Key Lessons Learned About DAO: Creation, Practice, and Culture

Author: Linda Xie

Compiled by: Translation Guild Gink, The SeeDAO

Decentralized Autonomous Organizations (DAOs) are groups organized around a specific mission. DAOs collaborate through a set of shared rules executed on the blockchain. A DAO itself is merely a specific organizational structure used to control shared economic resources and the protocol rules of the organization, so the way each DAO operates can vary significantly. Some DAOs are closed (translator's note: with strict entry barriers), while others are open, allowing anyone to join and contribute. In some DAOs, active contributors can receive compensation for their work from the DAO.

DAOs have always been one of my favorite areas in web3. People from all over the world can come together to work towards a common mission. This feature is particularly exciting, especially when this group cannot form under traditional corporate structures due to various barriers (such as location, age, part-time work, non-traditional education/work experience). For more information on the developmental potential of DAOs, please see my Beginner's Guide to DAOs (https://linda.mirror.xyz/Vh8K4leCGEO06_qSGx-vS5lvgUqhqkCz9ut81WwCP2o).

This article covers some of my key takeaways from working in DAOs. Most of these insights come from my experience as a representative in Gitcoin DAO, but I have also participated in and observed many other DAOs. I believe there is no perfect DAO structure, as each DAO has its own culture, so what one DAO holds as a standard may not be useful for another. The following content reflects my personal experiences and viewpoints, and others may have different opinions. The entire industry is also continuously iterating, trying to figure out what works and what doesn’t.

When founding a DAO:

• Clarify the mission of the DAO. A clear mission is crucial for maintaining a diverse and evolving community like a DAO, ensuring that the consensus among community members remains aligned over time and guiding decision-making. For example, if someone submits a funding proposal that exceeds the DAO's capacity, the DAO should be able to easily reject this proposal. However, if the DAO's priorities are unclear, it will be very challenging for the DAO to focus on its mission.

• Consider gradual decentralization. While many DAOs intend to fully decentralize operations and decision-making, placing a community into a completely decentralized DAO structure without guidance or leadership often leads to a lack of efficient communication and collaboration. The founding team typically knows the situation best, so they are the most suitable candidates to set the direction for the DAO, gradually empowering a broader community over time.

  For example, the newly established Optimism Collective has a working charter that defines the role of the Optimism Foundation as a steward in the early stages, as well as how the foundation will help guide the community and plans to decentralize this role over time. 3. The Optimism Foundation will serve as the steward of Optimism and its early governance model. The Optimism Foundation, registered in the Cayman Islands, is responsible for guiding the growth and development of the Optimism Collective. The foundation will do the following through its board:

• Facilitate and oversee collective governance.

• Allocate treasury assets to fund public goods, incentivize active contributors in the Optimism community, or otherwise promote the foundation and the Optimism community.

• Amend this working charter; and

• Take other measures conducive to its stewardship role.

• The foundation will undertake all these responsibilities in a manner consistent with the mission of Optimism and is committed to gradually decentralizing this role over time.

Execution:

• Smaller working groups are more efficient. Not all DAO members need to vote on every decision, big or small, within the DAO. It is impossible to keep up with everything, and it wastes everyone's time, especially as the DAO scales. Therefore, I appreciate the delegation model used by DAOs like Gitcoin and ENS, which allows token holders to delegate their voting power to someone or a group that can dedicate the necessary time to make informed decisions.

  Similarly, the delegated representatives do not need to be involved in every aspect of the DAO's daily operations. Representatives will not become experts in every field, such as financial investment, technical development, economic design, etc., and may not care about highly specific review details. Establishing smaller working groups that can focus on a specific area will be more efficient.

  For instance, in Gitcoin DAO, each quarter, working groups share their results from the previous quarter and the budget needed for the next quarter, after which representatives vote on the proposal. ENS DAO uses Orca to advance work. Orca is a governance tool designed for DAOs, specifically for small working groups to collaborate, with each such group in Orca referred to as a "pod."

