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One of the most attractive aspects of the Decentralised Autonomous Organisation (DAO) is that it allows people to vote on decisions that affect them as members of an organisation in a way that is decentralised and democratised. This is because of the transparency surrounding the processes of a DAO, allowing for more visibility and ensuring that every member of an organisation has a say in its future.
But how does a DAO take shape? This article takes a look at the process of forming a DAO by discussing:
To learn more about the history of DAOs, how they work, and some examples of DAOs in practice, read this Learn Crypto article: “What’s a DAO?”
A DAO or a decentralised autonomous organisation is an entity created allow organisations to freely govern itself or control its own affairs – hence the term “autonomous”. In other words, DAO is a decision-making concept that doesn’t need to have someone in charge.
In the world of crypto, a DAO is associated with a governance model backed up by blockchain technology and decentralised finance. It is a relatively new model that has been attracting a lot of attention because of enhanced levels of transparency that is lacking in current governance models.
The DAO concept is composed of a committee that wants to comply with predetermined rules for a common purpose as a way of bringing together people with common interests. The point is that there shouldn’t be one person having control over the whole group or making decisions without the group’s approval. This organisational concept is automated by computer code and is open to anyone who would like to become one of the participating members.
The concept stems from 2015 when Steemit founder Dan Larimer proposed it and later received mainstream attention Ethereum co-founder Vitalik Buterin supported and refined Larimer’s concept. The aspiration associated with the DAO avoids the centralisation of power to enhance democracy and transparency, as we discussed in an earlier article.
What does a DAO look like in practice? Generally, DAOs can be identified through five discernible features:
If you’ve arrived at the decision to create a DAO, it might be that your due diligence concludes that such autonomous organisations are more efficient than traditional organisations and business structures because of their automated and transparent business structures. They run the same way automated software does, avoiding the dependence on the human factor in a position of leadership.
Just as you would when creating any type of organisation, traditional or digital-based, it is important to define your main aims and subsequent goals. Are there very similar to the crypto projects out there using DAOs? Do they facilitate the way you envision how group members might coordinate their pursuit of common goals?
To discover other reasons why you might want to attempt a DAO, read this Learn Crypto article: “What's the benefit of a DAO?”.
Creating a DAO can be a relatively straightforward approach, especially using blockchain apps that use predefined settings. Each day, new projects launch using blockchain and crypto platforms, many of them taking the shape of DAOs. Theoretically, building a DAO is no different from founding a cooperative business model since group members are motivated to invest time and capital for a stake in the future success of the DAO.
Creating a DAO, at least, in the way that most DAOs are created, really just means that you are launching a project that is a self-governing and open-source tool suite, using all kinds of blockchain-based components. Even though each DAO serves different purposes, they do contain very similar components working on a common base.
So before launching headlong into a DAO, it might first be worth taking a look at the different components that make up typical ones.
When a DAO is created, its codes are placed in the blockchain or digital ledger to benefit from features that are typical for blockchain technology. The blockchain records everything that happens within the organisation and represents a chronological chain of information that is configured as a secure, shared, and distributed database. Each transaction and information that occurs within a DAO is safely stored on the blockchain.
In simple words, blockchain is the place where the DAO software lives. For instance, if you build your DAO on the Ethereum blockchain, then your DAO lives in the Ethereum network.
Despite their recent legal connotation, smart contracts are basically algorithms that are executed when pre-determined criteria are met and written in the DAO’s code.
The creators of the organisation create many sets of rules on how the organisation should automatically run and carry out tasks and these are encompassed as smart contracts. For instance, a rule for voting can be that if a proposal receives at least 60% of votes from all its members, then the proposal is automatically accepted.
Thanks to smart contracts, basic rules and DAO governance rules can be established that cannot be changed unilaterally, or in other words, without the vote of the community of members.
Financing governance is an important aspect to think about when establishing an organisation, even for traditional ones.
DAOs use tokens to take care of financing, creating a form of cryptocurrency native to the DAO and using them as rewards and all sorts of incentives. DAO tokens are also used for governance matters, voting, investments, and unlocking other related benefits.
In other words, DAO tokens are cryptocurrencies associated with the project in question. DAO members are either given tokens for their contributions, or have to obtain more tokens to make use of other benefits and to increase their voting influence within the community.
“I, by transacting on your platform and having you take a percentage of my activity, expect some remuneration for that.” -- Sarah Moosvi, aGENDAdao founder
With financing comes the responsibility to manage the funds within a DAO’s structure. This is where the treasury comes in.
For many DAOs, particularly those heavily reliant on funding to continue developing important projects, a treasury is what determines that contributors get paid correctly and in a way that facilitates their work.
Unless a DAO has generous contributors who like giving away funds to new ideas, it can be really difficult to get initiatives off the ground without a functional treasury.
The treasury is a significant segment of a DAO that, if designed well, can really be a great enabler for autonomous organisations.
