How to Start a DAO in 2024 – A Complete Guide

DAOs, or Decentralized Autonomous Organizations, are gaining popularity because of their flexible business structure that operates in a decentralized manner. This means that all the involved business stakeholders are participating in business management in a decentralized manner, operating autonomously, and there is no governing boss. 

Okay, so how do the DAOs actually work in such a non-structured model, and what do these heavy words – “autonomous” and “decentralized” mean?

How flexible are DAOs and what makes them this flexible? Do you want to start a DAO and want to know everything about their formation and functioning? 

Below, we discuss the answers to all these questions, explore DAO formation in complete detail, and dissect the legalities and technicalities involved in establishing them. Added are some key considerations for starting a DAO and expert tips to help you make the most of your business venture.

A Detailed Overview of A Decentralized Autonomous Organization

How to Start a DAO in 2024 – A Complete Guide

As the name suggests, a DAO works in a decentralized manner, which pretty much resembles blockchain technology – without any centralized or structured governing model, practically running on its own (autonomous), and is not controlled or managed by a single party or person. 

A DAO doesn’t have a centralized head, organizational boss, or CXO acting as the controlling authority. As the organization is operating in an autonomous manner, it is self-managing. This means that no formal organization body is required to manage the day-to-day workings of the DAO. 

In simpler words, a DAO is a group of people that come together for a specific purpose, such as renting properties, providing consulting services, etc. 

There are different types of DAOs depending on the nature, scale, and type of business. However, there is one constant – all of them are internet-based communities sharing a single bank account. This bank account is used to run the business or fund the cause (in the case of a non-profit) – whichever is the intent of the DAO. 

The overall way of operating as a business depends on the basis of a code finalized by the people putting together the DAO and this code then becomes the driving force for autonomous running of the organization. Finally, not everyone coming together for a DAO is an entrepreneur but they can be one after becoming a part-owner.

Types of DAOs

DAO memberships are of two types – token-based and share-based. 

Token-based memberships are completely permissionless and every member owns the governance tokens. These tokens can be traded by the members freely. The members can also earn the governance tokens through liquidity or work. 

On the other hand, the share-based memberships are more permission-oriented in nature. So, to gain membership you have to submit a proposal for joining the DAO along with a tribute. This tribute can be of different types, such as tokens or labor.

In such a DAO, the voting rights lay with the stakeholder’s shares.

How Do DAOs Operate as a Business?

How Do DAOs Operate as a Business

All the parties or persons coming together for a DAO enter into a working agreement (code) via the typical decentralized Smart Contracts. Smart Contracts are software programs with a self-executing code (which makes DAOs autonomous) in the blockchain (underlying logic of DAO operations that makes them decentralized).

These Smart Contracts contain the terms of agreement for all the parties or persons involved in a decentralized autonomous organization. Any of these involved parties or persons can vote for these Smart Contracts or make proposals to keep the DAO running as a decentralized and autonomous organization. 

Another amazing aspect of the business functioning of the DAOs is that all the members can make decisions in a DAO without actually knowing the involved parties or people.

This flexibility to work with like-minded people without having to know them or fretting over being duped or doing business as a layman with experts makes DAOs one of the most popular business entities these days. 

As there is no bureaucracy in a DAO, all the decisions are made by voting and every constituent party or person has the right to vote. For instance, if your DAO is for a property renting business and you wish to increase the rental amount for a hostel, then you can start the voting process for the decision, and if the decision gets the required number of votes, it gets passed. 

All in all, DAOs are run via a code, which sets the rules for business operations and is put in place right at the time of DAO’s creation. Any changes, additions, or updates to this code are done via the voting system. 

Also, all the involved parties or persons in a DAO who have the voting rights are called token holders and each token is equivalent to one vote. All the token holders are anonymous, which means no one knows who voted in favor of or against a decision.

There can be scenarios where you can have more number of tokens than anyone else, which you can use to support a decision if required. The clauses for allowing people to have more tokens can be set and changed as the organization evolves or right at the time of formation. 

Some of the most awesome characteristics of DAO that make it an amazing business model are as follows:

  • They are built on a shared objective and are a safe place to invest funds or store capital.
  • The wallet of a DAO is a multi-signature token, which means that more than one person is required to sign for transactions. This functionality makes the entire business structure inherently secure, reliable, and transparent.
  • All the rules, governing principles, and documentation, such as the Articles of Organization are easily accessible to all the token holders, for additional transparency.
  • Everyone can see and know about everything to anything that is happening in a DAO, which means the organization supports participation at all levels for everyone involved in the business.

Traditional Business Entities vs DAOs – Key Differences

Traditional Business Entities vs DAOs – Key Differences

By now it must be clear that DAOs differ from traditional business entities in multiple ways. From incorporation to functioning philosophy – they are more flexible, and transparent, and leave no room for redundant business processes.

Below, we share a more detailed walkthrough of all the benefits.

Partnerships and Memberships

The traditional organizational structure is static, more formal, and straightforward. There is a proper Board of Directors that is working toward a common business goal and the majority of policy-making and operating decisions are taken hierarchically.  

DAOs, on the other hand, are governed in a completely decentralized manner where partners or members don’t have to know each other or meet each other to create and agree on the decisions, or protocols. 

Transaction Management 

Even if traditional organizations have automated their finance operations, there is some sort fo human involvement, and major investment decisions or changes still have a hands-on approach. This can also leave room for errors and fraud. 

Since the DAOs are completely autonomous, transaction management no longer requires human involvement. All the transactions are properly recorded and managed via a decentralized ledger that has all the records of every single event and activity. 

Hence, the transactions are always transparent, and reliable and are extremely immune to any sort of fraud. Further, this transparency is not only limited to the transactions as every process and activity in the organization is recorded in the ledger that is accessible to every member at all times. 

