How do DAOs work?

A DAO creates a new arena of ownership and governance where exceptional talent can have a more significant stake in the organization's destiny, return, and profits.

DAOs and Blockchain

As our last blog post mentioned, a DAO (Decentralized Autonomous Organization) is an organization represented by rules encoded as a transparent computer program, controlled by the organization members, and not influenced by a central government. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles.

DAOs are one of many Web3 applications made possible via blockchain technology. A crucial part of blockchain technology is what is called smart contracts. Smart contracts are essentially programs that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions to which users agree. When those conditions are met, the terms of the agreement are automatically carried out.

The firmness of a DAO is the underpinning of its smart contract. The smart contract represents the organization's rules and automated decision-making. No one can edit the rules without people noticing because DAOs are transparent and public. Today, we are used to companies backed by legal status and operating agreements. A DAO may perfectly function without these legal foundations.  These smart contracts lay out the foundational framework by which the DAO is to operate. They are evident, verifiable, and publicly auditable, so any potential member can fully understand how the protocol functions at every step.  

You may be surprised that Bitcoin is considered the first fully functional DAO.  It has programmed rules, functions autonomously and coordinates through a consensual protocol.

Before Your DAO Journey Begins

While a DAO may seem mysterious, it is similar to setting up any other digital business. However, before you can successfully build and operate a DAO, it is imperative to establish the following::

1. The purpose of the DAO and its reason for being.  This defined purpose is essential to galvanize a community of members and gives the DAO a reason to run.

2. The voting mechanism and how members interact with the DAO and make changes. 

3. How the DAO will be governed and how the governance token or share system will work. 

4. A means to the growth of the community.  The offering will get stronger with a larger, decentralized and aligned community. 

5. A fundraising strategy and how the DAO will manage its treasury and crowdfunding.  

It is also essential to consider the legalities of bridging the DAO to the outside world.  Some considerations should include how to protect the DAO community members from unlimited liability, manage the treasury, and jurisdiction for the DAO.  Again, this is similar to setting up a corporation or LLC, but it should be part of the consideration set.  Legal Nodes has a DAO wrapper service that can walk you through the steps.

If you build it, will they come? 

Much like any organization, you will not only need to attract contributors to the DAO, but more importantly, you need them to stay and be engaged.  There is an excellent piece by Louis Albiverse on the contributor lifecycle for DAOs. Much like a business talent cycle, you need to attract, recruit, and retain community contributors:

• Attract: This is about getting the word out about the DAO.  Not surprisingly, you will utilize Web 2.0 to seed the community.  Like growing any other community, you will need to be active in social media to create and leverage followers that will help attract community members. Remember that the community members will be a crucial attractor to other community members.  

• Recruit: A DAO can decide whether to centralize new member recruiting or to have the community drive the recruiting process, such as tokenized incentives for new community members and the community to vote on each new member proposal

• Retain: Retention in a DAO and for the DAO to increase in value is to have an engaged community.  An engaged community will thrive, and there will be a genuine value exchange.  An unengaged community will wither.  Interestingly, the right level of engagement will be heavily tied to the purpose and will come back to the strategy for how the DAO will attract new community members.

Outside of the Web3 components of a DAO, you may be asking yourself how a DAO is additive to organizational models.  A DAO is a disruptive form of governance divergent from a Top-Down organization, which is what most would define as Corporate America and more specifically, marketing services firms.  While a DAO can be completely decentralized, a DAO can also take different levels of decentralization and formality based on how the smart contract is written.  For instance, a DAO can:

• Hire a CEO, a head of sales, marketing or otherwise

• Hire vendors and support staff

• Do all of the things a traditional organization can do (theoretically)

Part III Preview - The Ad Agency Model Evolves Into Web3

A DAO creates a unique opportunity in an industry ripe with heavy founder ownership.  That’s not inherently bad, as the marketing services industry has a history of visionary founders.  A DAO creates a new arena of ownership and governance where exceptional talent can have a more significant stake in the organization's destiny, return, and profits.

In Part III, we’ll discuss some of the ways that marketing services could welcome a new era of creativity.  Much like Web 2.0 has created rise to new types of marketing services firms that have disrupted the industry, Web3 and specifically, DAO structures have the potential to turn the industry on its head all over again.