How to Build A Blockchain Based DAO (Decentralized Autonomous Organization)?

Create A DAO: Finding an investor is a dream, whether you are an established business or a startup. But, things change when investors become the core members in driving the business decisions. It comes with the ego battle showing who is in charge, leading to a lack of transparency and the downfall of your business. 

This kind of inefficiency and unequal power in contributing may limit participation and innovation. However, this is just an example of explaining how a central authority can lead to incorrect decisions. This is why business leaders want a transparent solution where every member can have their say without confirming with a central authority. 

Solution- DOA (Decentralized Autonomous Organization) built on Blockchain

DOAs are completely automated democratic communities involved in anonymous participation and voting. DAOs collectively possess treasury holdings valued at $28.3 billion. ($24.3 billion is in liquid form and $4 billion is vested). As of January 24, 2024, there are 2,420 organizations in existence.

While many companies are creating DAOs, you must understand that it is a complex mechanism that needs skilled blockchain developers to include comprehensive functionalities. 

In this blog, you will learn what DAO is, how it works, different types of DAOs, and simple key steps to build DAO. Let’s start with what is DAO.

What is DAO in Crypto?

DOA is a blockchain-based system that fosters collective decision-making and management using smart contracts and distributed governance. 

In simple words, the system works as follows.

• A DeFi project is launched with a purpose and functionalities using smart contracts. 
• Users can join the system by purchasing the tokens and getting voting rights.
• Core members can vote for all important decisions without revealing their identities, making collaborative decisions with the transparent voting system.
• After the code is deployed, it cannot be changed without a consensual voting process of DAO members.

DAO is the opposite of how traditional systems operate. 

Before you start creating and launching your DAO, you must know what type of DAO you need based on your business requirements.

Types of DAO (Decentralized Autonomous Organization)

1. Protocol DAOs

These DAOs are used as a governing metric to make changes in any protocol. It includes decisions like how the project develops, how funds are used, and how to make necessary updates. One popular example of protocol DAO is Uniswap which awards native tokens to liquidity pool users that can be used to vote in the DEX’s decisions.

2. Collector DAOs 

These DAOs are built for artists to establish their art ownership and connect with their followers. Artists can use NFTs to share their artwork with DAO tokens. It is a secured community for collectors who create a common fund to share and buy artwork and other digital assets. One popular example of Collector DAO is Flamingo and PleasrDAO. 

3. Grant DAO

These DAOs accumulate funds from the contributions made by the community members. These members vote to allocate funds to promising DeFi projects and innovation. 

4. Investment and Venture DAOs 

As the name suggests, this DAO deals with investments in crypto or stock markets. It enables capital pooling for making democratized investments in different DeFi projects. The collected money can be used to fund a startup or any upcoming project. Some popular examples are bitDAO and ConstitutionDAO. 

5. Media DAOs

Media DAOs bring together content creators and their audience without charging fees or advertising commissions to the platform. Fans can support creators by rewarding them with the platform’s native tokens. Examples of media DAOs include Forefront, Scribe DAO, and Joystream.

6. Social DAO

People with similar interests join social DAOs to connect and network. Common activities in these DAOs include buying tokens, getting special invites, or purchasing NFTs.

7. Service DAOs

Service DAOs provide digital services, similar to traditional digital service agencies, but with a different governance structure. They operate under the same business model as regular agencies, but decisions are made collectively by members. An example of this type is MetaverseDAO.

8. Entertainment DAOs

DAOs in entertainment are growing in popularity, letting investors and participants shape their experience and take part in governance decisions. Examples include Bright Moments Gallery and Friends with Benefits (FWB).

9. Philanthropy DAO

Philanthropy DAOs are less common than protocol DAOs. They focus on supporting social responsibility projects in the Web 3.0 world. The Big Green DAO is the first philanthropy DAO, and it works to raise awareness about growing food.

Depending on what type of DAO you want, you can start with the development of the DAO on blockchain.

How to Create A DAO on Blockchain in 5 Steps?

DAO is based on 4 critical elements- Goal, Governance, Voting, and Rewards. Understanding them is the key to successful DAO implementation. 

• Understand DAO Smart Contracts as they define the DAO’s rules and operations. Governance decides how the community will make decisions.
• Set Up Financing as it issues tokens to raise funds for the DAO, giving token holders voting rights.
• Deploy the DAO on Ethereum to carry out transactions and execute the DAO’s smart contracts.

This is just an overview of how one should go. Let’s understand the key steps in detail.

1. Define the goal of your DAO

First, understand the goal of your DAO, and what you want it to do. It will help you analyze the relevant market and run validation tests to understand how it can make an impact in the chosen niche. Then plan the process to create smart contract terms and rules. 

Ask the following questions to have a clear visibility of your goal.

• What do you want your DAO to achieve?
• What decisions will your DAO make?
• Is your company ready for a decentralized structure?
• Is there a problem in your industry that DAO can solve?
• How will a DAO benefit your community and customers?
• Can you run your business without a DAO?
• What resources do you need to launch a DAO?
• How will your community help build your DAO?
• Are you ready for the risks of the crypto market?

Once you finalize the goal, you can start creating-

• A secured wallet for seamless transactions and storing tokens
• A smart contract with rules and governance
• A diverse community 
• Define voting period
• A platform or forum, for DOA members to connect and get real-time updates

2. Establish Ownership and Voting Mechanism

Once you’ve defined the purpose of your project, the next step is to set up ownership and decide how voting will work among members. Ownership can be transferred in three ways: airdrops, token purchases, and rewards. 