Consensus protocols are needed in distributed environments to enable participants to reliably conduct trustworthy transactions with one another. It answers the question: “How do I know this transaction is true and can be trusted?”
The consensus protocol of a DAO is based on smart contracts residing on the blockchain it lives on so it might be important to consider the various consensus protocols used by different blockchains before you decide which you want your DAO to live on.
You can read more about this topic in this Learn Crypto article: “Ultimate guide to crypto consensus mechanisms”.
DAO frameworks can be explained as frameworks needed to launch these organisations on the Ethereum network. Think of them as easy templates and tool kits to simplify a DAO launch with pre-set features.
Some examples of DAO frameworks are OpenLaw, Aragon, and Syndicate.
Now that you know what a DAO looks like and you know about its components, let’s take a look at how you can go about creating a DAO.
Before laying down a list of practical steps, it might be useful to note that most successful examples of DAOs began with an organised community-based approach. Long before arriving at the technical process of creating a DAO, your community should already be established, willing, and eager to embark on this process.
Nevertheless, the starting point is to determine what kind of DAO you want to create and to define the core structure of the organisation. Additionally, take note of the fact that such organisations can be built on divergent blockchain networks, yet most today have chosen to set up in the Ethereum network because of its perceived security and maturity.
To define the structure of your DAO, think and decide upon the central parts of your future organisation, such as:
Knowing what your main purpose is and having a clear idea of its structure provide you with a firm foundation to create a DAO successfully from scratch.
The quickest and simplest way to create a DAO is through an established platform or framework, as we discussed in the previous section. Many DAOs use Moralis or Aragon because of their basic code templates or Aragon.
For the sake of simplicity, this article will presume this approach to list the steps on how to create a DAO. They should work in very similar ways whether you choose Aragon, Syndicate, or Colony.
DAO tokens’ pricing and supply are important concerns for anyone who is interested in creating a DAO or getting to know how a DAO actually works. Each creator should think of a suitable pointer for token supply and set out the demand running instead of just putting down a random value of the initial supply of coins. Token allocation is also significant since the DAO community should be incentivised with rewards while holding adequate funds in the DAO treasury.
After finalising the supply of DAO tokens and allocation, establishing a DAO treasury is practically the final step before starting to run a DAO, as it is the requirement for secure management of funds within the DAO infrastructure. This is also when you decide how your treasury should allocate funds. All in its own DAO tokens? Stablecoins for more predictable value? Bitcoin for long-term potential?
Owing to this, it might be useful to add treasury management tools to your DAO in order to circumvent unilateral decisions and spending of capital. Some noteworthy tools include Superfluid, Utopia, Multis, Parcel, Gnosis Safe, and others.
Note and disclaimer: This article section does not constitute legal advice. It merely discusses ideas to complete the creation of your DAO with a legal overview. There is no one-size-fits-all solution for DAOs, along with the fact that a proper legal framework still hasn't been created. An ideal legal framework would allow DAOs to operate in an entirely decentralised manner including limited liability and simple taxation programs.
Creating any type of traditional organisation involves certain legal activities and registration. But the DAO is still a new concept, with its decentralised structure and automated operations raising complicated questions regarding the corporate status, determination of applicable law, and other matters that cannot be explained adequately using classical legal theories.
In most states and jurisdictions, a new legal entity must be registered and pay filing fees in fiat currencies. How that affects an organisational concept that may include multiple jurisdictions, is unclear at the moment.
In short, the law has not found a definitive answer to unilaterally regulate DAOs.
Nevertheless, there might be three possible solutions to ensure a DAO's legal framework, specifically in relation to US territories. Each option has its own benefits and drawbacks, specifically in relation to the legal qualification of tokens and subsequent requirements and consequences that may majorly differ in multiple jurisdictions.
The first option, used often within the DeFi environment, is about not setting up a legal entity in order to be completely decentralised. This doesn't mean at all that such DAOs operate outside the contemporary legal framework, however, since most jurisdictions treat such entities as general partnership.
Hence, even though you don’t register your DAO, you can still own assets, employ people, sue, and be sued. Not registering your organisation can bear significant implications for your DAO token. For example, the SEC stated that the greater an organisation's decentralisation, the less likely the native tokens would be considered securities.
The second possible option includes setting up an organisation with a corporate liability wrapper to safeguard the community members. This is a traditional and good option for DAOs that aim to operate in multiple jurisdictions and give away a bit of decentralisation.
Since we are mostly referring to the US due to its legal framework and market being most crypto-friendly, this option is a decent option for decentralised autonomous organisations that want to operate in the US.
The third idea refers to setting up a DAO as a foundation. A foundation can be defined as a legal entity with legal capacity created by one or more founders to permanently fulfill a pre-determined purpose with the aid of assets dedicated to the foundation. The DAO structure appears to be quite easily packed into such a foundation's legal construction.
Entirely decentralised autonomous organisations would have problems creating a foundation due to legal boundaries, but there are interesting parallels between DAOs and foundations in terms of structure, a high level of autonomy, and a permanent purpose.
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