Decision-Making

Traditional organizations often operate by the bylaws and organizational structure. For instance, in cooperatives, the decisions can be democratic and rely on the majority of votes. However, in a proprietorship, the decisions are taken by the sole decision maker. 

DAOs work on the basis of a code that dictates how every decision will be made, and if any changes are required in that code, the members have to vote as per the code. No human intermediary is required for this voting and the DAO program makes all the announcements. 

Organization Structure

The traditional organizations have a hierarchical structure so, there is a chain of command. On the other hand, DAOs are completely democratic in nature with a decentralized governance framework. 

No single person or entity is the leader of the organization and there is no particular chain of command unless the group approves this. Unless stated otherwise, every partner has an equal role in the DAO.

Do You Need to Register Your DAO?

The short answer is yes! 

If you are establishing your DAO as a business entity that is going to work with other companies, issue tokens, and have a treasury, you have to register it. On the other hand, if you think about having a non-incorporated DAO you will face difficulties in finding investors, contractors, doing cryptocurrency exchanges, etc. 

The non-incorporated DAOs are also exposed to a number of liabilities, such as judicial, tax, and financial crime liabilities. One of the very recent examples was the Ooki DAO vs CFTC (Commodity Futures Trading Commission) case. 

How to Start a DAO: Breaking It Down

How to Start a DAO_ Breaking It Down

Next, we discuss the process of starting a DAO. Depending on the business, the nature of your DAO and location, etc, you might be required to complete some additional steps or documentation formalities. For instance, process to start a real estate DAO might vary from a nonprofit DAO.

The generic process is shared below.

Define the Objectives

Establish the objectives like mission, core values, vision, etc. for your DAO. This will help you build the community and find like-minded people or entities. There can be many types of DAOs based on their intents and objectives. 

Some common examples include: 

  • Protocol DAOs: Focusing on the governance of decentralized protocols.
  • Investment DAOs: Joining forces with the owners of cryptocurrencies focusing on funding startups, new projects, startups, etc. 
  • Media DAOs: Alloe readers to contribute in exchange for native currencies for their labor, such as Forefront.
  • Grant DAOs: Similar to Investment DAOs that assist new initiatives only for DeFi projects, for example, Uniswap Awards.
  • Social DAOs: Facilitate social networks, such as establishing digital democracy for speakers, etc., for example, Blockster.
  • Entertainment DAOs: Offer decentralized entertainment by enabling creators with powerful capabilities, such as Flufworld.
  • Philanthropy DAOs: They are committed to assisting social responsibility initiatives in the Web3 environment, for example, The Big Green DAO.

Once you have established a solid goal and have identified your DAO core mission, you are ready for the next step.

Finding and Building a Community

You will need a thriving and supportive community for your DAO to last and sustain itself. While it can be difficult for beginners, you can leverage social media platforms and online communities, such as X (previously Twitter), Reddit, Discord, etc. 

If you are unable to find a community, you can also create a new headquarters for your DAO in the form of a group chat Discord server, or group chat.

Collecting Funds

Once the members start joining your DAO, you need to start collecting funds as you will need an initial cryptocurrency investment to create the native tokens for your DAO. This can also be done by submitting proposals to venture capital firms or via crowdfunding.

You can also get help from your online community for funding. This is the beauty of working as a DAO. It opens a whole different world of possibilities for your business. To make the community even more interested or inclined to help you, you can provide them incentives for specific tasks.

Encode the DAO Rules

You can create the DAO code in multiple ways such as coding your own Smart Contract, or by using an all-in-one DAO creator tool. You can also hire a developer team to get you through this step. 

Aragon is a popular platform for creating DAOs, which allows you to set up and govern their DAOs on the Ethereum blockchain. So, you can create DAO tokens using Aragon by just having the idea and a cryptocurrency wallet extension like MetaMask.

Once the setup is complete, you can create further rules for token assignments, voting power, etc. If you wish to have a completely customized DAO setup, you have to create your own code which is a tedious and complicated process. The open-source platforms available on the internet can be your help in this regard. 

Since a smart contract is irreversible, we recommend taking caution while creating protocols and reviewing them thoroughly before you finalize them.

Deploying the DAO

Now that your setup is all done and dusted, you have to deploy your DAO LLC that is different from traditional DAO. The expansion and further functioning is as per the rules mentioned in the code. Some good places to start include sub-Reddits, Discord servers, or any other DAOs that you are a member of. 

At this stage, there is no ownership or central leadership in the DAO as everything is now relying on the DAO members and the governing code.

Registering Your DAO as an LLC

While you can incorporate your DAO as any other business entity as well, we recommend opting for an LLC business structure as it is highly flexible and allows you to protect your personal assets from the business entity apart from many other tax benefits.

The State of Wyoming, Delaware, Nevada, and the Marshall Islands allow you to register your DAO as an LLC, while you can establish your DAO as a foundation in Liechtenstein, the Cayman Islands, and Switzerland. 

To incorporate your DAO as an LLC, you can apply online as well as offline as per your choice. The process varies for a US resident, non-US residents, and foreign members, and involves generic documentation formalities, such as obtaining an EIN and ITIN, opening a US bank account, and acquiring a US mailing address.

How Can doola Help?

doola is a comprehensive “business-in-a-box” service provider that offers LLC formation services for DAOs and all other types of business entities. You can put the DAO formation, compliance management, and tax filing on autopilot with doola’s expert team. 

doola is a SPOC service provider for founders from all over the globe when it comes to running an online business in the US. We also offer advanced and targeted service offerings, such as doola Money, bookkeeping, and tax consultation

For more information or to find out more about our services, we recommend getting in touch with our experts and grabbing a free consultation today!

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