Members can earn bonuses when ownership is transferred through rewards, based on their contributions. In the case of airdrops, tokens are distributed to members for their community involvement. Alternatively, tokens can be listed on decentralized exchanges, allowing members to purchase them.

Members can reject or approve decisions depending on the majority of votes within the DAO.

After deciding how ownership will be distributed, you’ll need to set up the voting system. It’s usually best to base voting power on the number of tokens held, rather than the number of voters.

3. Decide the Governance Structure

The governance structure is a key part of setting up a DAO.

It will include a voting system, various use cases, and details about important components like exchanges, transactions, validators, and community members.

You need to create a governance document that covers things like how to use wallets, how long tokens should be held, and how votes will be unlocked.

Additionally, the document should explain how the DAO will earn money by selling native tokens, which give members voting rights. You can also allow members to invest in early projects, letting them share in the profits from those investments.

4. Set up Rewards and Incentives

Decide how you will reward your DAO members for their contributions. Usually, native tokens are given to contributors who participate in DeFi protocols.

• Define Reward Principles: Set clear rules for fairness, transparency, and alignment with the DAO’s goals.
• Clarify Reward Eligibility: Decide who gets rewarded based on their work or involvement in the DAO.
• Create a Flexible Reward Structure: Offer different reward types like tokens or NFTs based on the type of work.
• Consider Reward Amounts Carefully: Set reward amounts that reflect the value of the work and market standards.
• Ensure Consensus on Rewards: Get approval from the community or a small group before finalizing rewards.
• Encourage Long-Term Engagement: Reward ongoing participation with long-term incentives, like staking or vesting.
• Regularly Review and Adjust: Regularly revisit the reward system to keep it fair and relevant as the DAO grows.
• Avoid Bias in Reward Distribution: Make sure rewards are distributed fairly and don’t favor certain individuals or groups.

5. Launch Your DAO

Once you’ve completed the basic steps to establish your DAO, you’re ready for deployment. At this stage, marketing is key to attracting global users to your platform. Creating communities on Discord and Telegram is an effective way to spread awareness about your DAO.

The successful implementation and cost-efficiency of any DAO depends on the technology stack. 

>Technology Stack to Create A DAO on Blockchain

Here’s how DAOs provide advantages over traditional organizations.

1. Powered by Smart Contracts

Smart contracts reduce reliance on humans by recording the DAO’s rules and financial transactions directly on the blockchain. Members can submit proposals for changes, which are automatically triggered on-chain. Blockchain ensures full transparency, preventing censorship of proposals and tampering with votes.

2. No Legal Status Required

Most organizations need legal status to operate. But with a DAO, there’s no need for legal status or third-party institutions. It operates independently.

3. Community-Driven Governance

In a DAO, the community members govern the organization, leading to fair, transparent, and governed decisions. It helps elevate productivity and leads to better innovation. 

4. Cost-Effective

DAOs are a cost-effective way to organize and fund a community. They raise funds through crowdfunding by issuing tokens. DAOs streamline operations, reduce reliance on intermediaries, and provide a cost-effective way for startups to scale and engage a global community.

These benefits enable startups and entrepreneurs to invest in promising DeFi projects while ensuring transparency and efficiency. However, implementing and developing DAO comes with potential challenges and risks that blockchain developers can help you with.

Understand the associated risks.

Risks Associated with Developing a DAO

1. Governance Power Imbalance

In a DAO, people who hold more tokens have more voting power. This can help keep big investors loyal, as they have a strong interest in the success of the project. But, it also means that users with fewer tokens have less say in decisions, which can create an imbalance.

This can lead to problems because a small group of token holders might end up making most of the important decisions. This concentration of power can be risky. For example, in the case of Build Finance DAO, a user with enough tokens took control and used their vote to steal $470,000 from the DAO’s treasury.

2. Security and Front Running in DAOs

Front running happens when someone buys or sells assets based on insider knowledge, getting ahead of the general market. DAOs are especially vulnerable to this because their members often know what investments are planned. Some users can take advantage of this by buying assets early, before the price goes up, and making a profit.

If front running is exposed, it can harm the DAO’s reputation and lead to financial losses.

3. Operational Costs

DAOs need to use cryptocurrency transactions, which involve gas fees for validating and storing transactions on the blockchain. These fees change depending on the network’s demand and supply. For example, Ethereum’s average transaction fee is around $3.84, but it can rise significantly when the network is busy.

Also, DAOs require continuous updates and improvements to their smart contracts and governance structures, increasing significant time and resources.

4. Legal and Regulatory Issues

DAOs operate in a legal gray area, as they don’t always fit into existing legal frameworks, leading to uncertainty around contracts, liabilities, and intellectual property. Additionally, DAOs may face compliance challenges, including meeting financial regulations and fulfilling anti-money laundering (AML) and know-your-customer (KYC) requirements.

Start Your DAO Journey With OnGraph

There is growing discussion about how Web 3.0 can transform traditional organizations by introducing community-based governance through decentralization. DAOs play a key role in this shift, promoting decentralization via blockchain technology and creating voting-based communities where all members have equal power, without centralized leadership.

Businesses can leverage DAOs to empower their communities and enhance their infrastructure.

OnGraph provides tailored solutions for businesses interested in integrating a DAO into their systems, including developing nodes, dApps, and smart contracts. With expertise in building secure, time-sensitive DAO platforms, OnGraph ensures global connectivity and enables members to have a say in the causes they care about.

Contact us today to explore our blockchain development services and learn how we can help you build your own decentralized autonomous organization.