The Future of DAOs, Part 1: The Structure
subDAOs and the Sociotechnical Solutions of Governance
Introduction
When I first outlined this essay—almost a year ago—the state of decentralized autonomous organizations (DAOs) was much different.
Some things haven’t necessarily changed: Web3 projects still issuing tokens to distribute ownership and governance rights; teams still utilizing airdrops to bootstrap network effects; and, amid persistent leadership crises, Sushiswap approving yet another head chef. However, recent DAO organizational and operational developments reflect the velocity at which the crypto industry iterates. In my eyes, the most prominent trends include the following:
Delegating governance power to ensure not every DAO member has to vote on everything;
Establishing some form of pod structure to address DAO scaling problems; and
Implementing metagovernance to facilitate inter-DAO contribution and coordination.
DAOs are assemblages of technological and social processes. Decisions that are reached through democratic consensus are implemented and enforced through smart contracts that run on a blockchain. This way, DAOs represent a set of collective values and norms embedded in code. DAOs currently serve as the primary organizational structure of capital allocation and open-source development in the crypto economy, enabling entirely new forms of social coordination over the Internet. DAOs exist to govern various projects, which include protocol DAOs, investment DAOs, data DAOs, social DAOs, meme DAOs, and many more. In this series, I do not focus on any particular type of DAO, but instead focus on the general practices of what I believe will constitute a successful DAO in the future. I also explain how Web3 technology—primarily blockchain and digital tokens—enable certain novel features of DAOs.
In “The Social Life of DAOs,” I outlined what I saw as both the promise and responsibility of DAOs. By proposing the ways DAOs can (and should) make a difference to traditional systems of hierarchy and control, my goal was to help contribute to the conscious production of our future digital world. In this essay—which is now, a year later, a three-part series—I cover most of my current thoughts around DAOs, including the writings, projects, and events that have been most formative to my thinking. Over the course of the series, I describe how I see the future of the DAO landscape emerging with regards to three key elements: structure, mission, and product.
With each design choice made and experiment executed, outcomes are weighed and challenges revealed. Meanwhile, the definition of what constitutes a successful, sustainable DAO continues to evolve. In consideration of recent trends, it is important to address the question: where do we go from here?
DAOs will become the atomic unit of Web3 governance.
DAOs, rather than individuals, will represent the majority of voting power throughout the crypto economy. A DAO’s ability to aggregate and amplify the voting power of individual participants, while retaining autonomy and flexibility, will induce tokens to naturally accrue to the DAO-level. As DAOs become a primary social actor, they will further advance composable localism—the ability of bounded digital communities to freely build and innovate with each other. This trend is already evidenced by the advent of metagovernance—the ability of DAOs to exercise governance power within other DAOs using the diverse tokens held in their treasuries—as well as the acceleration of token swaps between DAOs. Additional integration will occur with the formation of a mature framework for DAO M&A (such as the Fei Rari merger) and partnerships (such as the Uniswap Voltz deal).
While the combination of open-source development and reduced frictions to enter/exit different communities make Web3 one of the most competitive industries, the technology and associated ideologies engender an increased level of cooperation between projects relative to Web2. The resultant composable localism—enacted through inter-DAO grants, bounties, employment, education, and metagovernance—will allow DAOs to compete with traditional institutions of human governance, as well as facilitate a more inclusive, representative, and equitable digital world. Individuals will vote on a DAO mission, aggregating their beliefs and objectives. The voice and values of each participant will then be broadcast throughout the ecosystem with the power of the entire DAO. As such, DAOs will likely resemble an amalgamation of local government and corporations, together playing a positive-sum game that advances the goals of the ecosystem and creates long-term social value.
In this essay, I propose a structure for DAOs that will facilitate this vision. I describe the constitutive elements of this structure—that is, a mutually governed system of autonomous subDAOs—and address key questions relating to leadership, compensation, accountability, and composability.
Web3’s Quantum Realm
Just as shareholders do not vote on corporate operations—and citizens do not vote on state operations—the majority of operational decisions will not be made at a DAO level. So far, the result of ubiquitous DAO-wide decision making has proven inefficient at best, and value destructive at worst. To remain open and inclusive, as well as continue challenging the hierarchical status quo through novel democratic governance models, DAOs will delegate most decisions. While token holders continue to delegate voting power to certain members of a DAO, DAOs will progressively delegate decision-making autonomy to smaller entities. If DAOs will represent the atomic units of Web3 governance, these collaborative groups will comprise the quantum realm.
They have been introduced by many names: pods, bubbles, subDAOs, metaDAOs, and miniDAOs. More colloquially, these social entities have been called squads, crews, tribes, and gangs. Nomenclature aside, small groups of people (usually in the range of 3-12 members) form the foundation of social organization. Accordingly, DAOs will leverage a more modular structure in order to foster rich social relations and operate more efficiently at scale. Simply put: the way to scale up is to scale down.
