Rethinking the Value of DAOs

Decentralized autonomous organizations (DAO) are an equitable, efficient means of distributing stakeholder power and resources. Removing the need for a central governing authority, they align with Web3’s decentralized, egalitarian ethos.

Since the original DAO – simply called The DAO – crowdfunded $150 million worth of ether (ETH) in 2016, we’ve heard about their potential to change everything from politics to philanthropy. Yet, the early clamor has died down and engagement levels in existing DAOs remain low.

Rick Porter is the CEO and co-founder of DSCVR, a Web3 social platform. This article is part of CoinDesk’s “Culture Week.”

So why has this revolutionary governance model failed to live up to its promise?

The answer lies in how – and why – each DAO is founded. Most are created by individuals or groups with a goal they believe others will share. But they often find that members either don’t show up at all or don’t stick around when they do.

We need to reverse this cycle: To build communities first and then create DAOs to support and serve their interests as they scale.

Created to capitalize emerging Web3 projects, The DAO came to prominence before crypto hit mainstream radars. It offered a novel model of collaborative governance, under which token holders were able to vote on different ideas to back and allocate rewards.

Record levels of fundraising demonstrated both the power and wide appeal of collective stewardship – until a $60 million hack sent The DAO crashing to the ground, almost taking Ethereum with it. The solution was a hard fork that took the network back to a point before the exploit, split Ethereum into two and altered the course of blockchain history.

The DAO initially appeared to have much in its favor, with a clearly defined purpose and ample funding. Some attribute its failure to bad luck. But that is to ignore the parallels in a more recent example: ConstitutionDAO, the so-called “financial flash mob” behind an unsuccessful bid to buy a copy of the U.S. Constitution.

See also: What Is a DAO? / Learn

Within a week of its founding, ConstitutionDAO raised $47 million from almost 17,500 contributors but was outbid at auction. Returning the funds proved challenging and fractious. High gas fees and administrative hurdles meant most contributors received a fraction of what they staked. Attempts to sustain the DAO and turn attention toward some new objective were soon abandoned.

The admission by Constitution DAO organizers that "we have not been able to focus on giving the technical aspects of DAO governance mechanics the careful consideration and community deliberation this topic requires" is telling. Still, the idea of DAOs still appears to have traction.

Personally, I’m not convinced the type of ad hoc campaigning is the best use of the enormous capabilities of the DAO model. In fact, these high-profile experiments have demonstrated how not to go about deploying one. Let’s recap what they taught us.

The glue that keeps everyone together and on the same page is only as binding as members’ ties to one another. That is why crypto builders need to start building a community before we create a DAO.

When a DAO comes first, social interaction is automatically forced and inauthentic – in part because of the financial incentives created by tokens. In contrast, thriving communities must be made of individuals who connect through shared interests (more than the pecuniary kind). A typical scenario would be coalescing first on social media, perhaps evolving from a Discord or Telegram group where folks chat, share ideas, offer tips, ask one another for help. They are growing together, creating shared values and building trust. At some point, a shared goal will arise naturally. Perhaps to stage an event, start a committee, define roles. Maybe the aim is to monetize skills.

DAOs are the framework that can help make these goals reality. They offer financial and structural empowerment, bringing organizational tools that make everything work. Smart contracts enshrine roles and operationalize community sales and payments. DAO tokens supply liquidity and provide efficient voting mechanisms.

The trajectory is very different when a DAO’s sole purpose is a defined external goal. Once that is achieved, or abandoned, the DAO is redundant. However grand the ambition, members have no incentive to stay.

Fortunately, we are now entering an era of widespread DAO adoption by truly engaged social communities. Cynics may disagree and point to today’s cold crypto climate. But that is my point. We’ve been here before, more than once. We know how it works.

Remember when non-fungible tokens (NFT) were new and exciting? Sales soared and fortunes were made. The June 2021 slump saw some poised to write their obituary but even higher peaks lay ahead, not least a Bored Ape Yacht Club launch propelling OpenSea to a single-day trading record.

See also: How to Use a DAO to Build a Web3 Community / Opinion

Such gyrations in the markets exemplify a fundamental economic principle: Hype cycles are a symptom of shallow community connections. Something grabs our attention, we take a look, dip a toe in the water. But when there is nothing to sustain our interest we move on.

Deeper engagement nurtures sustained value – like the type of building happening today. Authentic communities rooted in social interaction, online or off, have always been natural generators of economic activity. Those who contribute most stand to gain more.

The central purpose of a DAO is effective governance, but such structures cannot succeed without high levels of ongoing participation.

When DAOs arise out of engaged communities built on trust and shared interests, we will start to see them foster real, sustained change in the world.