  Another example is Aave V3, which allows whitelisted address holders to update parameter settings without needing to go through governance voting. However, governance voting will have the power to revoke these whitelisted addresses or add new ones.

Gitcoin DAO workflow for requesting budgets (Image source: Annika Lewis)

• Explore ways to establish accountability. The participation of each representative and working group contributor in a DAO is crucial. Gitcoin DAO is experimenting with representative health cards to measure participation, which track forum activity, voting participation, and more.

• At the same time, Gitcoin DAO is building workflow health cards to begin quantifying contributions within the DAO, so that some contributors in workflows can become more influential representatives by participating in the DAO. These metrics should improve over time to ensure their rigor and fairness, thereby reducing misconduct, such as voting merely for the sake of voting without considering relevant knowledge or expertise.

  A representative evaluation system can help DAO members decide how they want to allocate their governance power. Sometimes people may simply delegate to someone they know, but that person may not be an actively participating representative. I am also open to the idea of representative election cycles, which could serve as a way for people to gradually exit the DAO when they no longer wish to continue working, prompting representatives to consider whether the DAO is an organization they want to continue investing time and energy in.

• Discuss incentive structures. When members or representatives need to make significant contributions or sacrifices, the compensation structure should be openly discussed. Not everyone can afford to work part-time for free in a DAO, so they should be compensated for their work. In a model where representatives are delegated, I believe all major representatives should at least receive compensation for the transaction fees incurred while voting on-chain and submitting on-chain proposals. This can provide relatively equal participation opportunities for each representative. Ideally, the DAO will also strive for standardization of compensation mechanisms to ensure that it does not underpay or overpay salaries.

• Plan for the long-term sustainability of the DAO. Consider diversifying the DAO's treasury funds, whether through a round of public fundraising or converting funds into more stable assets like USDC or DAI (for example, Forefront's treasury fund diversification public fundraising). The cryptocurrency space is prone to volatility, and, like companies, it is essential to ensure that the DAO can operate long-term. This requires strict oversight of expenses from the DAO, especially recurring costs that do not have clear funding replenishment.

Culture:

• Cultivate a culture that can comfortably say "no" and engage in difficult conversations. Without a CEO who can act as the final decision-maker and quickly say no to things that do not align with the company's goals, DAO members and representatives bear the responsibility of safeguarding the DAO's resources (time, attention, treasury, etc.). When anyone can initiate funding proposals, the DAO treasury can quickly spiral out of control.

• It is challenging to say "no" when working with many friends and respected individuals; when proposals request resources for projects that do not serve the DAO's best interests, the entire discussion process can become difficult. Therefore, it is essential to cultivate a culture of saying "no" early on, where everyone understands that decisions are made for the best interests of the DAO, and that refusal is not directed at a specific individual or motivated by personal interests.

• Establish structures that allow members to rest. The crypto world operates 24/7, and DAOs collaborate asynchronously with people from around the globe. If a DAO does not have standards for rest or breaks, it can lead to burnout among members. Therefore, the DAO needs to provide clear guidance for members on when they should take breaks. For example, Forefront even includes vacation as part of their compensation.

• After working full-time at Forefront for three years, contributors can receive up to six months of paid leave for rest, travel, research, or training. In DAOs with representative voting systems, liquidity voting would be ideal. In liquidity voting, if representatives are inactive for a period (or if the voting area is not their expertise, leading to inefficiencies), they can delegate their voting power to others. This is no different from having colleagues take over someone's work while they are on vacation.

• Experiment early. Experiment with different systems and processes to see what works and what doesn’t for the DAO. Early experiments are relatively low-cost, as long as the communication process is open and transparent. However, as the DAO grows, it becomes increasingly difficult to experiment, change, or introduce processes. A worthwhile area to explore is governance Lego blocks from the Element voting library, which can fit many application scenarios, such as providing voting rights to GitHub contributors or allowing members who have staked tokens to vote.