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DAO First or DAO After? V2

Let’s be honest: DAOs are the future of organizations. They have been a long-time coming but they are finally here.

COVID pushed us to discover what many in tech already knew - distributed teams work.

Compound⁠

Gitcoin⁠

and many others showed us that merging those teams with the community and letting them make decisions also works.

So, does this mean that every startup should jump straight into a DAO building mode?

Not quite.

For one, not every business is suited for a DAO (e.g. your socks store on Shopify). But then, even if it is, there is quite a bit of work to be done well in advance.

To start, DAOs are communities. Communities form around a shared vision and a mission how to make it a reality.

Hector Espinal built

We Run Uptown⁠

around a shared mission - “to build a network to uplift and inspire NYC runners to be their best and have fun while doing it.”

But this wasn’t how he got his Washington Heights neighbours to run with him. Instead, he simply posted on Facebook:

“Meet me at 168th and Broadway. We’re going for a run on the bridge.”

Those joining Hector knew exactly what they were about to do (running) and with whom (neighbours). As for the “why”? Everyone one had their own personal reason but a shared one must have been to get fit.

The same is true for DAOs. You can’t start one before you know the “what”, “how” and “why” of your project and whether others care about them.

Then, DAOs need governance and an incentives. While the community will build them, you need to erect the scaffolding. It will carry your DNA and outline the general direction of the DAO. The governance and incentives will be a big reason why people will join.

So, if not on day one, then, when should you start building a DAO?

⁠

Jesse Walden⁠

from a16z has some answers:

Progressive Decentralization

Walden argues crypto startups should decentralize gradually:

“... Much of what it takes to build a successful product at the outset — product leadership, rapid iteration, a managed go-to-market — complicates the path to community ownership and regulatory compliance, which guarantee long-term health.”

Building a community around an untested idea distracts from the most critical task: testing the idea.

To avoid such missteps, Walden recommends going through three stages:

Discover a product-market fit

Build an active community

Transition to community ownership

Discover Product-Market Fit

Things move fast and direction changes quickly. You work in sprint mode: define the problem, draft a solution, and test it. You tweak and repeat until your solution clicks with the market.

Focus and rapid iteration are critical. To optimize for speed, you need to stay small and agile. Walden says decentralization should not be even a thought at this stage.

Community Participation

You’ve found your market. You’re solving a real problem for a large group of people. Your product is still in rough draft but customers keep asking for it. Some may even reach out with feature requests. This is when you start building a community.

A community is a good idea even if a DAO is not in your plans. There are two main reasons:

Gain customer insights to help you fine-tune your product;

Increase customer stickiness. Leaving an okay product is easy; leaving a community is hard.

In Web 2, businesses build communities to extract value.

Coda⁠

- the doc app I use to write this - has a vibrant space where people share templates, build workflows and exchange experiences. While members benefit from these interactions, the largest slice of value goes to Coda. It can mine the forum for use cases, feedback and ideas. In return, the users get to pay for a product they help build.

If this seems exploitative, it is - even if communities are voluntary. But things don’t have to be this way.

If Coda decides to take the DAO route, it can:

Enable community members to make proposals for product developments;

Set up governance and incentive structures at a community level;

Flow back value by paying members for their contributions (e.g. template creation, workflow development, etc.);

Introduce a token to enable transfer of value among community members.

Community Ownership

All the efforts in the previous stages culminate here - the founding team gives full control to the community. Token holders make all decisions about the future of the company no matter how big or small.

The biggest challenge in the leap from a community to a DAO is the governance and incentives. No matter how much work you’ve done at the previous stage, you’d have to work with the community to enhance the governance structure. You will have to develop processes and procedures to enable the DAO to manage all aspects of the business.

Besides the daily operations, you and the community would have to figure out how to deal with the existing shareholders, employees, taxes and incorporation. Most states don’t recognize DAOs as legal entities. Would you register the DAO as an LLC or

incorporate in Wyoming⁠

? If so, how would you deal with payroll deductions and employment law compliance?

I don’t have all the answers. Frankly, I don’t think anyone does. It can take years to design the right structure - often more than three, as we’ll see in the examples below.

