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How Do DAOs Operate When No One Is in Charge?

Mar 15, 2022 Leeron Hoory reading time 5

Imagine working in a company where you have access to its most confidential information. Nothing is off-limits. There is no central leader, and members make decisions democratically. 

Sound utopian? These ideas are some of the core principles of Decentralized Autonomous Organizations, known as DAOs. However, this radically-democratic way of organizing people and resources raises some important questions. If no one is in charge, how do these organizations operate effectively? Are they really as decentralized and autonomous as the name implies?

As DAOs are a key part of the decentralized finance, Web3 and crypto ecosystem, it’s worth thinking about how DAOs can – and should – organize themselves.

What Is the Point of a DAO?

A DAO is a community-led group of people with no central leadership. Many of the most well-known and successful blockchain projects and protocols today, like Compound Finance, Uniswap and AAVE, are run as DAOs.

Every DAO is different, but the core principles are generally the same. Instead of central leadership, the community votes on future decisions. Typically, members gain access by purchasing the DAO’s token, which allows them to introduce proposals and vote on policy changes on the future of the organization. 

For instance, Yearn Finance is a popular DeFi project that operates as a DAO. When founder Andre Cronje wanted to mint more of Yearn’s native token YFI, he introduced a proposal and 61% of the token members voted in favor. This is important, because it means the maker of the currency doesn’t have the power to do what they want with it. Instead, ownership and use of the currency give voting power. 

It could be argued that, unlike the central bank, which manages supply of US dollars, or stablecoins like Tether (USDT) who are tied to a Fiat currency, DAOs pave the way for an ideal monetary system where those who use it have a say in its governance. A true money for the people. 

How Do DAOs Work? Build, Then Decentralize

We reached out to some DAOs to find out how they really work on the inside. A senior member of DAO API3 revealed how decentralization creates a unique environment of self-organizing and self-motivated members. 

Ryan Boder, core team lead at API3, told Blockpit,  “Because you don’t have that strong personality at the top who’s just telling everybody what to think and what to do, it’s more of a ‘how can I contribute’ mindset?” 

However, setting up the decentralized structure of a DAO doesn’t happen overnight. 

DAOs typically start as a core team that establishes the project or protocol through smart contracts — all of which are fully transparent. Once a project is off the ground and gains some momentum, the core team can consider decentralizing certain parts of the organization.

At API3, for example, there are four or five core teams that represent functional areas of a company, such as the core tech team, the missions team and the marketing team. Ryan explains, “The teams themselves operate like individual, smaller companies or individual entities, which is good, because being decentralized to the extreme is actually quite inefficient.”

This way, smaller teams are working in a more focused capacity, and the larger DAO can propose and vote on specific ideas. 

Still, a decentralized organization creates the structures for new ideas and collaborations to emerge. “Being decentralized means that you have different opinions and people are self-organizing and self-motivated,” he explains. “We definitely work to align on the same larger vision and goals and even on tactical stuff, but at the same time, there’s more diversity than I think you experience in a company.”

Grace Rachmany, founder of DAO Leadership, a company that provides consulting and training services for DAOs, agrees that most DAOs are not fully decentralized. “If you look at most of the DAOs that exist, they have specific powers to decide about specific things. The DAOs don’t decide all of the policies of the organization. There is a core team who decides that and they’ve given the DAO some powers.” 

Scalability and the Future of DAOs

Ryan joined API3 two months before it transitioned into a DAO. The core members stayed in place and were still the ones to make most of the proposals. As API3 has been growing, he says he’s been seeing more proposals and initiatives come from outside the core team. 

“We’ve had proposals that have come from individuals or teams that weren’t around in that pre-DAO period. As the size of the project grows, the more we’ll have decentralized proposal-making and initiative.”

Decentralizing more aspects of the organization, where more people are contributing, proposing and creating their own teams, also allows the project to grow more than it could otherwise. Ryan shares, “It’s more difficult or maybe I would even say impossible to really be efficient with the central planning approach as the project grows. You need decentralization in order to scale.”

Several small core teams work well as long as each is relatively small. But if they grow too large, they would become inefficient and require reorganization. “In a centralized organization, that usually means introducing layers of middle management. In a DAO it’s more of a free market of contributors,” Ryan explains. “I think that’s what I expect to see over time with API3 and any DAO.” 

Challenges of DAOs

Of course, when implementing a new business structure, challenges will inevitably arise. The DAO voting mechanism is effective for many aspects of decision-making but not for others. “It’s nice to have something like a DAO voting mechanism where we can all come up with different ideas. If I think we should invest in A and you think we should invest in B, we can vote and the best proposal wins,” Grace explains. 

But if you’re trying to strategize about how the project can remain competitive, or which new products the team should introduce, a brainstorming session is likely the better way to make progress. “Maybe you need multiple proposals on the table, and you need to have more discussion. Or you need to define the problem. For that type of nuanced or complicated decision, the DAO isn’t the right mechanism for that,” Grace says. 

Ryan adds that one of the challenges in a DAO is that the steps involved in voting on a decision can often take time. The process from introducing a proposal to implementing it usually takes up to a month. In a fast-moving environment where every day seems to bring something new for DeFi, that might feel like a timeline that slows down progress. Ultimately DAOs balance larger-scale voting with decisions that are made among the core teams. 

Why the Mindset of a DAO Can Be Counterintuitive 

DAOs present a solution to common problems in centralized organizations: highly consolidated leadership, lack of transparency and corruption. Yet, for most of us, that’s an entirely new way of doing work, and understanding profit and how to share it. 

Organizing a DAO requires a collaborative approach, coming together as a team and saying, “We’re going to look at our finances together and decide who gets what. We’re going to try and do it fairly as a group,” Grace explains. “That takes a lot of skill that most people don’t have. So that’s the first obstacle.”

Grace emphasizes this mindset shift as a key factor that’s required to go from a centralized business structure to a decentralized one — and it’s one that’s easy to overlook. She explains, “Most people who start a new company are not thinking, ‘I don’t want to make all the profits. I want to share them with everybody.’ That’s not the normal mindset. It’s not a bad mindset. It’s just not the normal one.”

What Does the Future Hold for DAOs?

While there are many visions for the future of DAOs, no one knows for sure how they will evolve in the coming years. 

What’s clear is that DAOs work particularly well for blockchain projects, where the whole ethos is based on transparency, decentralization and the principle of verify, don’t trust. 

It’s likely that many future successful Web3 projects and companies will be DAOs, because the structure and philosphy aligns with the principles on which Web3 is built.

Despite the name, most Decentralized Autonomous Organizations are not truly 100% decentralized and autonomous. But at least it’s a step in a direction where founders share profits with the users, and currency holders contribute to important decisions. This new way of working requires a significant mindset shift. 

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