How to make a good DAO tool?

Author: p.mirror.xyz

Compiled by: The SeeDAO

Nowadays, DAO tools are all the rage.

/Left: Saving $10K for the kid's college fund

/Right: Investing $10K in the latest DAO tool startup

/Those coming to ETHDenver are either investors or working on DAO tools

/One must be true

But there are definitely some challenges.

/Hundreds of entrepreneurs are developing DAO tools, what is their biggest challenge?

/There are no mature DAOs yet, and no one knows how to organize, govern, and incentivize themselves. Everything will be completely different in a year or two.

/So, no one knows what the hell to do.

/We need more DAOs, not more DAO tools.

/Current state of DAOs

/Our ship is leaking.

A bunch of people are saying random things, but no one is coming to fix the hole.

I am a member of multiple DAOs, developing DAO tools at Mirror, and have closely collaborated with DAO operators over the past year. Based on these experiences, I will share some thoughts on DAO tools in this article.

First, let’s look at some challenges.

01 "DAO" is not a market

Saying you are developing DAO tools is like saying you are producing tools for businesses; it means nothing. There are many types of DAOs now, including protocol DAOs, social DAOs, NFT player DAOs, service DAOs, donation DAOs, and so on.

Therefore, the first step in developing DAO tools is to clearly define the target audience.

02 The needs of DAOs vary

Most DAOs share the same core components:

• Funding mechanism to launch a treasury and issue memberships. Usually done through crowdfunding, NFT airdrops, or token sales.
• Multi-signature for storing assets and authorizing transactions, typically using the Gnosis Safe platform (if built on Ethereum).
• Group chat for member communication, usually on Discord or Telegram.
• Governance processes for strategic decisions, such as how to diversify treasury assets, compensation plans, organizational structure, etc.
• DAO operations team to handle contributor onboarding, payroll, treasury management, marketing/communication liaison, etc.

However, depending on the type of DAO you are serving, they are likely to prioritize different functionalities, which will affect the product roadmap. Here are a few examples:

Protocol DAOs prioritize security and transparency. For key activities like governance, protocol DAOs often prefer on-chain protocols rather than just a UI written into a database. Protocol DAOs have treasuries worth tens of millions, some even billions. Since these are decentralized organizations, the redistribution of funds for investments, compensation, donations, etc., requires security, transparency, and automated smart contracts. Building a protocol DAO requires a highly technical team capable of delivering code in a high-confrontation and high-risk environment.

Social DAOs prioritize the activity level of communication among members. Whether they like it or not, Discord is currently the preferred tool for social DAOs. However, many DAO tool projects are trying to make token ownership a barrier to chat functionality, aiming to build a "web3 native Discord." I don't believe a project can achieve sufficient differentiation by setting a token barrier for chat functionality, as Discord already does this well and has strong network effects. Instead, I think the focus should be on developing single-user tools that are useful for DAO members (such as on-chain activity subscriptions, NFT airdrop tools, customized governance products, contributor directories, project updates via subscriptions and email pushes, etc.). First, aggregate a large number of DAO members with single-user tools, and then gradually introduce social features like messaging, social graphs, and notifications to build a network that can eventually compete with Discord.

NFT Player DAOs prioritize treasury funding mechanisms, governance tools for investment decisions, and facilitating fund allocation. Most NFT player DAOs on Ethereum use Gnosis multi-signatures to protect their crypto assets. The opportunity here is to develop a social application that makes it easy for players to collaborate and implement an abstraction layer on top of Gnosis multi-signatures for automated fund allocation. For example, community members vote on a governance proposal that states: buy when the Squiggles floor price is 5 ETH. If the vote passes, the tool starts queuing, and transactions meeting the conditions within a specified time are automatically submitted. That would be cool. The Gnosis SafeSnap module makes this easier to execute. As we see with financial flash mobs like Constitution DAO, Mirror crowdfunds, and PartyBid, there is a rapidly growing market interested in collective ownership of blockchain assets; they just need tools that meet specific needs.

Developing generic DAO tools is very challenging because different DAOs prioritize different functionalities. Therefore, people need to narrow their focus, become the leading solution for specific use cases, and then expand.

Here’s a good layout overview showing the current DAO tools for specific scenarios, which can be used for inspiration.

03 There is currently no clear business model

If your DAO tool is a protocol (e.g., a smart contract deployed on a blockchain network), then the business model is obviously on-chain transaction fees. But most DAO tools are just UIs written into databases. For these, there is currently no clear business model.

You can integrate Stripe (similar to PayPal) to charge transaction fees in fiat currency, but many DAOs are not registered companies and do not have bank accounts, which may limit the potential market size. Another downside of charging transaction fees in fiat is that it does not generate on-chain revenue, ultimately limiting your ability to deploy protocols, issue tokens, and grant ownership to community members. This is a long-term risk; if you don't start with the right technical and cultural foundation, it will be difficult to integrate later.

Although there are currently no best practices, DAO tools can monetize in several ways, such as charging monthly fees in USDC, NFT subscriptions, or tool tokens.

