When to avoid using DAOs

There are times where you shouldn't DAO It....

The traditional way of building organizations, with top-down leadership, has survived millennia for a reason. Guided by a benevolent leader, top-down management is battle-tested and efficient. After all, when it comes to willing a creative vision into the world or building something new, you probably imagine the stubborn visionary - people like Steve Jobs - organizing human and monetary capital and running through walls in pursuit of lofty ambitions. People are less likely to run through walls for an organization they feel a casual amount of ownership and commitment towards. Small, nimble startups are better at developing new products from scratch and taking things from zero to one since founders have big equity stakes and are incentivized to devote everything to the success of a project. It's important that the team can change direction fast without the consensus of a large community, and a benevolent leader can make tough calls like hiring and firing. DAOs add friction to action like passing proposals that is would hinder the fast iteration cycles and pivots needed in a startup. Generally, prefer startups for value creation and DAOs for value protection.

One of the most important considerations when starting a DAO is incentive alignment. Without careful planning, DAOs can face a tragedy of the commons problem where no one is incentivized to take ownership for things because no one has a clear mandate or potential upside. A persistent founder or software engineer at a startup is incentivized to spend late nights toiling and lead a project to greatness since they have a reputation and financial outcome on the line. In a DAO, each member usually owns a very small amount and doesn't have the autonomy to take significant actions without passing a proposal. To combat incentives problems, there are several things to keep in mind. If the DAO is looking to build software or a protocol together, setting aside a portion of the treasury for the Core Team can incentivize a group of people to build out the product. Of course, if a Core Team owns a large enough share of tokens to pass any proposal they desire, then it starts to feel more like a business and less like a DAO.

Another important element is creating a culture of paying for work. Many DAOs don't part with money easily, but it's important to create a culture where builders get paid. While DAOs often attract mission-driven people working for less than what they could make at market rate, paying people well prevents burnout and sets an example of the type of work the DAO values. The final option to align incentives is to start as a traditional company and decentralize after finding product market fit. Many of the most successful DAOs like Uniswap and Maker followed the playbook of gradual decentralization - starting as traditional companies and giving tokens to community members and/or selling them on an open market.

In cases where pivoting may be needed, prefer smaller, more centralized teams. In a startup, a team may pivot to other ideas if they have reason to believe the current approach is not working. DAOs are less easily steered, which is one reason why ConstitutionDAO ended up returning the funds to contributors after losing the bid instead of trying to repurpose the funds for something else. Should ConstitutionDAO have persisted and pivoted? Some criticized the DAO for having a core team that made a centralized decision to return the funds. If the DAO had been truly decentralized by that point, it would be necessary to have a governance vote to return the funds. The core team understood that if a DAO exists for a singular purpose, has a large number of members, and does not achieve its goal, It's very hard to change momentum and align a large group around a different cause than the one they showed up for.

While the ConstitutionDAO team made the right call, in some cases it makes sense for a DAO to pivot and pursue a related idea or goal. It's best to start by opening a dialogue with the community and posting a proposal with the suggested pivot and rationale. This may include changing the mission statement of the DAO or outlining a strategic shift in what types of projects the DAO undertakes. After getting input from stakeholders, put the proposal to a vote. The new direction of the DAO may be controversial and create some disagreement and divisions in the DAO. Some DAOs, like those created with the MolochDAO and newer TributeDAO frameworks, offer a way to rage quit and sell your share if you disagree with a big change like a fundamental pivot.

Back Home

Read the extended chapter...