DAOs are more than smart contracts

Introduction

DAOs are usually defined as an organization constructed by rules encoded in a smart contract that is transparent, controlled by the organization's members, and not influenced by a central authority.?

Whenever we talk about DAOs, a technical definition of the whole concept comes to mind. The first thing we read is that DAOs are built on smart contracts and are ‘managed’ by the code. Smart contracts are self-executing contracts in which the contents of an agreement are inscribed directly into lines of code. They are immutable and, thus, once coded, cannot be altered by anyone, ensuring trust, transparency, accuracy, and security.?

The DAO’s underlying technology undoubtedly plays a significant role in how the DAO operates. However, I would go against the usual narrative and say it is not the most critical component. There are two layers to any DAO -?the tech layer and the community layer. Even if a project has the best tech ever, unless a strong community supports the project and the vision, the tech alone can’t guarantee its success and life.?

Many think the community members are just investors on a Discord server and fail to understand the community's true purpose, importance, and meaning.

Instead, we should look at the DAO as a conglomerate of like-minded people that come together to achieve a common goal. That is, a place that provides better opportunities for community members looking for something different than traditional business environments, such as the freedom to get involved in the project as a contributor, the ability to vote on the DAO’s future, and the motivation to support the growth of the project.

Many founders do not pay enough attention to the community, except for looking at the number of likes and follows. However, no DAO can exist without a community unless you are running a centralized organization and calling it a DAO because it is a buzzword that makes you sound and feel good.?

A project may have the best tokenomics, whitepaper, idea, and tech, but without a community, the project is just a project and cannot survive for long, let alone be a functional DAO.?

Community Role

The concept of a DAO shifts the structure from hierarchical and vertical to a community-led and community-focused organization. This organization type does not recognize the role of managers and executives and favors encoding rules of behavior that allow the organization to perform independently from its members.

This unique environment encourages a focus on a community where individuals grow collectively with the organization rather than focusing on profit and dividing them amongst the shareholders.??

In a DAO, the community members are incentivized to work together towards a common goal. When DAO founders don't focus on community engagement and incentivization, the community is bound to lose interest and not be actively involved in the operations of the DAO.?

When there is no evident interest of the founders to engage or involve the community, the community itself would not feel included or motivated to be engaged in the project and contribute towards its development.

When discussing marketing or promoting blockchain projects, the founders often focus on how advanced their tech is, what problems they aim to solve, and how the project would benefit the industry. However, they miss out on building an active and involved community and a suitable decentralized governance framework roadmap that favors the community and supports a decentralized environment.?

Although some community members do not follow the project’s Discord server, are inactive, and frankly do not care much about what’s happening with the project as long as the coin's value is going up. However, the negligence of the inactive community members does not define the norm for the DAO.??

I spoke with a few members of a DAO's founding team. They shared that they had issues with inactive members and decided to limit their voting rights. Basically - they removed their voting power. I was amused in a negative way to hear statements such as ‘we will never have an entity, and we are a true fully decentralized DAO’, which was followed by the founding team's decision to strip community members of the ability to vote. Even though I understand the issue of passive communities, removing someone’s power to vote in a DAO is a simple no-go.?

Compare it to the centralized world where we have too many examples of when someone disagrees with the current politics or the actors and is stripped of certain rights. This is no different. The key word is decentralized, and even though the active community keeps their voting rights, it’s again centralizing the power on a larger group of people. The ability to vote in a DAO can’t be selective or participation based. It needs to be equal for all the hodlers.

Nurturing, supporting, and incentivizing the community to be active should be a priority, especially if a DAO has an issue with the involvement. Before blaming it on the lack of interest of the community, one should assess why that is happening. There are a few reasons why that happens. I will mention some of those:

1. CEOing the DAO

This happens more than often, and it makes the community members lose interest in what’s happening with the DAO, as they don’t feel they can contribute anyway. People come to this industry with the premise that it's built on decentralization, trustlessness, transparency, and equal participation. When the founding team acts as the decision-making body that organizes Zoom calls to keep the pretense of a DAO, members quickly lose interest and disengage. They have enough of that in their regular jobs. Calling it a DAO, does not make it a DAO. Similarly, building it as a DAO makes the DAO in the making. I addressed this issue in more detail in my previous article “Stop calling yourselves DAO CEOs”.

