How to Start a DAO

Establishing and running an organization takes a lot of work. It can be tricky to develop rules and positions, no matter the size of the membership. And when left unchecked, power imbalances can harm the group.

Establishing and running an organization takes a lot of work. It can be tricky to develop rules and positions, no matter the size of the membership. And when left unchecked, power imbalances can harm the group. 

These issues become even more prominent when the organization involves money and funding. Trust is valuable in such organizations, and the structure needs to reflect that. 

This is where decentralized autonomous organizations (DAO) come in. Like non-fungible tokens and cryptocurrency, these blockchain functions are creeping into the mainstream. What is a DAO, and how do you start one?

Meaning of DAO

Simply put, a decentralized autonomous organization is an online community with a common bank account. DAOs come in many shapes and sizes, supporting various causes and purposes. Some are open-source and blockchain-based, while others operate similarly to a limited liability company (LLC). It all depends on the organization's vision and goals.

Its use of smart contracts makes the organization autonomous. A DAO is built upon rules coded into a program, which handles every activity. These include financial transactions, organization records, tasks, et cetera. Every member needs to agree with every aspect of the code before it becomes operational.  

There is no centralized leadership in a DAO. Instead of a CEO, decisions fall upon the entire membership. Every change in the organization requires a proposal and an affirmative vote from the membership. Only then can the members revise the code to implement the changes they agreed upon.

A DAO can exist and operate solely through the blockchain. But, since a pure DAO is not a legal entity, it will also not enjoy any legal protection. In 2021, however, the state of Wyoming started recognizing DAOs as LLCs. Incorporating your DAO as an LLC can help you navigate legal processes safely.

DAO vs Traditional Organization

DAOs and traditional organizations have quite a few significant differences. After all, a DAO is anything but traditional. Here are some of the aspects where they differ.

Membership

Traditional organizations are more straightforward. They are a group of people with a common goal, either for-profit or non-profit. When their operations require funding, many of them register as legal entities. The membership also has a general idea of the organization's structure and composition.

A DAO, however, can have a completely decentralized governance framework. The members don't have to know each other--they just have to create and agree on the protocol. Membership can grow exponentially with no need for management.

There are many different types of DAO membership. These two are the most common: token-based membership and share-based membership.

Token-based membership can be completely permissionless. Members can trade these governance tokens freely. They can also earn tokens through work or liquidity. Trading and earning native tokens is favorable, as token holders get voting rights.

Meanwhile, share-based membership is more permissioned. To gain membership, aspirants must submit a proposal to join along with a tribute. This tribute can take different forms, such as labor or tokens. A member or stakeholder's shares dictate their voting rights.

Organization Structure

The common structure of traditional organizations is hierarchical. We have the president or CEO who oversees and implements all operations. They head a chain of command that encompasses the entire organization. After the CEO are the department heads, which manage groups of employees. Most, if not all, are primarily motivated by salary and work experience.

In contrast, a DAO can have a fully democratic governance framework. As the name implies, it has a decentralized leadership structure. No one has total command unless there is a majority approval of the group. Since the organization is autonomous, it requires no human intervention for it to work. Each member can therefore have an equal role in the group.

Decision-Making

Decision-making in traditional organizations often depends on its structure and bylaws. They can be fully democratic and rely on a majority vote. We can see this in the case of cooperatives.

However, most traditional organizations have a hierarchical structure. This organizational structure will also affect the group's decision-making dynamics. Often, organization leaders have the power to implement policies and decisions by themselves.

If a traditional organization goes through voting, the process still requires a human intermediary. Members can vote through electronic means, as is the norm. However, the tallying check and results announcement would still be handled manually.

DAOs work entirely based on the code. The code dictates the extent of the decisions that any member can make. If one or some of the members want to install any organizational changes, they need to vote. There is no other way around it.

Compared to a traditional organization, a DAO requires no human intermediary to conduct polls. Members cast their votes, and the DAO program handles the tallies and announcements.

In most DAOs, members need to have DAO tokens to cast a vote. The number of tokens one has will depend on their contribution to the group. Two of the most common ways to earn DAO tokens are through contract work or contributing funds.

Operations And Transactions

Business automation is becoming very popular across different industries. However, traditional organizations still require a hands-on approach. Any organization's tasks and services still require some degree of human handling.

Human handling can be effective, especially when it comes to assessing standards. But, this approach can also leave your data and finances vulnerable to manipulation. Corruption and dishonesty can be especially harmful to an organization. It can also be challenging to establish complete trust.

Since a DAO is completely autonomous, these processes no longer need human handling. Financial transactions will immediately commence and reflect on the blockchain. Each DAO process can occur in a decentralized manner with no need for human management. 

Transparency

Traditional organizations can have different degrees of transparency. Of course, there are certain documents and information that are public knowledge. But, any organization reserves the right to keep secrets from the public or its own members.

This fact is not necessarily a drawback, but it is treading dangerous waters. A lack of transparency can be sinister when coupled with corruption and dishonesty. Without transparency, there can be no accountability. This can harm the organization, its members, and the people they serve or transact with.

A DAO has no secrets. Its code is completely open-source, and every transaction is recorded and maintained on the blockchain. Any member could review the protocol and the DAO's activities at any time. However, you will need to be knowledgeable about code to some degree to do this well.

This open-source nature allows all DAO members to keep the group in check. Even if they're millions of strangers scattered all over the globe, each one has the same access.

Benefits of Starting a DAO

DAOs might still be in their infancy, not yet in the mainstream. But, they have proven to be beneficial across different sectors. Consumers, investors, and business leaders alike have reaped its many benefits. Below are just a few of them.

