Web3 Communities — To DAO or not to DAO?

Tokenised communities can take many forms and not all need to transition to become DAOs

I have written loads about why I deem community building and engagement as one of the killer applications of web3, and how tokenisation can fuel a community’s core engines of mutuality and agency. I’ve always tried to keep in mind that technology, however promising and revolutionary, is only a means to an end. So when I started learning about DAOs and reading up on early experiments, my journey down that particular rabbit hole was guided by the same practical compass: where do DAOs fit and how are they a better solution to specific community problems and use cases?

Tokenised communities have the potential to turn members into active participants and stakeholders, by using community tokens as the primary means of community access, engagement & coordination. Community tokens combine elements of fandom (belonging and connection), patronage (membership and support) and investment (liquid ownership and financial upside), and depending on the community’s purpose and scope not all elements need to come into play. A community token’s value is both linked to direct community value (member access, benefits & privileges; social capital & status) as well as long term community reach and impact (financial value driven by community profits and by token demand and supply). It’s a form of the ownership economy giving member stakeholders exposure to the growth potential of their community as well as the opportunity to help shape that potential. With community or social tokens as equities, members get to benefit directly from the growth of the community, and hence are incentivised to actively help and contribute. These same tokens may end up being used as governance tokens for decision making and therefore as a means of control over community direction, resources and outcomes. However, that doesn’t make every tokenised community a fully Decentralised Autonomous Organisation (aka DAO). While there may be some level of collective governance and decision making, token-holders do not need to vote on every decision in the community. And even if token categories often overlap, the notion of intrinsic community value and status conferred with community tokens are key differentiators from pure governance and ownership tokens.

Before we get into how DAOs fit in and where they make sense, let’s first understand what sets them apart from other tokenised communities. Yes, it’s all in the name in the sense that at the core it’s about how DAOs look to decentralise and automate community governance, decision making and value distribution, leveraging blockchain, tokens and smart contracts. DAOs are unified by the underlying philosophy of embracing decentralisation, as well as a desire to innovate autonomous, democratic & collective decision-making. For doing so, they coordinate through a shared set of rules enforced on a blockchain, i.e. driven by code embedded into smart contracts and gated by token ownership to distribute decision making and financial capital. Ownership and decision-making power is more equally and fairly distributed over token holders, with no single participant or party having a disproportionate stake. And community activities tend to be orchestrated by transparent mechanisms encoded in smart contracts, essentially programs that run on a publicly accessible blockchain and trigger an action if certain conditions are met, without the need for human intervention (i.e. automated & trustless). Importantly, DAOs also come with their own bank account or treasury. A DAO, in its simplest form, is an internet community with a shared bank account that sets its own rules on how to operate, i.e. how to allocate the community’s resources and how to distribute financial rewards. So in short, DAOs tend to be more decentralised, autonomous and financialised than your regular tokenised community.

What they have in common is that both tokenised communities and DAOs look to activate a group of like-minded individuals around a common mission using the blockchain. Both are designed to incentivise and maximise member participation and agency, using Web3 technology. Typically, they do that by issuing tokens based on participation, contribution, and investment. These tokens often come with certain rights attached, such as the ability to access member-only privileges or vote on certain decisions.

What makes a community a DAO is the extent by which it is really owned and run by its members. A form of true co-op membership via tokens. One whereby members or token holders partake in both decision making and in profit sharing as a sort of governance body that oversees allocation of resources to maximise the long term value of the collective by submitting proposals, voting on execution, managing a common treasury and sharing in the upside. Tokens can be coded to automatically receive patronage dividends when there is revenue flow. This gives cooperative members or token holders the ability to capture the value they create. DAOs are web3 communities in their purest sense when it comes to decentralisation, democratisation, and economic participation, the key tenets of the new ownership economy.

Purity has a price. Given their decentralised nature, DAOs will need to go the extra mile to build and nurture their foundational pillars for success. Like any impactful community, DAOs will need to clearly and transparently lay out their Community Ps: Purpose, People, Principles, Processes, Platform and Proceeds. In doing so, it’s helpful to break down a DAOs purpose in 1) a ‘big P’ (grand, transformative vision), 2) a ‘medium P’ (the community scope in delivering against the grand vision) and 3) a ‘small P’ (what’s in it for every contributing member). As DAOs will be run by their members, it’s paramount (the right!) members sign up with full buy in and commitment. And that’s even more so when documenting operating principles and governing processes, as most of these will get coded in automated programs through smart contracts: from the DAOs tokenomics, to member roles and incentives, to its decision-making and voting systems, to how value gets created and distributed (Proceeds).

