Why is there a surge in DAOs? What challenges do they still face before maturity?

Author: Kyle, Babyt

This article will explore the reasons behind the explosive growth of Decentralized Autonomous Organizations (DAOs), while highlighting the challenges and opportunities associated with building a DAO ecosystem in the long term.

But first…

The "Gold Rush" Triggered by Gold Nuggets in the River

On January 24, 1848, carpenter James Wilson Marshall from New Jersey discovered floating gold nuggets in the American River at the base of the Sierra Nevada near Coloma, California. He was not looking for gold at the time: Marshall was there to build a hydraulic sawmill for John Sutter, a Swiss immigrant born in Germany who established the colony that would eventually become Sacramento.

Gold-seeking miners

Marshall later described his significant discovery, "It made my heart beat fast, for I was sure it was gold."

Marshall and Sutter tried to keep the gold a secret, but to no avail. By mid-June, nearly three-quarters of the male population of San Francisco had flocked to the gold mine. Throughout 1849, miners traveled across the United States in search of opportunities and wealth they thought they would never see. By the end of 1849, California's population had quadrupled year-on-year, estimated to reach 100,000 people.

Unfortunately, the basic infrastructure at the time could not develop quickly enough to accommodate the population growth in the area—overcrowded mining camps led to chaos, banditry, violence, and more. The region was essentially undeveloped, resulting in little to no infrastructure for miners to eat, wear, and live. Creative entrepreneurs found patchwork solutions to the infrastructure problems—such as importing small prefabricated houses from China.

The last remaining Chinese prefabricated house imported to support the gold rush is the Double Springs Court. This is pixelation in real life.

The Prosperity of DAOs

In the past 18 to 24 months, we have seen a surge in the creation of DAOs, similar to the gold rush of the mid-1800s. Just as hopeful miners traveled thousands of miles in search of opportunity, crypto/web3/DAO builders and enthusiasts believe a better world awaits.

In my view, there are four main reasons for the prosperity of DAOs:

1. Mature Layer 2 (L2) Solutions

L2 solutions are snippets of code that run on top of Layer 1 blockchains (like Bitcoin, Ethereum, etc.). These are core infrastructure components that can offload the work of processing transactions from the Layer 1 chain. Because these transactions are processed "off-chain," they offer higher throughput, faster confirmation times, and lower gas fees.

All of this provides a smoother end-user experience for the DAO ecosystem: from creating the DAO itself to voting on specific proposals to managing funds.

2. The COVID Effect

The depression and loneliness brought on by lockdowns led many to seek digital communities to fill the void. The extra time at home and new ways of working also forced people to question their relationship with work.

Both effects prompted individuals to seek communities that shared their values and vibes. It led employees to question what they were doing, how they were doing it, and who they were working with. All these pain points guided people into the DAO ecosystem.

3. The Crypto/Web3/DAO Narrative Going Mainstream

With powerful VC firms launching crypto media machines, web3-based publishing platforms giving a voice to enthusiasts, and diverse content creators continuing to share and educate the broader community, we have made significant progress in comforting the masses with what crypto/Web3/DAOs are and how to get involved.

4. DAO Operating Systems

I believe the final major puzzle piece explaining the DAO explosion is the maturity and adoption of "DAO operating systems," a term coined by Coopahtroopa in his DAO Landscape breakdown post. Platforms like Aragon, Daostack, and Daohaus allow individuals to create and manage DAOs with the click of a button—no coding skills required for DAO operators.

Foundations for the Future

Given the novelty of decentralized internet-native organizations, many DAO founders and operators are not well-prepared for the long term. The rapid growth of the DAO population has left little time for the development and maturation of foundational DAO tools and best practices. This sentiment is best captured in Julia Rosenberg's tweet:

Fortunately, this did not lead to the robberies and violence faced during the gold rush. As the ecosystem learns and matures together, it primarily leads to chaos and overwhelmed DAO contributors and operators having to face some degree of pain.

To expand, I believe DAO founders and early DAO contributors have many balancing acts to consider when thinking about how to achieve their long-term goals:

• Achieving product/market fit and penetration
• Scaling DAO operations through tools and processes
• Gradually decentralizing over time

A triangle attempting to explain a concept in my mind.

Given the current maturity of general product management, achieving product/market fit seems to be the most straightforward part of the DAO equation. There are some best practices outlining how to iterate, test, and learn to find product-market fit for products, services, communities, open-source software, and more. Not every DAO can achieve product-market fit, but at least there are precedents and scripts to reference.

The biggest challenges facing core DAO teams include:

• Finding tools and processes to support current state DAO operations
• Laying the groundwork for long-term decentralization plans

Even with a thriving environment of DAO tools supporting core functions of DAO operations, many of these solutions do not provide the composability needed for gradual building and decentralization.

Core decentralization themes such as core team engagement, asset management, community participation, and token distribution need to be modularly woven into the structure of DAO tools to support core functional areas and DAO decentralization goals.

The most successful and widely adopted DAO tools in the future will support DAOs in their journey toward decentralization through frictionless and intuitive experiences.

Conclusion

The explosive growth of the DAO ecosystem showcases the collective enthusiasm and energy. The promises of flexibility, autonomy, and ownership empower DAO founders and contributors to continue building their products and communities to achieve their goals.

However, the collective community should also recognize that the tools and related infrastructure necessary to allow DAOs to scale and evolve toward decentralization do not yet exist. If these issues are not addressed, core DAO teams, contributors, and communities will continue to feel frustrated, lost, and overwhelmed as they attempt to advance their products, services, and protocols. The community has a responsibility to continue effectively discussing, debating, and pushing for better solutions to meet the unmet needs of core DAO operations and decentralization goals.

Thanks to those who have had a significant impact on this work and continue to shape my thoughts daily: Nichanan Kesonpat, Jesse Walden, Chase Chapman, Samer Hassan, Jacob Phillips, Julia Rosenberg, Amphiboly, Christian.