TL;DR
A DAO is a type of governance commonly used for DApps, projects, and crypto-investment funds. DAOs are popular for their openness and decentralization, as well as their ability to work with self-executing smart contracts. Creating a DAO needs a technical solution to manage your proposals and votes. There’s a variety of open-source options available based on your needs.
Introduction
With crypto’s roots in decentralization, DAOs are a popular governance model in the blockchain space. Using a bit of technical knowledge and some tools, you can get a DAO up and running quickly. But first, you better have a good plan and a community to support you. Let’s run through the very basics of what’s needed and how you can set up your DAO.
What is a DAO?
DAO stands for Decentralized Autonomous Organization. As the name suggests, a DAO is an organization automated by computer code and open for anyone to participate (as long as they meet some basic requirements). Being autonomous means that smart contracts help run the majority of the processes without human interference. A DAO is created and managed by a community, which collectively manages its funds and projects.
DAOs became well-known with Ethereum’s 2016 venture capital fund “The DAO”. Unfortunately, by three weeks into the token sale, the project suffered an attack due to a vulnerability in the code. The funds were later restored due to a hard fork. Despite the early challenges, the DAO concept has improved over the years, and is now one of the most popular governance models for Decentralized Finance (DeFi) projects.
Each DAO is different, but most follow the same basic principles. Anyone holding the DAO’s governance token has voting power proportional to the number of tokens they own. Holders can also make proposals for changes in how the DAO operates.
Why should I create a DAO?
For crypto projects, DAO’s have some significant advantages. Perhaps the most important is the model’s reliance on smart contracts. These on-chain pieces of code make DAOs less reliant on human input to operate. For example, a proposal could have its results posted on-chain and automatically trigger a proposed change. A new proposal can’t be censored, and votes cannot be technically rigged.
DAOs are useful ways to organize communities, especially if they are mostly anonymous. There is often no accountability to a real identity, and you have to trust people you don’t know. A DAO allows them to organize themselves efficiently with technology that guarantees integrity. It’s also easier than creating a traditional organization or entity as many projects have international teams. Finally, a DAO is a cheap option for its functionality in organizing people. You can set one up for free or pay a small fee to do so.
Understand carefully that a DAO will hold you accountable for its decisions. By decentralizing power, you no longer will have total control over your project. If you decide to ignore governance decision-making, there will almost always be negative consequences.
What does a DAO need?
Among other things, a successful DAO should cover at least the five points below:
1. A DAO needs a purpose. DAO’s are simply a way of organizing projects or funds. Without a good underlying project and reason, your DAO will have nothing to run.
2. A DAO needs a voting mechanism. This is the primary way people interact with the DAO and make changes. There are multiple ways to do this. You could create your own voting mechanism or use a third-party provider, as we discuss later. Your DAO may even vote to change the mechanism later, but you need to start with something.
3. A DAO needs a governance token or share system. How will people prove their right to an opinion in the DAO? A governance token is very common, and the token often might also be a utility token. A shares system is more common to funds where users deposit cryptocurrencies with the DAO to be invested.
4. A DAO needs a community. Decentralization gets stronger as more people join and participate in the governance of your DAO. This way, power is spread across more stakeholders.
5. A DAO needs a way to manage its funds. Most DAOs will have a treasury or access to some crowdfunding. This is usually held in a multi-signature wallet, which can only be used if all key participants agree.
How do I create my DAO?
On the technical side, you’ll need a mechanism for handling votes and proposals. There is a selection of open-source solutions available to use. Aragon is one popular choice for the Ethereum blockchain. Snapshot is another that works over multiple blockchains. All of them will provide roughly the same structure, but the ways they do it can differ. Some DAO systems work with on-chain polling and others off-chain. The exact one to choose will depend on what your DAO deems important.
Don’t forget to have enough crypto to cover your transaction fees when deploying your DAO to a blockchain.
Aragon
Aragon allows you to create a DAO organization on Ethereum, Polygon, Andromeda, or Harmony. The project provides open-source software through its Aragon client enabling the creation of customized DAOs. The project is also run via a DAO and has its own non-profit organization to manage Aragon’s raised funds.
Creating an Aragon-based DAO is quite simple. You’ll need to:
1. Own an Ethereum Name Service domain.
2. Make sure you have enough crypto to pay the DAO creation fee (0.2 ETH plus gas fees).
3. Create an organization linked to the ENS domain through the Aragon DApp. There are several preset organization structures you can use.
4. Configure your settings, such as vote duration and percentage support needed, and then launch the DAO.
You can find further information in Aragon’s FAQ.
Snapshot
Snapshot is a customizable off-chain voting mechanism. It uses digital signatures via wallets to cast votes based on a snapshot of token owners. A certain block is chosen, and all token holders and/or stakers have their holdings noted. This stops users from purchasing more tokens to influence an open vote. Keeping votes off-chain works well for multi-chain projects where users have governance tokens across many blockchains.
To create your voting system on Snapshot, you’ll need to:
1. Own an ENS domain. This must be on the Ethereum mainnet regardless of what blockchain your project operates on.
2. Link Snapshot to your ENS domain.
3. Customize your space’s settings, such as admins, voting power strategies, terms, etc.
4. Verify your space. This will include having at least 1,000 members and proof of ownership of the related project.
You can find full instructions on Snapshot’s docs.
DAOstack Alchemy
DAOstack Alchemy is a tool for creating DAOs on Ethereum and Gnosis Chain (formerly known as xDAI). Through their UI, you can create a fairly simple DAO, add DAO members, and open your organization. As of writing, the fee for setting up a DAO on Ethereum is roughly 0.2 Ether (ETH), but you don’t need an ENS in this case.
To create a DAOstack DAO, connect your wallet to their DApp, go through the four steps shown, and pay your fee. You will need roughly 0.2 ETH to successfully deploy the DAO.
Examples of successful DAOs
If you need some inspiration on the rules and set-ups that work best, take a look at some of the established DAOs in crypto. Some run incredibly detailed and open organizations that operate like large businesses. A few examples to look at include:
MakerDAO
MakerDAO is one of the oldest, most successful DAOs on the market. The organization manages the crypto-collateralized DAI stablecoin. They split proposals into Governance Polls for non-technical decisions and Executive Votes for smart-contract changes. Anyone holding MKR, the project’s governance DAO token, can participate.
Aave
Aave is a DeFi lending platform on Ethereum that lets holders of the ERC-20 token AAVE or staked AAVE participate in its DAO. Along with project changes, Aave governance also votes on new projects built on the protocol and Aave Grants to fund ideas.
Uniswap
Uniswap is a multi-chain Automated Market Maker (AMM) that has inspired a generation of DeFi projects. It’s one of the largest decentralized exchanges, and UNI holders can vote on and create proposals. To submit a new proposal, you need to hold at least 0.25% of the UNI’s total supply. To encourage healthy discussion, there is a governance forum for community members to debate changes.
Conclusion
Creating your own DAO is easy to do technically, but running one successfully is difficult. As you’ve seen, many simple tools exist to get you running quickly. However, the key to creating your DAO will be your project and community.