Let’s talk about subDAO

8 min readSep 18, 2022

The antidote to centralization and bloat?

About six months ago I went deep on this concept called the subDAO. It was initiated as a challenge from a contributor at Index Coop who said “how do I create a subDAO”. I think the driver was mostly around giving the finance workgroup greater autonomy, but as I thought critically about the value of the subDAO, I saw it had the ability to counteract the bureaucratic and centralizing tendencies of DAOs.

Thanks to @mel.eth and @sixty_keys for their help and feedback on my early research on this subject. Also, thanks to @Pepperoni_Jo3 for the input and coaching.

Let’s back up. Part of the issue with organizations is they tend to invent work to keep themselves busy. If I have 40 hours dedicated to a job, I’m going to fill those 40 hours with something. That means people build processes around themselves to make their job important. If you want an example of this, go to any US Bureau of Motor Vehicles and notice how many different lines are required to get different tasks done. There is a window for drivers’ licenses, a window for registration, a window for changing documentation, and a window for figuring out which window you need to talk with.

DAOs are no different and they might be a bit worse. Centralization drives and directs actions and activities. Immature decentralization means you have a group of people that go off willy-nilly working on whatever they think needs to be done. That’s great for innovation, great for speed, great for engagement, but not so good for efficiencies. Left unchecked, a DAO can bloat itself right out of the treasury.

So, what is the solution? Aside from a bear market?

What is a subDAO?

If you ask five people to define a subDAO, you’re likely going to come up with five different answers. What we’ve tried to do here is to outline some characteristics to help think about the subDAO.

But, the subDAO is just another way of organizing work and people. Think of it in the context of an autonomous working groups that is economically and relationally aligned to the parent DAO, which we will call the “superDAO”.

In real life, we can use the example of a parent and a subsidiary or affiliate. The relationship between the parent and the affiliate/subsidiary is defined by the ownership stake of the parent, but the relationship is intended to be arms length. Said another way, the child is mostly autonomous and the parent does not direct operations or strategy. The standard IRL example is a conglomerate (ParentCo) that has a pharmaceutical division (PharmaCo). That pharmaceutical division will almost always be an affiliate or a subsidiary in order to isolate the risk from the parent company. If PharmaCo poisons a bunch of people, liability is limited to PharmaCo and ParentCo is (mostly) protected.

Conceptually there are five things that are different about a subDAO versus a working group or pod within a DAO.

Let’s discuss them one by one.

Link to the superDAO

The subDAO has a lighter link to the superDAO. What this means is that the subDAO by design has less of a linkage to the superDAO than a function or workgroup. And this is the point, it gives the subDAO greater autonomy and relationally increases their entrepreneurial behavior.

Economic Autonomy

This subDAO has its own wallet and funds are managed within the subDAO. The superDAO may grant funds regularly to the subDAO, but once funded, it typically has its own multi-sig and there may/may not be superDAO members on the multi-sig. Additionally, the subDAO may have its own income stream and even plans for its own token.

What gets interesting is the shared income / token ownership between the sub and super DAO of any future income/tokens. recall that the subDAO remains economically and relationally aligned to the superDAO. If the subDAO creates its own token, there’s going to be a conversation to work out income sharing and token distribution.

Severability

The subDAO is severable. Let’s look at an IRL example. If we look at a medium-sized traditional company, you don’t really ever consider turning off the human resources department. We might scale it back, reduce the number of people, or outsource some components of it like payroll, but you generally don’t turn off an entire department. This is different, the subDAO is built in a way that it can be severed completely from the superDAO.

superDAO(s)

By design, the subDAO is built to serve multiple superDAOs. This is what can unleash the power of the subDAO when it has the ability to take advantage of economies of scale and offer services to multiple customers. This is what can create its own income and provide treasury relief to the superDAO.

Why subDAO?

The core point of the subDAO is to reduce bloat, decentralize and unleash the entrepreneurial spirit.

It does this by allowing the superDAO to scale exponentially without the efficiency breakdown associated with bureaucratic inertia. In parallel, it can maximize the superDAO treasury via sub tokens and alternative revenue streams. If your DAO is stareing at a shrinking runway it might be time to consider if there are any exceptionally well run components that can develop their own income stream.

Consider also the greater autonomy granted to the subDAO, the lower the managerial lift for the superDAO. The larger and organization gets the greater the tendency is to be to build a central team, board, or council that will make efficient decisions for the organization. This is understandable, and in my opinion, it’s a DAO trap. See this document where I outlined the risk of reapplying MBA thinking to the DAO.

https://twitter.com/chaserchapman/status/1559635720075083780?s=20&t=ZU-KbKLQQoAmk_jW73IxHg

The subDAO also combats bureaucratic inertia by encouraging a greater degree of entrepreneurship. Smaller teams with fewer people lead to faster cycle times and greater individual ownership. This is why smaller companies can run circles around older more well-established and better-funded organizations. Related, the subDAO also allows for noncore expansion. If your DAO project is focused on building the next greatest financial product, but you’ve got five people that have built a killer recruiting workgroup, cut them loose and let them build their own new core competency.

Another component of the subDAO that may not be as obvious is the ability to attract local talent in the local language. The best example of this is BanklessDAO Brazil. By creating a subDAO, they’ve been able to tap into a kick-ass Brazilian talent market that may not have been able to participate due to language issues.

From a risk perspective, it’s easier to turn off a subDAO than a function. This could be a game changer in the next bear market where a subDAO can react faster to market conditions by scaling up/down based on needs. In parallel, if a subDAO serves more than one DAO, it has less exposure to drastic swings in one protocol.

When should you subdDAO

When to create a subDAO is not obvious. Here are a couple of things to think about

· Profitability: is the work group generating its own revenue? If it does, or could, it might be a good candidate to subDAO.

· Function: can the superDAO survive without the subDAO? Recall the subDAO has a lighter link to the superDAO and with that greater autonomy, it might decide that it’s best to serve others Don’t export your core competency without a backup plan.

· Sustainability: if a workgroup is generating its own revenue, can it survive on its own? Is there market fit and does it have the leadership required to generate cash flow to survive on its own? If not, it’s probably not a good candidate.

Risks of the subDAO

The move to a subDAO is not without risk, and one should not confuse action with progress. Just because some other DAO is moving to a subDow structure, does not mean you should do it too.

· Incentives and principles: By aligning incentives, the two organizations have a reason to collaborate on shared goals. Similarly, by keeping aligned principles the two teams can continue to work in parallel — but if one organization puts profit ahead of people and the other organization puts people ahead of profit, you’re up for a difficult relationship.

· Hope for harmony, but plan for divorce: the superDAO need to consider what is going to happen if things don’t go well. Are you going to stop funding the subDAO, or try to reabsorb the work? By planning for these things in advance you’ll have the ability to execute a plan versus reacting to a negative scenario.

· Loss of capability: Greater autonomy granted to the subDAO means the subDAO could walk out on the superDAO, or just fold. If that happens, can the superDAO rebuild or hire the lost capability?

Conclusion:

if you ask five people what a subDAO is, you are going to get five different answers. The point is that we would do well to consider the subDAO as an option for exponential growth unencumbered by centralization and bureaucracy. Doing this will protect us from the next bear and position us for explosive growth in the next bull.