DAO Series part 3: Find the right governance model
No DAO is like the other — long-term success requires the choice of a sustainable governance model. To do this, you need to understand the purpose of the DAO.
Following the discussions about DAOs, you might think that a completely new form of organization is being invented here. I already explained why this is not the case in my first article in the DAO series. Today, I want to talk about what is necessary to create a DAO whose purpose is more than just offering a token.
When DAOs are needed
The first important question is why you need a DAO at all. A DAO is a decentralized organization. Such a form of organization makes sense when something is to be created jointly in a group and the group work is not to be dominated by any single member. This sounds obvious, but it is not a reality at all for most of today’s DAOs.
They are fighting hard with their promise of autonomy and complete decentralization. And with good reason. So every idea initially grows best in a small team. In this way, it is possible to react quickly to unforeseen events. Until the business model reaches stability, this form of organization is highly efficient. This is also the reason why startups are centered around a strong founding team. The same applies to Web3 and thus DAOs. Relying on the community of all DAO members for every single decision to be made leads to extremely slow decision-making and causes friction in the team. Especially when fundamental decisions have to be made at the beginning of a project, a decentralized form of organization is, therefore, a handicap. For this reason, among others, the control in many DAOs has a rather classical, i.e. centralized organized team. Basically, this is not a bad thing. The only important thing is to create the right structures from the very beginning to enable self-management at a later stage.
Aaron Wright’s tweet contains two interesting, albeit opposing, facets. DAOs consist of open participation on the one hand (subreddits) and structures (governance) on the other. The governance aspect thus seems to be an essential characteristic of a DAO.
Why Governance Matters
So what exactly is governance? These are structures that are intended to improve the management of an organization in its achievement of goals. And structures are where many of today’s DAOs fail, because the perception here is that DAOs and structures are mutually exclusive. A Discord channel or a subreddit is not a suitable structure for improving goal achievement. Strictly speaking, a group of people interacting with each other is not yet an organization, but rather tends to be chaos.
Self-managed organizations in particular need structures to succeed, because these structures replace hierarchies. Since many of the DAOs are very technology-driven, it is worth taking a look at software development. The success of agile software development lies primarily in the very mature methods such as SCRUM. Agile software development follows clear structures, decision paths and processes. Only in this way does it become possible to overcome the very hierarchical software development of the past. Structures replace hierarchical decision-making power. Without these structures, larger teams cannot be coordinated and results cannot be achieved efficiently. These structures are the governance of a DAO.
DAO governance model explained
Even though DAOs operate in the context of blockchain, a look at the values and principles of self-managed organizations is more important for governance than the technology. One of the core principles is “commitments over force”. That means not using traditional, hierarchical force but distributing the power across the entire organization. Hierarchical organizations run on permissions whereas self-managing organizations run on constraints. One can do anything unless the organization said that it is not allowed to do that. And this is achieved by consent. Due to it being impossible to get consent from a large group of people, self-managing organizations are typically structured in circles or pods.
These are small autonomous units of members. The units are connected and can also have sub-units. Such a unit structure emerges over time and is not written in stone.
However, they must be positioned in such a way that the work of the organization can be accomplished. The members who can meaningfully contribute to the success of the work in this section are grouped into the units. The creation of units and the filling of roles in them is typically done through proposals on which the members can vote. All this is very complex and requires clear rules and structures to which all members of the organization must adhere. In this way, pyramid-shaped org charts can be broken down and transformed into self-managed structures. Structures of a self-managed organization thus organize people around the work to be done, instead of organizing the work around the people listed in the org chart. Now, the work to be done differs significantly between different decentralized organizations. Therefore, while self-managed organizations follow common principles, they subsequently differ from each other in their specific design.
Choose the right governance model for your DAO
To find the right governance model, the purpose of the organization must be clearly defined.
- What exactly is there to do and decide in the organization?
Then it must be determined who the organization needs.
2. What competencies and roles are needed to get the job done?
These two questions must be answered very clearly and precisely.
To illustrate the different approaches of a DAO, I would like to show 4 models in which a DAO can operate. All these models need a distinct type of governance, since the tasks to be done are fundamentally different.
1. Utility DAOs
The purpose of a Utility DAO is to offer a service to the market. This could be an app, a protocol, or a decentralized marketplace. In this case, the DAO has a market offer to third parties, in other words, non-DAO members. The governance structure must therefore ensure that this offer is provided per the defined terms and conditions (terms of service). The revenues and expenses generated in the course of providing the service must also be managed.
2. Data Exchange DAOs
The purpose of this type of DAO is to enable the exchange of information between members. If such data exchange is to be decentralized, the members must agree on standards for data and exchange formats to ensure interoperability. Such standards are needed, for example, when setting up IoT networks in which machines from different manufacturers are to share data. Standards are also needed in the area of decentralized digital identity to exchange identity features across different networks and wallets in an automated manner and to verify their authenticity. The governance of such a DAO must be able to define and continuously maintain standards. However, the implementation of the standards in applications and protocols is not part of the scope, as this is done by the members themselves or a Utility DAO.
3. Asset Management DAOs
If assets such as NFTs, real estate, or even machinery are to be jointly acquired and managed, an asset management DAO structure is required. The governance structure must define the rules under which the organization takes ownership of the assets and under which they are managed. Structures for the distribution of revenues and costs are also necessary.
4. Infrastructure DAOs
The classic DAOs are the infrastructure DAOs. The purpose here is to operate infrastructure in a group of operators. The blockchain itself is the most prominent representative. Here, the validators and token holders are members of the DAO. The governance structure must secure the operation and further development of the infrastructure. Thus, questions about the adaptation of the operating structures must be resolved by consensus. The currently ongoing transition to Ethereum 2.0 can be taken as a practical example. The distinction from the Utility DAO is that the Infrastructure DAO members do not offer a market per se but only agree on common operating conditions. However, no one can be held directly responsible if this infrastructure does not meet expectations.
Multi-Purpose DAOs
Of course, a DAO can fulfill several or even all of the above tasks. If, for example, a mobility network wants to standardize the exchange of data between different means of transport and operating companies at the same time, a Data Exchange DAO with the operating companies as members makes sense. If these operating companies also want to enable data exchange physically, an infrastructure sub-DAO is needed. This will enable the systems needed to connect the IoT-enabled means of transport as well as the exchange of data between the members. If the services of the DAO members are also to be offered to third parties, an application is needed that is operated by a utility sub-DAO. If vehicles are also to be procured and managed, an asset management sub-DAO is required.
The entire system can quickly become very complex. Therefore, as always, it is recommended to start small and first determine the core of the cooperation and set up the appropriate and functioning structures for it. This will be done by a small group of initiators, who follow the values and principles of self-managed organizations, to build up a permanently functioning hierarchy-free, and independent organization. This can then also be called a DAO.