2. The Community is taken for granted

The concept of a DAO empowers the community as the decision-making body of the DAO. In order for the community to be able to vote on certain changes, updates and proposals, it needs to be informed at all times of the problems, risks, and steps needed to be taken to mitigate those risks. The community needs to be given the appropriate amount of information to know, react and be able to make a decision from the very beginning.?

Of course, when a DAO is still young and has a small community or none, there is no community to inform or vote on certain things, but it does matter how one treats the community from the very beginning. The initial stages of building a DAO are crucial, stressful, and time-sensitive. The founding team has the responsibility to build a solid basis, and for that, they have to be SMEs and the ones making the decisions. What matters is to let the community know and be up to date with the developments and next steps. Transparency is the key to making the community trust the projects and their representatives, and it keeps them on.

3. Fish, fish, whales

One becomes a DAO member by purchasing and holding the tokens of a DAO. This further enables them to participate in the DAO initiatives, vote on proposals made by other members, get involved in DAO plans, etc. The power of one is usually determined by the number of tokens one holds. Usually, the governance assumes: that the amount of the tokens is the voting power; or the vote is calculated?-?1 wallet?= 1 vote, and some have implemented the liquid democracy.?

The first one brings the risk of so-called whales, those that possess huge amounts of the token, while the second one, many argue, is not really in the spirit of decentralization, which I tend to agree with.?

Similar to how shareholders in a company can influence decisions, these Whales are able to sway the decision in their favor and thus make the DAO essentially a centralized organization. Small holders might not be incentivized to vote on proposals if they keep seeing that the whales, which often can be founders themselves, always win the vote regardless of what the majority (of wallets) think. We recently had an issue where one wallet bought additional power to secure 90% of his favored vote. No decentralization here, but full-on centralized decision powered by a decentralization tool. Ironic, but a lesson learned (hopefully). The whale issue can be solved by implementing the voting power cap in the governance and, giving equal opportunity for everyone to be heard.?

How regulations may affect the community

We are used to recognizing DeFi and Web3 as unregulated environments. However, it is an environment where the founder’s vision and ideas are built on trust among the community members, where everyone is anonymous and here for the same goal. At the same time, the execution itself is trustless and entrusted to smart contracts.?

Given that the investors enable the founders to bring their idea to life, the founders are responsible for ensuring that the community is protected. In situations when no one accepts the responsibility but takes on the power, the project is prima facie decentralized but centralized at its core.?

Non-compliance with the upcoming regulations may lead to risks and liabilities for all community members. In cases where a DAO is not incorporated, and there is no legal entity representing the DAO, there is the risk of unlimited liability being implicated on the community members. Founders owe legal protection to the community. Ideally, the focus should be put on the legal standing of the community, protecting them from tax and legal liabilities and, as a result, protecting the project from any legal uncertainties.?

When a project is not in good legal standing, its scalability and longevity may be in peril. Many blockchain-based projects that have not taken any steps toward compliance are put at risk, and the community and have no protection against scams, rug pulls, or legal implications. Further, the unlimited liabilities implicated on the community due to the misconception of DAOs as General Partnership puts them at a greater risk.?

Conclusion?

The community members are the investors and long-life supporters of the project. The project can last only as long as the community lasts. Minimizing the importance of each member that has invested in the project rids the project of its true nature of being a decentralized organization.?

DAOs are an innovative form of organization that needs to prioritize the community members and contributors as a ‘tool’ for its advancement and building a product that solves a certain problem.

Having dormant community members can possibly impede the development of the DAO. Having less turnout in the voting process impacts the project in a way that confirms its centralization, which can impact the industry as a whole.?

What is your experience? Are you an active community member, or do you prefer leaving making decisions to the founders and contributors? Do you have a story to share? Would love to hear it in the comments below!?