Inclusivity

DAOs allow for better inclusivity among stakeholders, especially during decision-making. With the absence of a central authority, members do not have to schmooze or climb up the ranks to get a say. Aside from an initial investment, members do not need power or vast amounts of money to participate in decision-making.

Automation

The entire ecosystem of a DAO runs on codes and algorithms. With this level of automation, there is less room for human error and manipulation. The members just need to ensure that the code works the way it should. If they notice an error or a need for an update, the membership can make a collective decision.

Opportunity

DAOs, NFTs, crypto, and blockchain technology are all relatively new. All this innovation is just the start of tremendous opportunities to come. The environment surrounding them is reminiscent of a Wild West era. Getting in early can blow up your investments once DAOs hit the mainstream.

“Unlike a standard LLC which is managed by human members/managers, a DAO can be managed either by human members/managers or algorithmically.” - Arjun Mahadevan, Co-Founder, doola.com

How To Start a DAO

Starting your own DAO can seem intimidating, especially if you're new to the scene. It does deal with a lot of complicated technology, but a lot of tools exist now to simplify the process. Here's how you can start and grow your own DAO.

Set Your Goals

The first thing you need to settle is the objective of your DAO. It doesn't have to be complicated. It just has to be something you can build a community around. 

DAOs can be decentralized finance (DeFi) protocols like Uniswap and Aave, collectors like PleasrDAO, or social networks like the Friends With Benefits DAO.

Do you want to trade and collect digital assets like non-fungible tokens (NFTs)? Do you and your friends want to rate and review popular memes? Do you want to support artists and other creators? Are you planning to establish a startup business? Having a solid goal helps you simplify the steps that will follow.

Find And Build A Community

To create a DAO that will last and sustain itself, you need a community. This can be difficult to accomplish at first, especially if you're operating from scratch around a new idea. 

You can promote your DAO through various social media and online communities. Tweet your idea, make a Reddit post, or message people on a Discord server. You can also create your own headquarters in the form of a Discord server or group chat.

Aside from growing your membership, you'll also need to collect funds. Creating native tokens for your DAO would require an initial cryptocurrency investment. You can do this via crowdfunding or submitting proposals to venture capital firms.

You don't have to do this alone--ask your community for help! It's also good to provide incentives for specific tasks this early on so you can meet your goals more easily.

Encode The Rules

For this step, you can go about a variety of ways. You can either use an all-in-one DAO creator tool or code your own smart contract. During this step, you can hire a team of developers to expedite the process.

One popular platform for creating DAOs is Aragon. It allows users to set up and govern DAOs on the Ethereum blockchain. You only need a cryptocurrency wallet extension like MetaMask and your idea in mind. It even creates your DAO tokens for you.

Upon setup, you can create your rules, such as token assignments and voting power, among others. It also hosts everything you need to run your DAO. Much like a regular governance framework, it has executive, legislative, and judicial functions.

If you want to completely customize your DAO, you can opt to create your own code. This can be quite complicated and will take longer than the previous route. You don't have to start entirely from scratch, though. There are open-source DAO frameworks available online, which you can customize yourself.

Make sure to double-check your protocols with your community since a smart contract is irreversible.

Deploy The DAO

With the setup done, you can now test and deploy your DAO to the world (or your desired membership)! Of course, the community you build will likely be part of it.

How you expand your DAO will depend on your organization's goals. Some good places to start are Discord servers, subreddits, or other DAOs you are already a member of. 

At this stage, the DAO is its own entity. There is no more ownership or central leadership--everything now relies on the community.

Register As A DAO LLC

This step is optional but ideal if you want your DAO to enjoy LLC protections and benefits. 

As of writing, only the state of Wyoming has policies in place to recognize DAOs as LLCs. You can apply online or submit a paper form, depending on which is more convenient to you.

DAO and Blockchain Explained

A blockchain is a peer-to-peer, distributed ledger containing records in "blocks," hence the name. Every block of data resides on nodes or small servers. These are usually computers or devices connected to the blockchain.

Many of us know the blockchain as a record for trading crypto or NFT transactions. However, it has a lot of other purposes, one of which is supporting the formation of new digital communities. In fact, the first blockchain was invented to support Bitcoin, which many argue was the first DAO. The community dynamics of blockchain allow users to share knowledge and support.

Blockchains come in many different types for different purposes. The most popular one for DAOs today is the Ethereum blockchain. It is open-source and programmable, which allows for numerous applications. There are a bunch of Ethereum projects today with lots of uses. These include banking, e-commerce, communication, and community organization. 

These features make Ethereum accessible and extremely functional. 

Need Help Incorporating an LLC in Wyoming?

DAOs are still a nascent technology at the moment, but it holds massive potential. More and more DAOs are being created each year, and the outlook so far remains positive.

If you have an idea for a DAO but want the legal protections of an LLC, we at doola are here to help. Our expert team can guide you through a smooth and hassle-free process. 

We are passionate about helping anyone turn their dream into a viable business. Feel free to call, message, or email us for a consultation!

FAQs on How to Start a DAO

How much does it cost to form a DAO?

Starting a DAO and generating tokens has no fixed cost, as ETH prices often fluctuate. However, forming a DAO as an LLC will cost $100 in fees. 

Does a DAO have to have a registered agent?

When forming a DAO LLC, you will need to have a registered agent.

Do I have to live in Wyoming to register a DAO?

No. However, you must have a Wyoming registered agent that meets statutory requirements.

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