Co-founder of FWB: Discussing the evolution and future of DAOs with SubDAO as an example

Original author: Cooper Turley, Co-founder of FWB
Translated by: 0x22D, Rhythm BlockBeats

A DAO is a network community with a shared bank account and equity structure, and many predict that DAOs will eventually be larger than any country, company, or existing entity.

So how will this happen? How do DAOs grow to such a massive scale?

Through SubDAOs.

In this article, I will take you into SubDAOs and how DAOs grow into the digital nations outlined for them by Web3.0.

The Current State of DAOs

Most DAOs are structured like this:

• Treasury ------ used to manage the DAO's bank account, commonly Gnosis Safe.
• Voting ------ used for proposals and governance, commonly Snapshot.
• Chat ------ used for community discussions, commonly Discord channels with token-gated access plugins like CollabLand or Guild.
• Blog ------ used for communication with the public, commonly Mirror.

DAOs typically have a primary asset that represents governance and ownership within the community. This asset is mainly fungible tokens (FT), but we have also seen some DAOs start using non-fungible tokens (NFT) as their primary asset.

These core mechanisms collectively lay the foundation for ownership, allowing DAOs to evolve from a small experiment into a fully self-sustaining organization.

As shown in the image below, there are many types of DAOs.

DAOs are native crypto organizations, just as there are no shortage of limited liability companies or cooperatives, there will not be a shortage of DAOs.

All DAOs share some common goals:

• Attract new members.
• Create maximum value for the community treasury.
• Ensure governance plays a meaningful role in decision-making.
• Create a market for their tokens to value ownership.

Most DAOs have hundreds of members, a community treasury with a certain amount of funds, and a secondary market for their tokens. Therefore, the price of their tokens is directly related to the value of the community treasury.

DAO Token = Net Asset Value of Community Treasury x Community Sentiment

For the most powerful DAOs, the trading price of their tokens will always be higher than the net asset value of the treasury.

As communities seek to attract new members and maximize the value of their wealth, we enter a new incubation phase.

The Future of SubDAOs

SubDAOs are DAOs created or derived from a ParentDAO.

As DAOs grow, new groups or working teams will gradually begin to operate independently from their original purpose. Just like company expansions, new departments, teams, and focuses will be brought into the DAO's orbit.

Instead of controlling all activities under one roof, SubDAOs can provide a medium for working groups to create their own foundations and ownership structures—while linking value back to the original DAO.

Here are some early examples of SubDAOs in Web3.0 today:

FingerprintsDAO - theRAWdao

Fingerprints (an NFT collector DAO) incubated RAW DAO—a photography-focused DAO conceived through Twin Flames PartyBid. All voting supporters received RAW tokens, while Fingerprints DAO retained 12.5% of the RAW supply in its treasury.

PleasrDAO - ownthedoge

After purchasing DOGE NFTs, PleasrDAO (a cultural collector DAO) split them to launch DOG tokens. As DOG appeared on the secondary market, a new DAO and working group were established to maintain and grow the community. PleasrDAO retained 55% of the DOG supply in its treasury.

Seed Club - mCLUB

Seed Club (a social token incubator) launched mCLUB—a DAO that provides funding for creators on Mirror. After a successful crowdfunding campaign, mCLUB created its own team and infrastructure, while Seed Club retained 15% of the MCLUB supply in its treasury.

In these three examples, DAOs with their own tokens (PRINTS, PEEPS, CLUB) launched a new token (RAW, DOG, MCLUB) to represent ownership within the SubDAO.

Next, I want to discuss why this is important.

How DAOs Evolve

SubDAOs create value by scaling the DAO.

DAOs should own a portion of all their SubDAOs, managed and placed by the community treasury.

Reflecting on the goals of DAOs we mentioned earlier:

• Attract new members ------ SubDAOs achieve better expansion by creating multiple sub-tasks and teams.
• Maximize the value of the community treasury ------ SubDAO tokens increase the net asset value of the treasury.
• Ensure governance plays a meaningful role in decision-making ------ SubDAO tokens increase the likelihood of governance within the DAO.
• Create a market for their tokens ------ SubDAO tokens create additional demand for DAO tokens.

DAOs should retain 5-15% of SubDAO tokens.

Additionally, the distribution of benefits from SubDAOs should always favor DAO members, whether through airdrops or whitelist opportunities for early funding and profit.

Creating SubDAOs

Each SubDAO will differ from the next.

Not all working groups within a DAO are suitable to become SubDAOs; there are several principles to judge:

• Staff ------ Are there full-time contributors in the working group?
• Profitability ------ Can the working group generate sustainable income?
• Novelty ------ Is the working group distinctly different from the DAO?
• Sustainability ------ Can the working group survive on its own?

If the answers to these four questions are affirmative, then you may have a SubDAO.

Keep in mind that some working groups are better off not becoming SubDAOs, as many backend functions are not profit-oriented but serve an important purpose for the DAO. Similarly, time-limited projects (like NFT airdrops) and one-off bounties (like offline events) are better off as core components of a broader DAO.

How to Create a SubDAO

To create a SubDAO, follow the steps shown below:

1. Create ------ Designate a team leader and draft a proposal to create the working group.
2. Funding ------ Work with the team leader to request funding from the DAO in the form of USDC and DAO tokens (usually at a 50/50 ratio).
3. Staffing ------ Provide the team leader with the ability to onboard contributors.
4. Sales ------ Allow the working group to prove its value by generating income for the DAO.
5. Launch Tokens ------ Once the income generated by the working group exceeds the initial funding received, designate a DAO member to work directly with the team leader to create the new SubDAO.
6. Distribution ------ Mint new SubDAO tokens, sending a portion of the total supply directly to the DAO—this is subject to a cliff vesting period. The remaining SubDAO tokens are distributed to contributors and the SubDAO's community treasury.

When distributing new tokens, income should be allocated between the DAO treasury and the new SubDAO treasury.

After a period of time, 100% of the income should flow to the SubDAO's treasury—allowing the SubDAO to fully own its governance framework and onboarding framework. Then, the SubDAO can choose to buy back SubDAO tokens or DAO tokens—benefiting both in the process.

At this point, the DAO owns the SubDAO, while the SubDAO itself also owns a portion of ownership and benefits that better incentivize full-time contributors within the working group.

As SubDAOs grow, both the SubDAO and the DAO benefit. If a SubDAO fails, the liability is limited to the working group and its members, rather than the entire DAO.

A Year of Belonging to (Sub)DAOs

The trend of DAOs is to become increasingly niche over time.

Joining 100,000 members overnight does not guarantee success for a DAO; success comes from creating cultural spaces and phenomena that continuously generate value specifically for its members.

SubDAOs provide a scalable growth solution for all DAOs.

I hope DAO operators embrace the independent demands; a DAO does not mean accommodating everything under one roof.

As the scale of DAOs expands, SubDAOs play a crucial role in maintaining the core community culture. If you are a member of a DAO, ask your community what role SubDAOs will play in the future of the organization.

For those looking to join their first DAO, here are some recommended entry-level DAOs:

@FWBtweets ------ Culture
@forefront__ ------ DAO
@seedclubhq ------ Community
@developerdao ------ Developers @banklessDAO ------ DeFi @songcamp ------ Music
@KrauseHouseDAO ------ Sports
@brtmoments ------ Offline NFT
@protein ------ Brand
@pubDAO ------ Media @waterand_music ------ Research

Keep a close eye on the next generation of SubDAOs; you are likely at a critical juncture in their formation.