Creating a Benchmark DAO

Have you heard the buzz about DAOs but wondered if they’re all hype or the start of a new organizational revolution? The truth it can turn both, depending on technology adoption, regulatory limitations and overall organisation governance trends.

Decentralized Autonomous Organizations (DAOs) offer a new model for collaboration, promising efficiency, transparency, and resistance to centralized control.

But how do you design a DAO that truly lives up to this potential? In this article, we’ll explore a comprehensive framework for creating a Reference DAO, emphasizing decentralization, autonomy, and community-driven decision-making. We’ll delve into its core principles and the step-by-step process that allows it to function effectively and review the issues of the present DAOs and how far from perfect they are.

First, let’s dive into the base principles of DAO:

Decentralized

A balanced distribution of voting power: Participants have equal or balanced voting rights, preventing concentration of power.

Transparency: All decisions, transactions, rules, and code are open and accessible for all participants to verify.

Censorship resistance: There is no possibility to block or limit participation and access to information.

Autonomous

Self-regulation: The DAO should be able to make and change its rules without external interference.

Code is law principle: All actions and operations of the DAO are defined and automatically executed based on pre-established code within the framework of the memorandum.

Economic incentives: Participants are motivated to support and participate in the DAO not only ideologically but also through built-in economic mechanisms (e.g., rewards).

Organization

Collective decision-making: Important decisions are made collectively, taking into account the opinions of the majority (50%+1) or absolute majority (75%) of participants.

Community orientation: The interests and well-being of the community of participants are the top priority. The DAO serves the interests of its participants and strives for their well-being.

The ethos of cooperation: DAO participants strive to cooperate, share knowledge, and work together towards common goals.

Decentralization, autonomy, and a community-driven approach are the foundational pillars. But turning these ideals into a functioning DAO requires a meticulous translation of principles into practice.

How actual DAOs operate

Regardless the promise they hold, many DAOs in existence today are marked by issues such as voter inactivity, centralized decision-making, and security vulnerabilities. These problems suggest a shared pattern of challenges in translating the idealistic vision of DAOs into effective and sustainable organizations. A critical examination of these common shortcomings is essential as we strive to develop more robust DAO models for the future.

• Centralised Treasury Management: Despite the underlying philosophy of decentralization, a common problem in DAOs is the concentration of treasury assets in the hands of a small group of participants. This can result in decisions that are not truly reflective of the broader community’s interests. It’s essential for DAOs to establish clear, transparent mechanisms for treasury management, ensuring genuine distribution of control.
• Plutocracy: The promise of democracy within DAOs is sometimes undermined by a drift toward plutocracy. Those with the largest token holdings (often founders and early investors) tend to wield disproportionate influence over the DAO’s direction. To counter this, DAOs should continuously explore alternative voting structures, such as quadratic voting or systems that consider factors beyond simple token ownership.
• Voter Apathy: Securing sufficient participation in governance remains a major challenge. Token holders may passively hold tokens without actively engaging in voting and proposals. This lack of participation creates vulnerabilities, can stall progress, and reduces the legitimacy of decisions. Strategies like rewarding participation, creating easy-to-use voting interfaces, and carefully designing proposals that resonate with voters are crucial for tackling apathy.
• Technical Complexity: The underlying technologies supporting DAOs (blockchain, smart contracts, etc.) are still relatively new and evolving. This complexity can deter potential participants and make understanding the full mechanics of DAOs difficult for everyday users. Educational outreach, the development of user-friendly tools and interfaces, and a strong focus on accessible documentation can help bridge this gap.
• Security Risks: Smart contracts, as the backbone of DAOs, can have vulnerabilities that hackers could exploit. This has led to significant losses, damaging trust in the DAO model. Implementing rigorous code audits, security best practices, and potentially bug bounty programs is essential to mitigate these security risks.
• Regulatory Uncertainty: Governments globally are still in the early stages of understanding DAOs and their legal implications. This creates significant uncertainty, making it difficult for DAOs to operate confidently within traditional legal frameworks. Staying informed on the evolution of regulations, pursuing open dialogue with lawmakers, and potentially adopting legal structures that offer some clarity can help manage this uncertainty.

Overcoming these obstacles is crucial for the development of robust DAO models. Prioritizing transparency, simplifying technology, enhancing security, and navigating regulatory frameworks are essential steps on the path to realizing the full potential of DAOs.

The Guide to Building a Benchmark DAO

Building a perfect DAO is not a one-time event, that’s why we developed the approach in step-by-step instructions on how to turn an utopian vision of DAO into an operating efficient system.

Properly distributed quorums

1. 51% for all financial operations and operations that change quorums and DAO rules.

In the future, it could be interesting to have a DAO economy auditor with an additional 20–30% quorum, which they use only to confirm changes to the rules in the Memorandum, quorum parameters, and other critical economic changes in the DAO. With the auditor, a 75% quorum could be used for changes to the rules in the memorandum.

2. The remaining quorum, which is not critical for the security of the DAO, can be flexible and adapted to the convenience and needs of the community.

Categorized, described, and created expert DAOs

Composed of groups of people/DAOs, experts with a proven background and a desire to develop and build DAOs. Motivated by the narrative to be part of something new and great.

Delegated Token distribution

In order to achieve quorum, it is necessary to distribute voting power from the treasury in a quality manner. To do so, tokens must be delegated to expert DAOs in the minimum economically viable amount.

