Finding investors is the dream of every founder. This dream, while offering numerous opportunities for entrepreneurs to innovate and scale their business, usually includes a seat for investors as board members.
While the founders are focused on getting famous people around their boardroom table, these members can start an ego power game to show who’s in control. In such cases, founders understandably find it difficult to stand their ground and are forced to make the wrong decisions for their business.
Because of these clashes of ego and the inability to speak out loudly, the day-to-day operations of the business and its future are in jeopardy.
This example is just one way to explain how fatal wrong or forced decisions can be. To address these issues in a number of other use cases, businesses have gradually begun to turn to the convenience of transparency and equal rights that the DAO blockchain offers.
If you are reading this here, it is safe to assume that you already know that DAOs on the blockchain are 100% automated democratic communities based on anonymous participation and voting. They rely heavily on smart contracts that determine decision-making opportunities among voting users (generally, whoever has more tokens has more voting power).
Ultimately, in its many faceted elements, answering the question of how the DAO works brings it to the very opposite end of how a traditional organization works.
|Services||automated||Needs human interaction|
|Vote||Mandatory for all participants||One party can make decisions based on company structure|
|Control||Community||Based on the board of directors or executive directors|
|Transparency||Completely transparent||Not transparent|
Now, before we get into the step-by-step description of creating a DAO, let’s give you some options in terms of the types of DAO blockchains you can invest in. While we started our article by drawing the connecting lines between how a DAO-like Model can be useful in organizational setup, the reality is that its use cases are much more common.
DAO Blockchain Types
Depending on the ultimate goal, technology and structure of DAO can be divided into several types.
When tokens act as a voting metric to make changes to any protocol, the governance framework represents the DAO protocol. For example, Uniswap – it awards native tokens to liquidity pool participants, which can then be used to vote on decisions related to the management of the DEX.
Artists who use non-fungible tokens (NFTs) to create artworks are dependent on the collectors’ DAO to establish ownership of their artworks. An example of this can be found in Flamingo and PleasrDAO.
Also known as venture DAOs, they allow the pooling of capital to democratize investments in multiple DeFi operations. Krause House is a prime example of a venture capital DAO run by basketball fans to run the National Basketball Association.
Providing a DAO
In this type of DAO blockchain, the community contributes to a grant and votes to allocate funds to invest in innovative DeFi projects. An example of this is the Aave protocol, which uses the infrastructure to grow its DeFi initiatives.
These DAOs allow creators to innovate in the digital world by giving them control over governance.
The choice between these or other DAOs on the blockchain will greatly influence the next section we are going to look at – how to create a DAO. However, if there’s anything these use cases are saying, it’s the undeniable fact that DAOs are gaining popularity on a massive scale, and here are some statistics to back it up:
How to build a DAO on the blockchain?
At their core, DAOs are made up of four essential elements: purpose, governance, voting, and rewards. Understanding them is critical to understanding the process of building a DAO.
To start with, the basics of building a DAO is to have a deep understanding of DAO smart contracts as they will create all the rules set by the community members and determine how the protocol will work. This is where management becomes very important.
The next step to create a DAO will be to determine the funding and how to govern after the rules are written on the blockchain. This is usually where the method of issuing tokens is introduced, where the protocol sells tokens to replenish the treasury of the DAO. Here, token holders receive voting rights proportional to their amount of assets.
Once funding is complete, the DAO is ready to be deployed on the Ethereum blockchain, which once deployed to production requires Ether (ETH) to complete Ethereum transactions. After that, ETH is assigned to the address of the DAO smart contract at the initial stage of creation, as indicated in the codes.
Understanding how the model works will help answer the question of how to form a DAO, but you will still need to plan the four elements we mentioned at a detailed level. So let’s get started building a DAO on the blockchain.
1. Set a goal and lay the foundation
The first step to creating a DAO is to determine why it is needed, what role it will play, and how it works. It would be important for you to find an opportunity, conduct a market check for the need for a DAO, and complete the processes that can be included in smart contracts.
Once this foundation is set up, you will need to create:
- Encrypted wallet to store tokens and transactions
- Smart contract with automated processes
- Community of Stakeholders
- Definite voting schedule
- Forum or chat option for members to know what’s going on
2. Plan your ownership and voting mechanism
After agreeing on the goal of the DAO, the next step is to establish ownership and decide on voting mechanisms among the participants. Typically, when you create a DAO, you need to transfer ownership to members – this can be achieved in three ways – Airdrops, Rewards, and buying a token.
In the case of airdrops, tokens are issued to participants based on their contribution to the community. On the other hand, rewards are bonuses paid to members who achieve their goals or fulfill their responsibilities. The third option is to list your tokens on decentralized exchanges and allow participants to buy them.
Now, since we talk so much about membership, let’s take a quick look at the role of membership in building a DAO. When you create a decentralized autonomous organization, you will need members who will vote to approve or reject the decisions around which your DAO operates.
To do this, there are two types of membership, one is token-based (people holding a DAO token will become members) and the other is share-based. In the latter case, people will be required to submit a proposal indicating that they have the experience to make valuable decisions.
Once ownership is planned and established, you will need to create a voting mechanism. A popular way to approach this is to decide to vote based on the number of tokens rather than the number of voters. The side that receives the maximum number of tokens will be the final result.
3. Create a governance structure
This is the most important aspect when answering the question of how to create a DAO. This step details how decisions will be made after the creation of the DAO. It will contain information about the voting mechanism, several options for using the process, and explanations of the main components of the DAO network, including the exchange that will conduct the transaction, the validator – the one who will verify the entire transaction, the developers who will build the code, and the users who will participate in the community.
You can get an idea of the DAO governance structure from the Maker DAO documentation. It contains details on things like the correct use of wallets, the use of IOU tokens to block votes, the duration of how long a token holder must hold a token before they become eligible to vote, how to unlock votes, the decision to what happens to the value of the token, the danger of whales, etc.
It would be helpful to add a section to the governance structure document you are creating about how the DAO will make money. While it is known that the DAO will earn from the sale of its own tokens (which will give members voting rights), members can also contribute capital in exchange for purchasing an early-stage project that will share the profits with them as a share of the investors.
4. Set up rewards and incentives
The final step in creating a DAO is to establish rewards for DAO members for their contributions. Typically, native governance tokens are distributed to participants who use the DeFi protocol for consideration. They represent the property rights they carry. You can also reward them with cryptocurrencies such as USD Coin (USDC), ETH, Tether (USDT), or with ratings and titles.
5. Run DAO
Once you’ve gone through all the steps, you’ll move on to the step where you answered how to create a DAO and are now ready to run it. While there may be several ways to solve this problem, the fastest one is to create a Discord and Telegram community to raise awareness and then direct members to your DAO platform.
At the same time, we considered several stages of creating a DAO. Now, I’m sure the more you research, the more you’ll come across platforms that provide a do-it-yourself answer to how to set up a DAO, such as Aragon, Syndicate, DAOstack, and more.
However, these articles rarely mention issues that require a strategic solution. Remember the 2021 incident where a simple UI bug helped hackers get $120 million from BadgerDAO? So while these low-code platforms provide convenience, online threats like Badger can rob your brand of the future.
Partnering with a blockchain development company that not only has the experience of building a DAO on a blockchain from scratch, but also solved the complexities that come from centralization caused by master nodes (those who own the most tokens), shadow voting, code vulnerability, and renewal term by vote of each member.
At Appinventiv, we specialize in building time-sensitive, hack-resistant DAO platforms that allow the world to communicate and solve the cases they care about. Want to know more? Contact us to create a DAO.