Building and Running a DAO: Why Governance Matters - a16z crypto

Risk management To fund future operations, DAOs must manage their currency exposure. Some DeFi and NFT DAOs have treasuries worth hundreds of millions or billions. In addition to funding development and audits, these assets provide insurance if underlying protocols fail and are used for user acquisition and growth. To achieve these goals, DAOs mana... See more

The three key governance areas Growing DAOs will likely reach the point where their communities demand governance structures for all three key needs. Below, I share a more detailed breakdown of each of them to help builders/protocol developers identify where they will have to put their focus if they want to build a successful DAO.

Use governance tools To enable DAO members to understand what it means to vote to reduce collateral/margin requirements or increase interest rates, several quantitative tools have emerged to visualize DAO risk (and possibly their protocols). Aave and Compound, for instance, hold billions of dollars in assets to backstop lending protocols. DAO treas... See more

Experiments paved the way for modern DAOs Early DAOs were collective investment vehicles designed to function like decentralized venture funds. Tokens represented voting rights and economic interests in the DAO. Every participant was rewarded on Ethereum for their contribution regardless of their contribution. DAO winter coincided with the bear mar... See more

Collective asset management DAOs are seeded with some initial capital in the form of governance tokens and assets used to buy governance tokens. The initial treasury of a DAO consists of 500 governance tokens and 100 ETH if it mints 1,000 governance tokens and sells 500 for 100 ETH to genesis members. When a DAO grows in terms of users or cash flow... See more

When DAOs are needed The growth of DAOs in general and the massive success of some of the most innovative ones inevitably result in the perception that the route to growth and robust network participation requires a DAO structure. In times of ebullience, market forces make it easy to assume that every organization, community, or project needs a DAO... See more

Partition into “subgroups” The first DAO to partition itself successfully was Yearn Finance. Subgroups can operate independently and focus on specific tasks (development, marketing, etc.). With Yearn's growth and constant product evolution, multiple teams needed to independently handle tasks like front-end UX, core protocol development, and marketi... See more

Asset curation The most natural place for asset curation is NFT collection DAOs, such as PleasrDAO. DeFi DAOs can also face this problem. DeFi DAOs use their governance tokens as art and culture curators to vote on adding or removing assets. Anyone can create a trading pool in Uniswap, but those with leverage cannot. Governance determines which ass... See more

Growth incentives Compound, an on-chain lending protocol, decentralized itself in June 2020, with its core developers turning over the network's operation and ownership. Community members had control over the protocol's reserve assets generated by borrowers in a Compound Governance DAO. This was (at the time) the highest revenue generated by an on-... See more