That means operationalising DAOs can be quite complex and daunting. Before reaching a state of self-regulation and harmonious collaboration, it is very likely DAOs will have to go through multiple loops and potential repivots, churning through quite a few iterations before a basic healthy state (or ‘minimum viable community’) has been achieved. Like with start-ups aiming for MVP, a basic and evolving canvas plan can be used to define and finetune all the key moving parts of a DAO. The community canvas will need to guide the design, testing and optimisation of all core processes so in order to create the conditions necessary for DAOs to achieve maximum impact and self-sustainability. This covers both the required tooling as well as the predefined rules determining everything from member screening and onboarding, who gets how many tokens today, to how tokens will be distributed in the future, to what economic and governance rights token ownership confers, including the actual proposal and voting process.

Decentralisation is a process, implying a spectrum of leadership from tight-knit cementing of core purpose and principles into gradual community empowerment and delegation. As such, many web3 projects and communities follow a process of progressive decentralisation, with more centralised control over the initial stages to deliver community-market fit with a small dedicated team, before fully going-to or exiting-to a DAO structure. When transitioning from a more central to a fully decentralised structure, it will be important to balance rewards for the core incubating team (and early adopters) with incentives for increased participation and ownership by the broader community. Some may consider a hybrid DAO model in which a core team retains control of high risk-return or time-sensitive business and community decisions, but DAOs make decisions (through voting) regarding other aspects of the community.

Whatever the ultimate purpose and scope of a DAO is, its success hinges on its authentic endorsement of the power of crowds and the ability to funnel that collective energy for the right outcomes. Also, the underlying value model needs to be community expansive and not extractive, i.e. 100% by and for the community. True grassroots empowerment and ownership starts with identifying and onboarding authentically aligned and committed community members. DAOs require a high degree of member engagement and a vibrant community to make sure good ideas are developed and refined, so optimally incentivising participation is going to be another governance challenge. This will require ongoing information dissemination and community engagement to ensure everyone is fully onboard with the DAO’s core mission and roadmap, and providing for conditions to ensure inclusive sharing and constructive discussions amongst community members. And it will depend on effective tokenised incentive mechanisms, to ensure that DAO membership is following more of a meritocratic ‘play-to-earn’ model, than a traditional ‘pay-to-play’ gated membership. But most importantly it will be about introducing innovative, fair and inclusive voting paradigms, to optimise for democratic participation and quality outcomes.

In a DAO, your ability to vote depends on whether you have voting rights and how much your vote counts. Typically, you get voting rights based on the amount and type of tokens you own, which you’ve either bought or earned. Ideally, you contribute to the DAO in exchange for ownership in the DAO, represented by tokens, which in turn gives you governance rights to participate in proposal voting and other token-holder privileges. Both how proposals get submitted and how they get reviewed and voted upon needs to be optimised for access (or inclusion), scale (allowing for mass participation) and quality (value and impact).

DAO Governance: Challenges, Ideas and Tools | by Tally | Mar, 2022 | Tally (withtally.com)

While there is no single right formula, multiple parameters can be adjusted to find the right mix, fit for the DAO’s specific purpose and scope. Before formal voting kicks off, a first filter can be applied to the proposal submission process and potential pre-checks or temperature checks. For the actual voting, minimum levels of participation (aka quorum) can be defined as well as minimum thresholds for achieving a majority vote. But most of the custom tuning will need to be applied to how token ownership maps to voting rights, with multiple variations for stake-based voting: from 1 token = 1 vote (1T1V), to 1 person = 1 vote (1P1V) to more complex (eg quadratic) stake-based voting. Other options are to apply some weighting based on the token holder’s reputation or community role, or to allow for delegated voting whereby voting rights can be transferred to other (more specialised) community members.

In summary, DAOs need a lot of tuning and tooling to fulfil their true promise of fully decentralised ownership and autonomous self-regulation. Not all tokenised communities need to go the full or extra mile to transition to DAOs to create stronger member engagement, sense of belonging or active participation. Many may want to look at a hybrid approach, applying increased decentralisation of governance and financial rights to a subset of community activities, thereby gaining the best of both worlds, continuing to build and activate community, while delegating some control and ownership to its members. Or, as phrased before, to activate your members to become agents, and for your most active and contributing agents to become co-owners and principals.

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