• For non-traded tokens, this could be 5 experts with 10 million votes each.
• For medium-cap DAOs, it could be 10 experts with 5 million tokens (votes) each.
• For large-cap DAOs, it is ideal to distribute to 50–100 experts with 0.5–1 million votes each.

Expert DAOs

• If the option with a small number of experts is chosen, it is important for the expert DAO to count a larger number of quality participants and sub-DAOs.
• Ideally, delegated tokens should be distributed to a larger number of governors.
• The more tokens are delegated, the more decentralized the DAO will be.

Delegated Token Withdrawal

• When delegated tokens are withdrawn, the delegate’s coefficient will change slightly, leading to an outflow of delegated tokens and an overflow to another.
• This will organically increase decentralization and reduce plutocracy.

Rewards

• It is necessary to calculate the minimum amount of rewards received for each user so that by voting $500, they compensate for the basic network fee, e.g., $0.5. This is about 5% per annum with 50 proposals per year.
• With the correct distribution of voting power among experts, it is ideal to achieve an inflation rate of no more than 2% per DAO (excluding team rewards).

Building a Sub-DAO System

Create working sub-DAOs that will optimize rewards, reduce the total number of proposals in the main DAO, improve the reporting system, and distribute resources more transparently.

Main DAO

• Functions: Creation of sub-DAOs, resource allocation, control, and monitoring.
• Proposals: On-chain proposals for major decisions and resource allocation.

Sub-DAOs

• Treasurer Sub-DAO (1st level)
• Functions: Financial management, creation of working sub-DAOs of the 2nd level, distribution of funds.
• Proposals: On-chain proposals for requesting resources from the DAO, off-chain proposals for internal interaction with working groups.
• Working Sub-DAOs (2nd level): Product, Technical, Marketing, SMM, and Community groups.
• Functions: Specialized tasks in accordance with the direction.
• Roles: Group leader, specialists.
• Proposals: Off-chain proposals for internal tasks, on-chain proposals for requesting resources from the Treasurer.

Operations and Interactions in DAO

1. Creating the Treasurer

• Time frame: At the beginning of a quarter or project cycle.
• Establishing the Treasurer: Define a specialized Treasurer (a Level 1 group consisting of leaders of Level 2 working groups) and appoint a group leader.
• How to do it: Make it through internal meetings and consensus.

2. Creating Working Groups and Subgroups

• Time frame: After assigning the Treasurer.
• Establishing Working Groups: Define specialized groups and subgroups depending on their skill and input (Levels 2 and 3). Appoint leaders.
• How to do it: Through internal meetings and consensus.

3. Planning within Working Groups

• Time frame: After the creation of working groups.
• Establishing a Plan: Leaders of each working group form plans, budgets, and timelines for their groups and subgroups. They submit these plans to the Treasurer in the form of proposals.
• Why doing it: To have a clear detailed plans of action for each working group.

4. Consolidation of Plans by the Treasurer

• Time frame: After the planning by working groups.
• Establishing a Single Document: The Treasurer (a DAO of working group leaders) collects the plans into a single document.

The Treasurer forms a proposal with a single plan of action, budget, and timeline, and presents it to the main DAO.

Why doing it: To provide a complete picture of the plans and needs of the main DAO.

To obtain approval and resources from the main DAO to work for the quarter/project.

5. Request for Resources by Working Groups

• Time frame: At the beginning of each month/phase of the project, after the Treasurer has received resources.
• Creating a Proposal: Leaders form proposals with plans, budgets, and timelines for their groups.
• Why doing it: To ensure clear coordination and distribution of resources among working groups.

6. Task Execution

• Time frame: During the month/phase of the project.
• Creating Task: Each group member distributes tasks among their competencies (in agreement with the Group Leader).

They create a proposal to receive funds.

How to do it: Using internal task management tools and regular meetings.

The process of desicion making from local sub-DAO expert to execution

7. Reporting

• Time frame: At the end of the month/phase of the project.
• Creating a Report: The working group leader collects reports on work done, goals achieved, and costs into a consolidated report from the rest of the group or from lower levels working groups. The Treasurer collects these reports into a consolidated report.
• How to do it: Through special off-chain proposals, as separate files.
• Why doing it: To demonstrate progress, resource utilization, and justify future resource requests.

8. Feedback and Adjustment

• Time frame: Continuously, with a major review at the end of the quarter/project.
• How to do it: Through regular meetings, reviews, and KPI analysis.
• Why doing it: To make adjustments to plans and strategies, ensuring continuous adaptation and improvement.

The Reference DAO model we’ve explored aims to address these challenges and provide a blueprint for creating communities that are truly decentralized, transparent, and efficient. As DAOs continue to mature, it’s likely we’ll witness innovative solutions to the problems mentioned above. By building strong foundations and iteratively improving upon them, DAOs have the potential to revolutionize the way we collaborate, make decisions, and build a more equitable future.

The Ongoing Pursuit of the Ideal DAO

The Reference DAO framework provides a powerful blueprint for communities seeking true decentralization, transparency, and efficiency. While the current landscape of DAOs highlights persistent challenges, these imperfections are not a sign of failure but rather a call to action. By addressing these issues we move closer to realizing the full potential of DAOs.

The evolution of this organizational model will be shaped by continuous refinement, innovation, and a willingness to learn from setbacks. Let us embrace the challenges, prioritizing solutions that foster broad participation, robust security, and adaptability within an evolving regulatory landscape. The journey toward the perfect operational DAO is an ongoing one, driven by a collective commitment to building a more collaborative and equitable future.