownership or participation in the business, anyone can contribute funds and become a stakeholder, creating a more decentralized and community-driven financing model.
2. Decentralized Collaborative Ecosystems
Businesses can form or join DAOs in industry or niche-specific collaborative ecosystems.
The goal of these DAOs is to provide the necessary framework for businesses to share resources, knowledge, and best practices, network, tackle challenges, and collaborate.
Tools and Platforms You Need to Form a DAO
Building a DAO involves a combination of blockchain, decentralized technologies, smart contracts, and web development tools.
Here’s a high-level overview of the toolstack typically used to build a DAO:
- Blockchain platform (e.g., Ethereum, Polkadot, or Solana)
- Smart contract programming language (e.g., Solidity, Vyper, or Rust)
- Front-end programming language (e.g., HTML, CSS, or JavaScript)
- Web3 library (e.g., Web3.js, Ethers.js, or Web3.py)
- Decentralized storage tool (e.g., IPFS, Storj, or Arweave)
- Web3 development framework (e.g., Hardhat or Truffle)
- Testing and debugging tools and testnets (e.g., Ganache, Maian, Sepolia, or Rinkeby)
- Security auditing tools and frameworks (e.g., Securify or Slither)
- Legal agreement protocol (e.g., Open Law)
- Web3 financial tools for crowdfunding, transfers, treasury management, and more (e.g., JuiceBox, MetaMask, Yearn Finance, and Gnosis Safe)
- Decentralized voting system (e.g., Snapshot or Tally)
- Tools and platforms for community/audience building, discussing proposals, collaborating, delegating tasks, managing payroll, and more (e.g., Twitter, Discord, Collab.Land, Coordinape, and Utopia Labs)
Alternatively, if you want to create and sell NFTs to fund your DAO and define voting power rather than using governance tokens, you can use:
- NiftyKit to create, mint, and sell your NFTs or Manifold Studio to mint them and create a custom smart contract.
- OpenSea to sell your NFTs — you can set a percentage of proceeds to be automatically sent to your DAO’s funding address upon each sale.
- Snapshot to enable NFT holders to stake their tokens in your DAO’s vault and govern the voting process.
Note that this is a massive oversimplification of the DAO-building process and toolstack — we would need dozens of articles to properly explain this.
Also, non-techies, fear not! Aragon, for example, is an all-in-one DAO creation and management platform with absolutely no coding required.
A Legal Framework for Decentralized Autonomous Organizations
In the US, there’s no countrywide legal framework for DAOs. Since they can’t be incorporated, they fall into partnership status by default, meaning all members are under unlimited liability.
To have limited liability protection, DAOs need to be legally recognized.
In 2021, Wyoming became the first state to afford them limited liability company (LLC) status, granting them legal protection and corporate structure. In 2022, Tennessee followed suit.
Vermont law doesn’t mention DAOs but allows companies that run on blockchain to register as “blockchain-based LLCs” (BBLLCs) since 2018.
Traditional Delaware LLC law is notoriously flexible, allowing it to accommodate various DAO principles — but not all.
Jersey, a UK self-governing territory, introduced a hybrid model where DAOs are protected by the LLC model as well.
So, Will You Create Your Own DAO?
DAOs offer SMBs exciting opportunities for innovation, collaboration, funding, community engagement, and more.
All this information might’ve been overwhelming if you’re new to DAOs, but we encourage you to keep learning about them and have a go at some of the tools and platforms we mentioned.
Subscribe to our newsletter for updates on the state of DAOs.