I believe the lack of a clear business model for DAO tools is a short-term issue that will eventually be resolved. Especially as more activities and computations move to L2 and low-fee blockchains, this will allow projects to profit creatively from on-chain activities.

04 There are only a few legitimate DAOs fighting over scraps

While many agree that DAOs have long-term potential, the reality today is…

/We are really in the very early stages

There aren't many legitimate DAOs yet. Most DAOs are just for fun and don't really want to become long-term projects. Whenever a new DAO tool is released, you usually only see the logos of a few familiar DAOs in the customer showcase on the login page. I still think this is mainly a short-term issue because as launching, managing, and scaling DAOs becomes easier, this problem will eventually be resolved.

In any case, if you are developing a DAO tool right now, you should think deeply about your marketing strategy. This may include having well-known DAO operators on the founding team, securing investments from high-profile DAOs and DAO operators, establishing business development partnerships, and offering token rewards.

Once you have secured an initial group of target DAOs and developed a product that keeps them highly engaged and retained, it will naturally make sense to shift your focus to features that make it easier for the types of DAOs you care about to launch. This way, you can expand your market size rather than just increasing revenue from a limited customer base.

Despite the challenges of building DAO tools, I still believe there are plenty of opportunities if you think deeply. Here are some upper-level guiding principles I have witnessed as viable:

05 Start with services

Every DAO tool is competing for a few DAOs, so you need to have your own distribution advantage. One of my favorite strategies is to start by serving different DAOs, allowing you to accumulate expertise in specific areas, build relationships with core teams, and eventually productize your services. A great example is Llama DAO.

They started as a small team submitting governance proposals related to treasury management for top DAOs like Uniswap, AAVE, Gitcoin, and FWB. Soon, they became the go-to experts in treasury management. They also built a community of high-quality contributors and established deep relationships with all the top protocol DAOs. Now they are productizing their services with their own protocol. During the service provision, participate in DAO governance forums, contribute to working groups, apply for grants, execute bounties, submit pull requests, create Dune dashboards, publish proposals, and do everything possible to start building relationships and developing expertise to learn how to productize services.

Also, don’t become the type of DAO tool founder shown below.

/Don't ask:

A woman's age

A man's salary

Which DAOs the DAO tool founders participate in

06 Dominate a niche market

As mentioned earlier, the needs of DAOs vary. Depending on the type of DAO you are targeting, they will have different requirements regarding protocols, interfaces, feature sets, marketing, and business development. Rather than developing mediocre products for a broad early market, focus on developing the preferred product for a specific area. For this, consider your vertical and horizontal positioning.

Vertical focus refers to specific types of DAOs (e.g., protocol DAOs, social DAOs, NFT player DAOs, etc.). Horizontal focus refers to specific tools applicable to different types of DAOs (e.g., governance, treasury management, payroll, contributor onboarding, etc.).

First, I would develop something at the intersection of vertical and horizontal (i.e., governance for protocol DAOs or contributor onboarding for social DAOs). Consider this your strategic starting point. Your first milestone is to become the preferred product in this market. If your DAO tool is a networked product (e.g., social applications, marketplaces, collaboration tools), focus on liquidity rather than scale early on.

In this context, liquidity refers to the quality of the user experience when using the product. In networked products, liquidity often depends on the number of other relevant users using the product. For example, if you are developing a DAO social application, the quality of the experience depends on whether people interact with the content you post and whether there is enough interesting content to interact with. Collaboration tools are similar to the above situation.

A recent example is Clubhouse. It started with just one audio room where everyone was a designated speaker, mainly consisting of founders, operators, and investors from Silicon Valley. Every time someone opened the app, the founders of Clubhouse would receive a Slack notification, and one of them would immediately open the app to greet them in the room. As more people joined, there were usually at least a few relevant people in the room to chat with. This created liquidity and ensured that most people had a good experience. Over time, Clubhouse distinguished between speakers and listeners, allowing everyone to create their own rooms and expanded beyond Silicon Valley to other networks. Many networked products initially adopted such restrictive measures to drive liquidity (e.g., Facebook and Tinder targeting college students, Amazon starting with books, Uber and AirBnB expanding city by city, etc.).

Most networked products do not need to be very large early on; they just need a minimal viable network in a specific market. This way, early users will have a good experience. Therefore, carefully consider your strategic starting point, liquidity, what drives it, and how to quantify it before scaling.

/DAO tools should be more like multiplayer online games rather than companies offering SaaS (Software as a Service) models

After that, you can scale by providing relevant tools and/or distributing them to different types of DAOs.

07 Focus on retention and business development

Once you define your initial market and the factors driving liquidity, you can start thinking more deeply about your product and distribution.

On the product side, you should focus entirely on improving existing features and adding new ones to keep your initial group of users and DAOs frequently interacting with the product. If they continue to use your product, that's great! How is their engagement? How does it compare to other products? If it's not good, are they using other products? Why? Do they need new features? Are existing features not working? Have they switched to any other products for this use case? If not, maybe it's not a core issue for them. Observe customer behavior, collect feedback, and understand the broader market. Additionally, consider the levels of product engagement and establish engagement loops so that each user interaction leads to a) further future engagement, and b) more engagement from other users.

