Back to Blog

Should You Start a DAO?

Sam Sklar
@_samsklar

Background

As you’ve probably seen, DAOs are the hot thing in web3 right now. Platforms are popping up left and right with DAO in the name - Blimp DAO, Links DAO, Moon DAO and City DAO to name a few. Does starting a twitter and discord and adding “DAO” to your name actually make you a DAO? No, but it might help you win a few followers.

While you’d be right to approach this new fad with caution, many of these DAOs are actually making a good faith effort to unlock the power of what is an exciting new way to organize people and pool talent. Unfortunately due to the lack of quality tooling (which we are working to fix at Barracuda!), it’s not as easy as it should be to run a DAO as it should be.

In this article we’ll explore the benefits of DAOs to creators, community members, and investors and why this fad is here to stay.

A primer on corporate structures

We can’t talk about the merits of a DAO without background on the existing corporate structures. Today, the common playback is to (1) create an LLC (2) fundraise via a community building site like Kickstarter or through private investment options venture capital.

Prior to the invention of the LLC in 1977 in Wyoming, people who were looking to start a business could either create a sole proprietorship or a corporation. While Sole props are easy to set up, they can be risky because the owner’s personal assets are not protected from issues with the business. If your trucking company gets in an accident, you could lose your house in a lawsuit filed against the company. Corporations offer liability protection to the owners but are expensive and onerous to set up. They require annual board meetings and diligent record keeping. Moreover, Corporation owners face double taxation as the corporation pays taxes and the owners are taxed again when they receive payouts from the corporation. The LLC was created as a hybrid to enable business owners the flexibility and tax benefits of a sole prop with the liability protection of a corporation.

Starting your LLC is straightforward - you can do it for $500 in a few days with Stripe Atlas.

In today’s market, you can raise a private seed round from VC’s with no more than a pitch deck. Crowdfunding via kickstarter is also an attractive option, although the site takes a 5% cut.

Regardless of your company type, people management is common across the board. The CEO, and other C Suite executives sit at the top. Individual contributors sit at the bottom. As the company grows, layer upon layer of middle management is slopped in between.

The (first) DAO

The DAO was launched in 2016 as a pooled venture capital ethereum investment vehicle. Over 18,000 people contributed to one of the most successful crowdfunds of all time . The DAO raised over $150M which was 14% of the total ether supply at the time.

The DAO was created with transparency and community empowerment in mind. The funds were controlled by collective vote of the community - removing the need for centralized fund managers who would take a cut and potentially misuse funds. In exchange for eth, contributors were given DAO tokens which represented their ownership stake and voting rights.

As is common in web3, all of the code was open source and could be verified by the community. Changes to the code, in addition to capital investments, had to be confirmed by community vote. Any proposal that saw greater than 20% participation and majority approval passed.

The DAO founder’s did not full democracy though - all proposals had to be vetted by a group of “curators” before they could go to community vote.

The DAO failed because security gaps in it’s smart contract allowed a hack of epic proportions. You can read more about that hack and the fallout here . While the hack led to the downfall of the DAO, the project showed the potential of this new organizational structure and has paved the way for today’s resurgence.

They demonstrated the potential of crypto community crowdfunding. They showed that people could contribute to a shared vision without well defined roles and management structures. And they ended up allocating funds to very promising projects because the collective research and analytical abilities of the group led to solid decision making.

Key Components of a Successful DAO

  1. Dentralization (obviously): Token distribution should not look like equity structures of traditional startups. If founders or private investors hold 20% equity stakes, they will be rewarded disproportionately for the success of the project and have too much power in governance votes.
  2. Autonomy (obviously): DAO members should be able to contribute their unique skills to the project without bureaucracy getting in the way. If you assume good intent, which you have to in a DAO, sub teams can be responsible for their own KPIs and manage their work independently.
  3. Transparency: Corporations may be motivated to hide information from the public and shareholders to protect their share price. DAOs shareholders are also their employees so this kind of obfuscation is not possible. Direct communication about where a project is succeeding and where it isn’t gives everyone the context they need to onboard and become an active contributor and identify the highest ROI areas to work on.  
  4. Bias towards action: Since DAOs are still in their infancy, and the most active participants are early tech adopters, they primed for rapid experimentation. Organizations without strong central leadership are at risk of stagnating. It’s essential that DAOs in the early stage commit to taking many big swings early and often. Even if every member may not agree with every decision, it’s crucial to adopt a mindset to try many things and fail early if necessary. .  
  5. Less paperwork: In this article , we talk about why it may be justifiable in some cases to do a public token sale for your DAO without registering as a security.

DAO pros

What does a DAO get you that a traditional corporate structure doesn’t?

  1. Aligned incentives: Token sales align incentives between the original creator and community members. Supporters can be rewarded for contributing to a project through token airdrops and the rising value of those they already hold. Founders, community members, product users, and marketing evangelists can all win together.
  2. Staying power: Hierarchical organizations crumble when they are poisoned from the top. DAOs don't depend too much on any individual. As people come and go, the other nodes flex to fill voids.
  3. Wisdom of the crowd: Since all token holders have a say in governance, DAOs unlock the wisdom of the crowds. At a traditional company, management will spend millions doing user research and polling to understand what users want. In a DAO, your users will tell you exactly what they want through their vote.
  4. Transparency: With all decisions made publicly on the blockchain, team members aren’t left in the dark about where the project is headed or where everyone stands. The current status of the treasury and how those funds are deployed is viewable by everyone. Employees benefit from full salary transparency across the organization.
  5. No middle management bloat: Most of us have either worked in middle management or been forced to deal with it in our career. Middle management exists to play a game of telephone between leadership and individual contributors. It’s not satisfying for anyone. Need we say more?
  6. Meritocracy: The anonymity of web3 communities forces us to judge people based on the quality of their contribution, not what they look like or what they’ve done before.

DAO cons / risks

  1. Stagnation: Without strong central leadership, you risk members fighting over decisions and having your project grind to a halt. We address above that it’s critical to bias towards action.
  2. Bad documentation: Since DAOs are most often distributed teams, they face the same problems other distributed companies face. Clear documentation is crucial to keeping everyone on the same page otherwise you have people duplicating work or building pieces that don’t fit together.
  3. No governance participation: Many DAOs are structured such that proposals require a participation threshold to be met for a proposal to pass. If many of your early contributors go dormant over time, you risk having the majority of your governance power sitting idle..
  4. Not broadly recognized by the US government: This year, Wyoming passed a law to grant DAOs the same legal protections of an LLC. While we expect other states to follow suit, such protections don’t exist broadly. Therefore, if you’re DAO faces a lawsuit, individual participants could face the same liabilities as a sole prop founder.
  5. Cost: As the majority of your DAO management happens on chain, you can face high gas fees. We recommend combatting this by working with a more efficient layer 1 chain like Solana.
  6. Lack of KYC / AML: We are going to sound like boomers here, but assuming best intent from a community of internet strangers is risky. As we spend more time using our wallet address to connect to DAOs / DApps, we can develop a track record to identify good / bad actors online.

Closing Thoughts

We are just scratching the surface of the ways that DAOs can revolutionize the way we work together. When kickstarting any new project, you should seriously consider whether a DAO is for you. While not everything needs (or should be) a DAO, many of the great companies of the next 20 years will be. If you’re ready to start a DAO, or just want to discuss whether it’s right for your project, we are happy to help.