A responsible blueprint for growing a decentralized community, and eventually a full on-chain DAO.

TL;DR

One of the most responsible ways to grow a decentralized community/organization might be to have a traditional web2-like “bootstrapping phase” (with no blockchain tokens being used or issued at all), until a certain level of quorum, decentralization, and size of the community is achieved. Followed by a transition to an “autonomous phase”, which marks the organization now being self-reliant and autonomous, less threaten by potential trusted parties and administrators who might try to go against the will of the community, harm them, or impede them. For this second autonomous phase some web3 and on-chain blockchain tools will most likely be necessary, such as smart contracts and fungible/non-fungible tokens.

Enter the DAO

Up until recently communities have always been for the most part trusting, permissioned, censorable, and centralized. The introduction of blockchains and blockchain tooling such as smart contracts and fungible/non-fungible tokens allow new possibilities that empower communities to not only have more capabilities, but also be safer, more resilient, more accessible, less corruptible…

This is where the concept of a DAO comes in. DAO stands for “Decentralized Autonomous Organization”. DAOs use a mix of off-chain web2-like and on-chain web3-like components to achieve their goals. Despite recent claims by many web3 communities of being DAOs, they are often not. They’re neither sufficiently decentralized nor autonomous to be considered as such, they just make use of some web3 components such as tokens and smart contracts. Instead of being helpful, these tools can often increase the potential for harm to members of these communities, since with any blockchain token there’s always money and economic activity (directly or indirectly) involved.

Everytime we introduce money into the equation in any capacity, the ethical and legal complications of creating and managing a community/organization go up through the roof. The incentives to try to make a profit at the expense of others or misbehave also increases. But this is not an inherent fault of these web3 tools, we can use them to make communities better, safer, and more capable than their old web2-like counterparts, but it takes some careful consideration and planning. DAOs can be an overall improvement to how we create and manage decentralized organizations, if we set them up and use them correctly.

How to set up a DAO

I won’t go into any of the legal or regulatory steps to create a DAO in this article. Let’s just assume a single individual or a group of people (could also be a business or a brand) want to start an online community. Furthermore, they want the possibility for this community to have voting mechanisms and perhaps even manage a treasury in the future, issue fungible and non-fungible tokens, etc. The question we’re interested in asking here is, what might be the most responsible way to go about doing this?

I’m going to argue here for a 2-step process, a bootstrapping phase, where the community is not yet considered fully autonomous and self-reliant, and the transition to a second phase, where it is. First we need to admit that the most likely scenario is for a community to start heavily centralized and permissioned, but with the possibility of becoming more decentralized, trustless, and permissionless over time. Communities need time to grow and to settle, and certainly reach a big enough size and maturity if they hope to become an autonomous actor on their own. Until this point of maturity has been reached the community/organization still has its training wheels on.

So it makes sense to refrain from issuing tokens or involving smart contracts during this bootstrapping phase, which would only add to the potential mishaps and troubles that could occur. And most actions like voting can be done already with established web2 tools, albeit being permissioned and centralized. Just launching an on-chain DAO through a smart contract is not enough. Any decentralized community/organization will not be 100% purely trustless or based on web3 technology, there will always be some trust and non-web3 components, so first we need to plan how to handle these in a decentralized setting.

First we need our community/organization to reach a certain level of quorum, decentralization, size of membership, and maturity. Enough so that any governing and voting mechanism we put in place can be considered legitimate. Then the community can elect moderators and administrators, to for example manage the front-end aspects of social media, accounts, and other community tooling. During the bootstrapping phase, the people managing this community might not be “elected officials”. It could be just this one person or business that started a community, or a group of people that informally wanted to gather together, but didn’t have any plans to setup a complicated and growing community involving monetary assets when they begun.

This bootstrapping phase allows the community to start the process of becoming decentralized, without having to worry about involving blockchain tokens that carry serious ethical and legal implications. And only when they’re ready, they can make the jump into the web3 world.

Preparing to become a DAO

One of the first government actions a decentralized community should do after they’ve reached an enough level of maturity, is set the stage to be able to democratically elect who will be the people responsible for running all the parts that cannot be made autonomous or decentralized. These could be the same people that have been doing this job until now, but the community should also have the option to elect a different set of people if they wish to. If the same people get elected to continue doing the job, at least there will now be an express consent from the overall community, and the ability to replace them if they’re not happy with them.

After the point where the community has grown enough and decided to elect its own administrators/officials, we should be able to effectively consider this community self-reliant/self-sustainable. It still might not be fully decentralized, trustless, or permissionless, but it’s in a great position to start introducing the web3 tools that will allow for this.

Introducing blockchains and web3 tooling, and becoming a full DAO

Up until this moment, there must have been some sort of mechanism to perform polls, vote on decisions, and some way to decide the initial distribution of voting power. Given that we want a seamless transition from a web2-like organization to a web3-like organization, and since it only makes sense to use tokens and smart contracts for the on-chain components of a DAO, ideally we should have a plan to transition this web2 voting power into web3 voting power.