The modular DAO structure will encompass small working teams, or subDAOs as I will call them, enabling people with similar expertise and interests to work together on shared goals. subDAOs will be kept small in order to foster better collaboration between members, and resist the bureaucratic and hierarchical tendencies of incumbent organizations. Due to the subDAO members’ expertise and level of involvement, they will be equipped to make decisions and react quickly to change regarding their area of focus and their objectives. Crucially, each subDAO will operate autonomously from the larger DAO, differentiating this system from a traditional corporate environment and advancing the DAO emphasis on coordination over control.
To expand upon the idea of “autonomy,” I refer to the anarchic theory of organization, in which Colin Ward states:
Anyone can see that there are at least two kinds of organisation. There is the kind which is forced on you, the kind which is run from above, and there is the kind which is run from below, which can’t force you to do anything, and which you are free to join or free to leave alone. We could say that the anarchists are people who want to transform all kinds of human organisation into the kind of purely voluntary association where people can pull out and start one of their own if they don’t like it.
The traditional corporate model is “run from above,” where orders are “forced upon” the lower constitutive entities. Conversely, subDAOs will be “run from below,” base their decision making in mutuality rather than hierarchy, and allow individuals to enter and exit without unnecessary frictions—a structure which will reflect the organizational principles of entire DAO’s.
With subDAOs, information will be aggregated and decisions will be made on the periphery by the individuals with the most relevant knowledge. This system will necessitate robust channels of communication both within a DAO, in order to measure performance and maintain transparency, as well as between DAOs, in order to foster DAO-to-DAO relationships and circulate best practices. As a result, communication-related roles will open up within the ecosystem—roles responsible for sharing knowledge acquired through participation across DAOs.
Further, subDAOs will maintain the full-DAO accessibility, thus promoting Web3’s value of open participation. A good example today is NounsDAO and their subDAO, Lil NounsDAO. Lil NounsDAO provides a way for more people to get involved with the Nouns ecosystem, as typical Nouns NFTs—representing both entry and governance rights in the community—auction for 50-80 ETH (approximately $65-100k at the time of writing). Most Lil Nouns NFTs go for about 0.15 ETH, while granting holders an outsize say in NounsDAO, as Lil NounsDAO holds eight Nouns NFTs in their treasury. In the end, Lil NounsDAO has ushered more participants into the Nouns universe, funded projects that have proliferated the Nouns meme, and promoted a more open, decentralized decision-making system. This example illustrates how subDAOs will help solve a problem that has continually plagued DAOs: the inherent tradeoff between inclusivity and effective action.
Subjective vs. Objective Decision Making
Each subDAO will be “inDAOed” (which I am now proposing as a candidate for the Web3 version of “incorporated”) with a specified focus that is approved and funded at the DAO-wide level. Because of their well-defined, often quantifiable goals, their performance will be accounted for and managed by more objective measures, such as KPIs. Meanwhile, the larger DAO, comprised of all token-holding members, will engage in more subjective decision making, such as enacting a DAO-wide mission and approving subDAO inDAOments—decisions which tend to be high-level and infrequent.
This structure—the separation of objective and subjective decision making—bears a resemblance to Vitalik’s proposed “pod structure” for DAOs. Vitalik’s model includes a sub-level of centralized pods responsible for “convex” decisions (where choosing either one or another policy yields the best outcome), and a more decentralized DAO super-level responsible for “concave” decisions (where choosing some mix of policies yields the best outcome). I interpret convex and concave decisions as objective and subjective decisions, respectively—where convex problems typically have a right or wrong answer and concave problems do not. Ultimately, objective decision making is best made autonomously on the edges, by the subDAOs and subDAO operators with the most relevant knowledge and expertise—actors that are more likely to get the answer “right.” Subjective decision making, on the other hand, is best made by a wider, more diverse governance body that incorporates the wisdom of the crowd in order to implement fair, rational decisions.
Still, two problems remain: leadership and compensation. Regarding leadership, I believe that any related decisions are inherently subjective, and thus, will be performed at the DAO level. However, as a DAO grows, the leaders of individual subDAOs will emerge more organically at the subDAO level, with decisions based upon skills, qualifications, social relations, and subDAO needs. An autonomous working environment, though, necessitates two essential qualities of leadership. First, DAO and subDAO leadership should be temporary. Leaders should be voted on or changed with relative frequency, so as not to ingrain hierarchical tendencies and cause leadership to put its own survival over the collective interests of the DAO. And second, leadership must remain voluntary. While this quality applies to the individuals assuming leadership positions, more importantly, it pertains to all other DAO and subDAO members. If an individual disagrees with leadership decisions they must retain the right to exit the organization with minimal frictions, while still retaining their proportionate share of aggregate DAO value (much in the spirit of MolochDAO).
