Creating a DAO: A Step-by-Step Guide for Decentralized Governance

Basics

DAOs are a favored governance model within the blockchain space due to their roots in decentralization. By utilizing technical know-how and various tools, setting up a DAO can be a quick process. However, it is essential to have a well-thought-out plan and a supportive community. Let's review the fundamental requirements for establishing a DAO.

Definition of DAO

DAO, short for Decentralized Autonomous Organization, is an organization that operates through computer code and is open to all who meet certain prerequisites. The DAO is self-governing, which means that most processes are automated through smart contracts and require little human intervention. The DAO is founded and managed by a community that collectively oversees its finances and initiatives.

DAOs gained prominence with the 2016 Ethereum venture capital fund "The DAO." Unfortunately, the project experienced an attack three weeks into the token sale due to a code vulnerability. The funds were eventually reinstated via a hard fork. Despite these initial setbacks, the DAO concept has evolved and is now widely used as a governance model for DeFi projects.

Although each DAO is unique, most follow similar basic principles. Those holding the DAO's governance token have voting power proportionate to the number of tokens they possess. Token holders can also submit proposals for modifying the DAO's operations.

What Benefits Will I Gain From Creating a DAO?

DAOs offer several significant advantages for crypto projects, primarily due to their reliance on smart contracts. This means that the DAO's operations are less dependent on human input, making them highly efficient. For instance, proposals can be posted on-chain, and their outcomes can trigger proposed changes automatically, without fear of censorship or technical vote-rigging.

DAOs are particularly useful for organizing communities, especially when members remain mostly anonymous. In such cases, traditional accountability to real identities becomes challenging, and trust becomes a significant concern. A DAO's technology ensures integrity, allowing for the efficient organization of members without the need for a traditional organization or entity, which can be challenging for international teams. Additionally, setting up a DAO is cost-effective as it can be done for free or for a small fee.

However, it is important to note that DAOs hold members accountable for their decisions, and decentralizing power means giving up total control over the project. Ignoring governance decision-making may result in negative consequences.

What Are the Requirements for a DAO?

For a DAO to be successful, it should encompass the following five points: 

1. Purpose. The purpose of a DAO is to streamline and coordinate endeavors, finances, and resources related to a project or venture. Without a clear purpose to build around, a DAO will lack direction and relevancy.
2. Voting mechanism. There are several ways in which this can be done. One option is to design your voting system or use external services from third-party providers. The voting system can be altered later through a further vote; however, the initial consensus must be made first.
3. Governance token. Governance tokens, typically utilized as utility tokens, are the most common approach, while share systems are commonly seen in funds where users deposit cryptocurrencies with the DAO to be invested.
4. Community. A strong DAO community is integral to this process, as the collective strength of the members amplifies and diversifies the powers within it.
5. Funds management. This is generally done through a treasury or utilizing a crowdfunding platform. To ensure security, the funds held by the DAO will typically be placed in a multi-signature wallet, meaning the funds can only be accessed if the key participants of the DAO unanimously agree.

What Steps Do I Need to Take to Set Up My DAO?

For handling votes and proposals, you'll need a technical system. Several open-source solutions exist for this purpose, and two popular ones for Ethereum are Aragon and Snapshot. These tools typically provide a similar structure but may differ in function. While some adopt an on-chain polling system, others use an off-chain approach. Your DAO's needs will help determine which solution to use.

Remember to have sufficient cryptocurrency to cover the costs of deploying your DAO onto a blockchain.

Aragon

Users can build a DAO on Ethereum, Polygon, Andromeda, or Harmony through the Aragon client. The Aragon client provides free and open-source software for users to customize their DAOs to fit their needs. Additionally, the team behind Aragon operates its non-profit organization to manage the funds raised for Aragon, which is also run as a DAO.

Setting up an Aragon-based DAO is relatively easy. The steps you need to take are:

1. Register with the Ethereum Name Service to own a domain.
2. Ensure you possess sufficient cryptocurrency to pay the fee for the DAO's formation (0.2 Ether plus gasoline charges).
3. Set up an organizational structure utilizing the Aragon Decentralized Application linked to the Ethereum Name Service (ENS) domain. Several organizational structures are available to choose from.
4. Once you've determined the necessary settings for your DAO, such as vote duration and the percentage support needed, you can launch the DAO.

Snapshot

Snapshot is an off-chain voting system that can be customized. It enables token owners or stakers to cast votes using digital signatures through wallets. The voting process begins by taking a snapshot of token holders on a predefined block. This prevents an unfair advantage, stopping investors from acquiring more tokens to influence the vote. Off-chain voting works particularly well for projects that operate on multiple blockchains and where users possess governance tokens across various networks.

To set up your voting system on Snapshot, you must:

1. Buy an ENS domain name registered on the Ethereum mainnet, regardless of your project's blockchain.
2. Connect your ENS domain to the Snapshot platform.
3. Adjust the options for your area, like who is an administrator, how to best utilize voting strength and any relevant rules.
4. Ensure that your area has met the requirements, namely having 1,000 members and providing evidence of ownership of the related project.

DAOstack Alchemy

The DAOstack Alchemy is a platform designed for establishing DAOs on Ethereum and Gnosis Chain. By utilizing their user interface, it is possible to build a fairly straightforward DAO, add members, and initiate your organization. At present, the cost of creating a DAO on Ethereum is approximately 0.2 ETH, and there is no need for an ENS in this instance.

To establish a DAOstack DAO, it is necessary to connect your wallet to their DApp, follow the four steps displayed, and pay the fee, which will be approximately 0.2 ETH.

Examples of Successful DAOs

For ideas on successful DAO rules and set-ups, examine some renowned DAOs in cryptocurrencies. They often manage intricate, transparent systems, much like large corporations. For instance, take a peek at the following:

MakerDAO

MakerDAO is among the sector's most established and successful decentralized autonomous organizations. It oversees the DAI stablecoin, which is backed by cryptocurrencies. MakerDAO's approach consists of Governance Polls for matters that don't require technical competency and Executive Votes for smart contract modifications. Any holder of MKR, the project's governance token, may participate in the voting process.

Aave

Aave is an Ethereum-based DeFi lending platform that allows users holding the AAVE ERC-20 token or staked AAVE to participate in its DAO. Through this governing body, changes to the protocol are voted on, and new projects related to Aave and Aave Grants will be used for financially backing innovative ideas.

Uniswap

Uniswap, the pioneering DeFi Automated Market Maker that has spurred a new wave of projects, is one of the largest decentralized exchanges. Holders of UNI tokens can have a say in developing proposals and getting them approved, though a minimum of 0.25% of the UNI's total supply must be held to do so. To support an enlightened discussion, all community members are welcomed to a governance forum to discuss the relevant changes.

Conclusion

Establishing the technical elements required for a DAO may be simple, but managing it effectively is much more complicated. While there are a variety of platforms available to help you get off the ground, the success of your DAO will be determined by the quality of your project and the strength of your community.