This will most likely take the shape of a web2.5-like mechanism, to exchange this until now web2-like proxy for voting power, into full fungible or non-fungible tokens living on a blockchain. This proxy voting power could take many forms, such as a voucher system, or a merit-based point system that gets rewarded to community members for advancing the goals of the community/organization. Once the community is ready to become a DAO, the first action should be to allow its members to exchange this proxy voting power into real voting power via tokens living on a blockchain.

Once this process is done, the community can now launch an on-chain DAO and/or treasury system (a crypto address to manage crypto funds/assets) via smart contracts, and set up the smart contracts so that the issued governance tokens can be used to approve any treasury actions such as removing funds from the treasury, or updating the on-chain parameters by which the on-chain components of the DAO is governed (threshold values, tokens that can be used for voting, etc.).

The power of tokens

Now that all the voting power of the community has been translated into tokens living on a — presumably decentralized and permissionless blockchain — we have gain a set of amazing properties for our decentralized organization. For starters, any actions involving the on-chain components of the DAO should now be in hands exclusively of token holders. No third party, middleman, or administrator should be able to change parameters or remove funds without a majority of token holders approving such action. This is the power of blockchain tokens and smart contracts, we have created a truly trustless system (for the on-chain components anyway).

Furthermore, we have gained a secondary property that also benefits any off-chain issues that might arise. If some of the entrusted parties with off-chain components of our DAO (administrators, moderators, etc.) misbehave or decide to abandon their responsibilities, or even try to highjack the off-chain components of the DAO, the community can now decide to perform a “migration”. They should be able to collectively decide to abandon any permissioned, centralized, censorable, web2 accounts and software they were using up till this moment (this would be a worst-case scenario), for new ones somewhere else.

The governing power still resides in the tokens, which shouldn’t be reliant on any web2 tooling/software to operate. And the on-chain DAO only is accessible via these tokens. So even if the DAO needs to adopt for its off-chain workings some software where we can’t force an administrator entrusted with some power out of their administrator position or any accounts they hold power over, or a hacker gains access to these accounts, this web2 tooling should in principle be easily replaceable or at least not crippling to the continuous function of the DAO.

A bright future for your DAO

Once this process of becoming a DAO has been completed, we should have achieved a sort of minimum viable governance. Now this community/organization can decide to engage in more interesting propositions, such as putting funds into the DAO’s treasury, issuing new fungible or non-fungible tokens as additional voting tokens, rewards for community participation, etc. There no longer is a small group of people responsible for the actions and maintenance of this DAO, the collective of token holders decides though governance actions what gets or doesn’t get done, every action requiring the approval/consent of a majority of token holders. This is how one might responsibly set up a decentralized community from scratch.

There is still however a lot of additional things we might want to do. For example, a highly recommended action would be to create a founding document or constitution, setting in writing the expectations, goals, and objectives of the DAO, and allowing token holders to update this document when necessary via a governing action, or even vetoing potential actions some token holders might want to achieve, that go against the spirit or the goals laid down in this constitution/founding document.

It is very likely that any DAO will not have exclusively 1 type of token and token-holder, one type of actor/participant, but many different ones. Issuing different tokens for each one of these actors would allow for “separation of power and concerns”. Some people might hold tokens that can engage in voting actions, but not vote on treasury withdrawals, or viceversa. Some community members might get rewarded with special tokens with a different weight of voting power or capabilities, members can even hold different types of tokens at the same time. Blockchain fungible and non-fungible tokens are so powerful because of their enormous flexibility and adaptability. They are the ultimate scarce digital asset. We’ve already seen how they can become money itself, voting power, a collectible, a membership credential… And their use cases and utility will only grow as the blockchain industry matures and becomes mainstream.

Final remarks

This is but a short proposal to how one might decide to start a decentralized community/organization in a responsible manner. Unfortunately, given the nascency of the blockchain and crypto industry we do not have neither legal guidance in most countries to how to set up a DAO, nor an informal guide of best practices on how to do so.

Most people are simply “winging it”, and due to how easy it can be to mint tokens, launch a smart contract, create a DAO… up to the level of a single individual, it is very easy to act irresponsibly. The natural yearn for speculating, investing, or making money off of these new digital assets (the tokens) only adds fuel to the fire. We’ve seen already multi-million dollar hacks and rugs, in fact quite frequently in the space. This is not acceptable, this is not responsible. We need to do better.

Hopefully this article will inspire you and other people to do just that. Let’s find better ways to setup and manage DAOs and other types of decentralized communities and organizations.

PS:
This is not a prescription, for many use cases such as many businesses or decentralized protocols it might make sense to launch with a token on day 1, but for many others this might be a burden and troublesome.