The question of compensation remains difficult, as it contains elements of both objectivity (did a DAO member or a subDAO achieve their performance goals?) and subjectivity (how much is a member’s or a subDAO’s contribution worth?). For this reason, compensation decisions—particularly the split between subDAOs—will initially be made on a DAO-wide basis, as is typically the practice today. But with time, performance will become more predictable and measurable, making compensation decisions less subjective. Accordingly, the influence of individual team members on their subDAO compensation arrangements will likely increase. Inter-subDAO compensation decisions will then be resolved by the subDAOs themselves, increasing their autonomy. This structure is similar to how Coordinape works today, with each team member participating in the reward or incentive calculation process, which is based on perceived contributions. Still, greater development will be required as DAOs continue to mature and adopt more sustainable, long-term compensation models fit for organizations at scale.
Accountability, Composability, and Sociotechnical Solutions
The underlying technology—primarily blockchain and digital tokens—enable the transparency, incentives, and scale that make the global collaborative efforts of a DAO function. However, technology alone will not provide all of the necessary features of organizational accountability and composability—demands of the modular DAO model that instead require a combination of technological and social processes, or sociotechnical solutions.
The proliferation of subDAOs will necessitate both on and off-chain—technological and social—solutions that facilitate accountability between actors. With greater amounts of subDAOs, and the resultant organizational complexity, technical tools will be required to monitor performance, as well as direct working capital towards the most value-added projects. The transparency of blockchain technology promises a transactional environment of “radical accountability,” however, DAOs and their operators have not yet taken full advantage. Research organization, Other Internet, suggests accountability mechanisms that include on-chain escrows that make the execution of a proposal conditional on the delivery of funds. Further, by combining smart contract logic with participant-defined KPIs, DAOs will be able to direct funding to new and existing subDAOs according to parameters defined by the DAO.
Today’s related solutions include:
UMA’s KPI options: tokens that can only be redeemed if the specified group hits a targeted goal;
Optimism’s retroactive funding mechanism: rewards projects that have already provided value, enabling voting on what was useful rather than what will be useful; and
Gyroscope’s conditional cashflow governance model: allows governors to claim rewards for good governance only if the system remains healthy for a sufficiently long period.
Still, DAOs and subDAOs will need additional ways of promoting accountability beyond on-chain, funding-as-a-reward systems. In their piece, Other Internet also proposes off-chain social sanctions for instances of accountability breaches. Additionally, DAOs will experiment with appointing dedicated individuals to oversee performance, as well as implementing more robust identity and reputation systems to reinforce accountability.
Composability—a widely touted benefit of the Web3 space—primarily stems from the technology’s open-source, permissionless development (among other technical aspects, such as shared execution environments and programming languages). The many composable elements of Web3—referred to as money legos, governance legos, organization legos, and even art legos—play a large role in the cooperative DAO landscape, as they enable projects to build with and on top of one another. Yet, neither frameworks nor policies have been established to decrease the friction inherent in DAO-to-DAO interactions. For DAOs to become the fundamental entity of governance in the crypto economy, various tools will be developed to facilitate the token swaps, deal negotiation, and governance participation that is performed at a DAO level. Further, treasury management practices will be expanded to manage fully-diversified treasuries—consisting of tokens from multiple DAOs—both financially and socially. These innovations will allow DAOs to maximally wield their influence and advance their values in other communities and throughout the ecosystem.
An initial sociotechnical solution to inter-DAO participation is Synthetix’s Ambassador DAO—comprised of individuals nominated by community members and delegated tokens of other projects. This entity empowers “the Ambassadors to participate in external protocols governance systems which have a positive impact on the Synthetix ecosystem.” Additionally, Index Coop, a pioneer of metagovernance, allows INDEX token holders to vote for other DAO governance proposals directly on their Snapshot page. Nevertheless, in a future where most DAOs act as agents within the governance processes of other DAOs, new systems will be needed for DAOs to efficiently contribute, build, and fund each other's initiatives, and thereby, accelerate composable localism on the Internet.
Conclusion
The ultimate—and admittedly somewhat ideological—vision for DAOs is one of shared ownership and mutual decision making. The modular, subDAO-based model for DAOs will build towards this future through organic leadership, sociotechnical accountability, and DAO-level composability.
Another, less salient role of subDAOs will be cultural transformation. Due to their autonomy, subDAOs will foster group identities through on and off-chain activities. As the small teams pursue a DAO-defined mission, subDAO members will begin to define their own common goals that will extend beyond purely financial objectives, including social status and relations. In time, these goals will begin to impact the identity and mission of the larger DAO, epitomizing the meaning of an organization that is “run from below.”
For this reason—among others—DAOs will extract minimal rent from contributors and subDAOs. With the distribution of ownership and governance power through tokens, DAOs already expand access to capital—that is, the value accrued by the DAO. Nevertheless, DAOs will still have to address the potential problem of subDAOs spinning off to compete, thinking they can operate more effectively and desiring more direct wealth accumulation. Thus, DAOs themselves will have to contribute some value to the network to justify their existence. And it is exactly this question—the question of a DAO’s mission and value creation—that I tackle in the next part of the series.