How Others Have Gone Full DAO

Gitcoin

In 2017, Scott Moore and Kevin Owocki launched

Gitcoin⁠

- a platform that funds the development of public goods for Web 3. Owocki

explained⁠

that many interesting projects never get built for one simple reason: lack of funding in the initial stages. To solve the problem, Moore and Owocki started a grant program to support developers in building open source for Web 3.

Gitcoin didn’t become a DAO until

May 2021⁠

when it launched its governance token (GTC). In the four years before then, Owocki and Moore were busy defining the problem, designing a solution, and building a community of builders and sponsors. After figuring out all of the above, the team had to lay the framework for community governance and how to turn over the keys to the DAO. The launch of GTC was the culmination of all these efforts.

AAVE

⁠

Stani Kulechov⁠

started

ETHLend in 2017⁠

. It was a decentralized peer-to-peer lending platform.

A year into it, Kulechov and his team switched their business model to a liquidity pool platform. They also

changed the name⁠

to AAVE - the Finnish word for “ghost”.

AAVE didn’t start functioning as a DAO until 2020.

What were Kulechov and his team up to in those three years? They refined their business model, rebranded and validated their product-market fit. Once AAVE had some traction, did they decide to go DAO.

MakerDAO

MakerDAO started as the Maker Foundation in 2015. Rune Christensen,

laid out⁠

a vision of building a stable token (e-Dollar) that would support exchange on value on the Ethereum network. The problem Christensen wanted to solve is the one we still face today - the major cryptocurrencies are too volatile be effective tools for daily transactions. Crypto needed a stable token.

In the years to follow Christensen scrapped the Maker Foundation, released a limited edition stablecoin, launched DAI, and paved the way to a full DAO. You can read the full version of Maker’s journey

here⁠

MakerDAO, along with many others, have successfully used progressive decentralization to go DAO. This approach, however, doesn’t make sense in other cases.

When Progressive Decentralization Doesn’t Make Sense

Progressive decentralization works best for Layer 2 applications. Usually, they are built on Ethereum and use smart contracts. Most DeFi and Web 3 applications belong to this group.

Some business models, however, that call for decentralization from day one.

Layer 1 Protocols

By design projects like Ethereum,

Solana⁠

and

Polkadot⁠

need a community of participants from the very beginning. Their raison d’etre is a decentralized blockchain that solves a specific problem. They are networks that operate without a central authority.

Ethereum would have never worked if its founders held all decision-making power. It would have not been trustless and permissionless. It would have been just another Amazon or AirBnB - a place where people operate following the rules set by the central rulers.

The value of the blockchain networks is in their decentralization. Hence, optimizing for it from the very beginning is a must.

Social Clubs and Investment Funds

⁠

The LAO⁠

would have been a traditional VC fund if it weren’t for Web 3.

PleasrDAO⁠

would have not existed in the first place.

The LAO’s success lies in the community of participants jointly investing in crypto projects. In the traditional VC world, The LAO would have had a general partner (GP) who would have pooled money from limited partners (LPs) into a fund. The GP would have been responsible for investing that money and delivering a return.

This model works in a world where LPs have little interest in the daily operations of the fund. Many LPs take this approach - as long as the fund delivers the promised return and maintains the same risk profile, no need to get your hands dirty.

An active LP, however, who wants to be more than just a bank account should be looking elsewhere. Decentralized organizations like The LAO and Meta Cartel are made for her.

You can’t pull off The LAO without a DAO. By design it relies on a network of people who play different roles - investors, scouts, mentors and founders. They work together to build projects that shape the future.

The same is true for PleasrDAO. Its premise is collectively owning digital art. By design, it calls for a group of people coming together behind a common goal. Collectors’ clubs do exist in the real world, however, they tend to be over-reliant on a central authority and be small in size.

While projects like The LAO and Ethereum wouldn’t have benefitted from progressive decentralization, they didn’t start as DAOs either. They, too, needed a small team of committed founders get things going.

The Infinite Machine⁠

, Camila Russo describes how

Vitalik Buterin⁠

worked with

Gavin Wood⁠

Charles Hoskinson⁠

and

Anthony Di Iorio⁠

to get the project going. Each one played a different role but they all came together to make key decisions about incorporation, legal registration, token issuance, etc.

By Russo’s account, the first days of Ethereum were by no means a smooth ride. Squabbles and power struggles were common. Most of the original founders left the project on mixed terms. The first days of any business are tough, even when founders get along. Trying to launch as DAO makes things only tougher.

⁠