/Talvel's engagement levels

/Level 3 Self-sustaining: User engagement with the product creates a positive feedback loop.

/Level 2 User retention: The product should get better with use to retain users through increased sunk costs.

/Level 1 Increase engaged users: Focus on increasing users who can complete core actions.

/Engagement loop

/Social applications:

How can one user's engagement trigger more engagement from other users?

/Tool applications:

How does current engagement in the application trigger future engagement?

/Organic, natural use cases are more popular than notification reminders, which can only serve as a facilitation method.

Often, engagement loops are driven by social features. Features like following charts, feeds, profile pages, notifications, etc., are scalable ways to keep users coming back.

This is an example of a social application engagement loop.

/User creates content -> Others see the content -> Generates social feedback -> Content creator receives notifications (loop back to the first step)

A more detailed version looks like this.

/Social feedback loop - detailed version

/User creates content, user submits, calculates how many social contacts, content is notified, recipient clicks to open content, recipient logs into the network, recipient provides feedback, creator receives notification, notification is opened while seeing click rates, creator reads notification (loop back to the first step)

Once the core engagement loop is planned, identify which steps need to be prioritized, iterated, and add other layers of engagement loops to strengthen your network. Also, consider how these features can be developed to optimize the composability of the entire Web3 ecosystem. For example, storing content on decentralized storage protocols and encoding social graphs as NFTs. This approach allows you to create a protocol that can integrate with other project use cases, contributing to the growth of both the ecosystem and your own protocol.

On the distribution side, joining a DAO is more like selling to enterprise customers rather than a bottom-up product promotion model. This is because most DAO tools today are coordination tools. Whether for governance, payroll, communication, transaction management, etc., the tool usually requires support from specific working groups or several core team members to be adopted. Therefore, start by locking in two or three top DAOs in your defined market, connect with decision-makers, and work closely with them. If you meet their needs and satisfy them, they will recommend the next batch of DAOs, and you can start to grow rapidly. Remember, in the early stages, liquidity is more important than scale.

08 Expand the market

At the highest level, there are two ways to grow DAO tools:

• Increase the average revenue per DAO
• Increase the number of DAO customers

You can increase the average revenue per customer by raising prices/commission rates, offering more features, and driving higher engagement. However, given the limited number of DAOs in the current market, if you do not establish a system to onboard and retain DAOs at scale, you may quickly encounter revenue ceilings.

In the early stages, you can rely on relatively manual methods for business development. Over time, you will need to invest in more scalable strategies, such as token incentives, developer tools (like SDKs, APIs, documentation, subgraphs, etc.), donation projects, and ecosystem investments. Each of these growth strategies is worth discussing separately, and I will elaborate on them later. In web3, one of the best growth strategies is to launch well-operated DAOs, which we will discuss in the next section.

09 Become a DAO

One of the new capabilities of Web3, blockchain, and crypto-economic networks is that they give rise to new internet-native organizational structures. This is essentially a DAO.

/Today's corporations:

Registration -> Jurisdictional legal entity

Finance -> Financial statements regulated by certified public accountants

Value capture -> Stored in databases and enforced by legal contracts

Governance -> Shareholders and paper ballots

/DAO:

Registration -> Smart contracts deployed on a global P2P network

Finance -> Distributed ledger secured by miners and validators

Value capture -> Programmable tokens enforced by smart contracts in personal wallets

Governance -> Token holders and on-chain transactions

The best DAO tools will become protocol DAOs. The goal of protocol DAOs is to create a self-sustaining protocol (defined by G, hats off!). Another apt description of this ultimate state is a superstructure (a superstructure is a crypto protocol that can run indefinitely for free, without maintenance, interruptions, or intermediaries).

A self-sustaining protocol DAO includes the following elements:

• A smart contract-based protocol with a value capture mechanism (e.g., transaction fees)
• Tokens representing governance rights and equity in the protocol
• Governance processes for updating the protocol
• A developer ecosystem that builds valuable products/protocol integrations
• Community initiatives to maintain DAO member engagement and activate new members (e.g., working groups, community mobilization, onboarding meetings, offline events, hackathons, etc.)

I recommend studying protocol DAOs like Yearn, Uniswap, Curve, AAVE, Compound, and Index Coop to understand how they operate in practice. Read their documentation, use the protocol through the user interface, dive into governance forums, check their GitHub, hang out on Discord, join working groups, apply for grants, execute bounty tasks. Pay attention to the common patterns these DAOs adopt and understand the frameworks they use to make strategic decisions (deep diving into governance forums is very helpful for this). Most of these projects follow the guidance of the "Progressive Decentralization Handbook" to become DAOs.

The idea of Web3 is to decentralize power and grant ownership to a broader set of stakeholders. Becoming a DAO is the best way to achieve this. In future articles, I will share case studies of leading projects that have evolved into protocol DAOs.

While there are certainly challenges in developing DAO tools today, if you narrow your focus, become the primary solution for specific use cases, and then expand, there are still plenty of opportunities. Take the time to find market gaps, focus on liquidity rather than scale in the early stages, and gradually push for decentralization.

So, is it just for fun?