What do DAOs need to succeed in the long run?

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The rising popularity of decentralized autonomous organizations (DAO) reflects the growing tendency toward the creation of community-focused projects within the Web3 ecosystem.

At its core, a DAO is an organizational structure that allows decentralized decision-making within a community.

Currently, there are over 4,000 of these projects in existence, according to the registration data of DeepDAO. With new tools available to make DAOs easier than ever, quantity can easily overtake quality within these communities and it begs the question of what will eventually make these projects relevant in the long run.

A basic ingredient

The basic structure for decentralized organizations seems to be similar to any other tech startup: It requires a service or product with added value, a community of users, treasury, a business development plan and marketing.

Speaking to Cointelegraph, Santiago Siri, founder of Proof-Of-Humanity DAO (PoH DAO) — the issuer of the Universal Basic Income (UBI) token — shared his special ingredient to make DAOs sustainable: a committed community:

“After building a participative community, we can find funding mechanisms, alliances with other DAOs, governance and participation mechanisms and so on. But without a community, the DAO is not real.”

The community focus is repeated all across the Web3 space, but just having a group of people signed up for your project will not be enough for it to thrive.

As Siri explains, the real priority for a DAO is to give that community a purpose from an early stage. “What usually happens with a project without a soul or purpose, is that a bunch of mercenaries are going to get away with the money without generating value,” he said.

Community as the base of a decentralized structure also supports another rather important factor: funding.

How to fund a DAO

One step that DAOs commonly add to their economic plans for sustainability is tokenization.

Speaking to Cointelegraph, Mitch Oz, DAO Steward for Giveth — a nonprofit organization and open source platform for decentralized projects — warned that tokenization is a rather dangerous step if done at the wrong time.

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“Usually when people get the idea of launching a token it’s on the lines of launching an airdrop, building hype. Having a token, a transferable token, is not a great idea to start with and I think that is where a lot of DAOs fail,” he stated.

In his experience, Oz recommends to start small when it comes to creating a community token. “I think it’s very important to have some sort of token-weighted governance and start with a token that can’t be bought,” he said.

On the other hand, there’s also external financing DAOs can receive via grant programs and venture capital (VC) for tokenized projects.

Rather than the fine tightrope traditional first-time entrepreneurs used to walk to get their first approved financing, grant programs focused on supporting Web3 projects and their communities have now provided a new avenue to receive funding.

Talking to Cointelegraph, Ashley Dávila, venture capitalist at blockchain-focused venture capital firm Gumi Cryptos, explained that Web3 grants allow DAOs to remain financially independent when receiving external funding.

“Grants are generally no strings attached, so they are very attractive and can be seen as revenue. The overall takeaway is that grants are non dilutive and VC funding is dilutive”, she said.

Christian Narváez, venture partner at OP Crypto and founder of Web3 Familia DAO, told Cointelegraph that Web3 projects should begin their funding externally through grants before knocking on venture capital’s doors.

“I always recommend that Web3 projects that are building up, apply to grants within the blockchain ecosystem. It’s an effective way of getting capital without having to give equity tokens of your project,” he said.

Narváez added that there’s even a technique that allows Web3 projects to stay afloat before they are ready to take their project to a VC:

“It’s called grant farming, which basically is applying to many grants of different blockchains and raising capital in an equity-free way, allowing projects to maintain ownership as long as possible before they try to raise VC money.”

While on the outside, a DAO may seem to run smoothly once it has built a community and received funding, achieving the decentralized dream is not as easy as idealists make it sound.

DAO drama

Even as all voting and funding processes are dutifully registered on the blockchain, DAOs still struggle with fund transparency and the centralization of power.

Scandals around these issues were a prevalent topic at Devcon IV — an international event dedicated to the Ethereum community.

In one instance, members of the Harmony protocol aimed criticism at the Blu3DAO directive, claiming they had observed suspicious fund management and a possible conflict of interest within the founding team and their main sponsor, the Harmony protocol itself.

Inconsistencies of information from the DAO also raised alarms. Harmony’s forum also showed ties between the organization and the company MoneyBoss — which is owned by Blu3DAO founders.

The blockchain community response was mixed, with support from members of Blu3DAO and questions from users on Twitter.

Blu3DAO founders addressed these accusations shortly after they were published, facing more backlash from the blockchain community. The team also provided proof of their transactions on the blockchain a month after the event to discredit fund mismanagement reports and have carried on their operations.

Siri further dedicated a part of his time on stage at the event to clarify the so-called “DAO drama” that involved the alleged centralization of voting power in PoH DAO by their governance partner, the Kleros team.

Another example occurred in April when the FEI/TRIBE DAO — a merge between the FEI protocol and Rari Capital DAO — reached the headlines with an $80 million hack. Uncertainty fell over the organization’s community once the governance started a tumultuous voting process that went back and forth on the decision to cover the funds.

As crypto personality Cobie explained in a Twitter thread, the voting was highly influenced by the FEI protocol itself, which voted against the repayment of funds on a second vote. FEI founder Joey Santoro concluded that their case was an example of the current exploratory status of DAO voting and confirmed the protocol’s separation from Tribe DAO.

So, how to start with the right foot on this uncharted territory of DAO?

DAOs from the ground up

Many new DAOs are born from pre-existing communities, often without funds or a business plan. Because of this, founders and governors take different routes to get their projects off the ground.

Such is the case of Cryptonikas DAO, a new women-focused organization led by eight women from Latin America. According to their founder and director, Giselle Chacón, their key to staying on course has little to do with relying only on Web3 tools but rather with creating a strong foundation to become sustainable both as a community and as a business.

Speaking to Cointelegraph, Chacón referenced her own experiences as part of a different DAO before starting Cryptonikas, which led her to take a rather traditional approach with her own community.

“Now that we are a strong community and we have people who want to fund us, we have proceeded to create a company in the United States,” she said.

According to Cryptonikas’ product manager Rosa Jérez, registering the project as a C-Corp business is an effective way to ensure the legality of funding well before opting for grant money.

“A C Corp allows us to act as a private company, capable of generating income out of our commercial activities,” she explained.

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Jeréz also added that this would be the preferred structure for the DAO “until there’s massive adoption of the entire Web3 ecosystem.”

Currently, the ideal setup for the majority of the Web3 community is one of total decentralization and betting exclusively on the technological and financial resources within the ecosystem. As Chacón stated, the struggle is to have realistic expectations and get into the DAO space with eyes wide open: