Starting a business can be so rewarding with the right amount of know-how and dedication. Which type of business entity you go with will determine how it’s run and how you’ll make money. A decentralized autonomous organization (DAO) is a relatively new model that’s attracting a lot of attention. If you’ve never heard of this type of business entity, then let’s go over it and discuss how to set one up.
A DAO allows groups of people with similar interests (businesses, non-profits, etc.) to operate their organization without a hierarchal authority figure and, instead, through decentralized governance. The DAO’s members can cooperate and run the entity with full transparency.
The organization’s rules are encoded into a transparent computer program and members can control the code without the worry of outsiders influencing it. This freedom sets DAOs apart from traditional organizations and makes them an attractive model to make a profit.
Now, how do you make one?
DAOs are nothing like traditional organizations. They run on a unique model that may sound a bit far-fetched, but many DAOs currently operate and are making profits.
As with any business type, you’ll first have to draft a mission statement. This is arguably the most important step in the process since this is where you’ll establish how the DAO will be run and what its goals are. It’s almost like a business plan you’d see in more traditional business entities.This is the perfect opportunity to be as transparent as possible.
The great thing about a mission statement is that you can draft it however you want and include whatever you’d like. Make sure the DAO’s goals are realistic and achievable given the resources at your disposal. Also be sure to specifically detail how the members should act and what should be done if changes to the DAO are ever needed down the road.
Building a DAO’s community may be the hardest step in the process. You’ll first need to decide if your DAO will be large or small and open to the public or exclusive. Your mission statement in the first step will also have to address this.
If you’re looking to build your DAO to have thousands of members, then you’ll need to put in some serious work to grow the community. On the other hand, if your DAO aims to have a membership that extends to only a specific number of people or audience with a specific interest, then you’ll need to limit who joins.
Building a communication hub to attract people interested in decentralized organizations is where the hard work comes in. There are plenty of community channels out there where you can attract this crowd, like social media groups or even chat platforms like Discord.
Having open communication with members is vital for the DAO. Remember, DAOs have no managerial hierarchy, meaning that its members will have to be open with each other in order to make the organization work. You can also use different platforms to keep in touch with your members, which takes us to our next point.
Going off of what we mentioned earlier about finding potential community members, use tools to keep in touch with them about DAO-related duties, like voting or talking about changes to the organization.
Chatting services like Discord and Telegram are great ways to safeguard your DAO’s duties. Forums can also offer a great form of communication.
Discord, for example, gives server owners the ability to restrict who joins the server, potentially eliminating the risk of having outside parties know what your DAO is up to, especially if it’s one that has membership stipulations.
The DAO’s treasury is what really makes the organization valuable. This part of the DAO allows the community to use capital to achieve its mission. It’s important to really take the time and establish how the organization’s treasury will be structured.
The treasury’s structure depends on the type of DAO. For example, if your DAO has a fee for usage, then you can put this money into the treasury. DAOs that sell membership access through other means, like non-fungible tokens (NFTs), work the same way.
Individuals or entities looking to join the DAO can purchase the organization’s native token, which is a form of digital currency. Members with tokens can be given voting rights that are proportional to their holdings. They can also own equity in the organization to shape its future.
The most important thing to keep in mind is that you should put as much capital into your treasury as possible since this empowers the organization’s community. This brings us to our next step.
Members of DAOs will need to chime in on discussions and proposals that can affect the DAO’s growth. Changes and actions will need to be voted on in order for the organization to move forward. Let’s take a closer look at how these organizations are governed.
Formal governance falls into two categories: off-chain and on-chain. Off-chain governance involves discussions that eventually lead to formal governance voting. On-chain governance involves token votes.
A DAO’s typical governance flow involves:
DAOs can also practice delegated governance. The community grants certain rights to a group of individuals or working groups. When these groups should step in is crucial. The last thing you and your community will want is to go through a formal governance process that can last weeks just to make a single decision.
Working groups with specific powers can allow the organization to move forward at a faster pace while also allowing the community to have its say in matters.
Distributing ownership in a DAO is how you allow members to vote on decisions and represent membership access. Two ways to distribute ownership are with NFTs and fungible tokens (ERC-20 token). Some DAOs use NFTs as governance weight while others uses ERC-20s. Both have advantages and disadvantages that vary depending on the type of DAO you have and how it operates.
Hopefully our how-to guide has painted a better picture of how to create a DAO. Since this is a newer organizational model compared to other business types, there are still many questions that come up with DAO operations. As the years pass, it’ll be very interesting to see just how popular DAOs become and how they’ll help structure the business landscape.
DAOs can make money in two ways:
A DAO LLC is a new type of LLC that lacks a leading member with majority rule. Regular LLCs have members that make core business-related decisions. Not so with DAO LLCs. They run autonomously through smart contracts.
Like with any business model, whether investing in a DAO is a good idea or not depends on its type, what its core mission and goals are, and how its members run the organization. This is where doing some research on the DAO is necessary.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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