How does Dao work
Written by MIDDLE.X @ Paka Labs
Reviewed by Owen @ Paka Labs; Shawn Lin @ 1PAR Research
This is the second installment of the DAO series by PAKA. Our last post explored DAO around Tokens and Governance, this one will focus on people and collaboration. We will answer the following questions.
1. What is the organizational structure of a Dao?
2. How does a DAO work and how do its members coordinate?
3. What are the different contributors in a DAO according to the level of participation?
4. How does the DAO guide and motivate members to work for the DAO?
Each DAO has its own business model and strategic goals, according to which we can divide DAO into several categories.
There are Venture DAOs and NFT DAOs that focus on investment and pursue financial returns, Grant DAOs that are used to distribute funds, Protocol DAOs that are responsible for managing agreements and pursue public services within reasonable profits, and Social DAOs (or Club DAOs) that are dedicated to serving members and creating social opportunities for them.
An overview of the DAO ecosystem:
Regardless of the form of DAO, it is not enough to have a democratic governance to achieve all of the goals, there still need people to do things. Many DAOs choose to rely on a centralized team, which has its validity and efficiency advantages, but is far from the DAO we expect.
With the development of DAO, Community DAO has emerged with stronger community collaboration attributes, broader business scope, and stronger creative ability, of which Bankless DAO and SeeDAO are typical examples. The discussion of DAO collaboration in this post is basically based on Community DAO.
1. Organizational structure of DAO
As a decentralized organization, what is Dao’s structure? What are the similarities and differences with a corporate organization?
First, a typical DAO will have a decision-making committee ( core team) that is empowered to make decisions on the day-to-day affairs of the DAO so that endless voting can be avoided. The community empowers it to manage day-to-day affairs is similar to a board of directors appointing a CEO and executives to manage daily works.
The DAO uausally have several skill groups, also called guilds, depending on business needs. Each guild is a collection of people with specific skills who are willing to work for the organization. These guilds like departments in a corporate, but are completely different in nature. Each person in the guild can decide for themselves what to do or not, which projects to participate in or not. In some sence, these guilds as talent pools for DAOs.
DAO could running multiple projects at the same time, and each project team has members from multiple guilds. The projects and the guilds form a structure as below which is the organizational structure of the DAO, and we can express it in the following diagram.
2. How does DAO work
In such a structure, power is distributed to each person and relationships betwwen members are independent, so how to work? In fact, in business management, there has been such an exploration, that is Holacracy, and the idea of DAO’s operation coincides with Holacracy. For example, in DAO, there is a coordinator in each guild, who has the responsibility of cross-group communication but without the power to do decide the work of each person, which is very similar to Holacracy.
2.1 Projects and Tasks
DAO’s work is carried out more project-based. Any member of DAO can initiate a project. if you have a plan to promote DAO’s goals, then you can initiate it as a project in the community. Then, you need to advocate in the community to get enough support. The community decides whether to fund your project by voting. If it was successfully funded, you will be able to recruit members from the DAO’s guilds to go through it.
This is different from working in a company, where if you want to initiate a project, all you need to fight for is the boss’s approval, and then he allocates resources for you to complete the project, and one interesting thing is to convince one person or a group of people may need same efforts, and a group may not make better decisions than one. DAO’s approach is more about principles of democratic than principles of efficiency.
The project will be decomposed into samll tasks that can be divided into two types: one is Bounty tasks with short-cycle and clear delivery. Completing Bounty tasks can get bounty and some contribution values directly. There is another kind of Project Tasks with a higher degree of collaboration and a relatively high threshold for receiving a project task. Completing it has longer reward cycle and with no direct rewards but a dividend.
2.2 Contribution value, rank, medal
In DAO, completing tasks could earn contribution value, different DAO call these in. different names, some are called reputation, some are called experience value. It is non-negotiable and will determine your future token earnings and privileges (e.g. whitelist) in a specific way. Contribution value also determines your rank, and raising your rank could unlocks more access permission and gives you the opportunity to receive more tasks.
Project members get contribution value by completing work, and most of the project budget will be allocated to members in proportion to their contribution value. Contribution value is one of the core elements of a DAO, and we will further elaborate on this when we talk about allocation and motivation mechanism later on.
When specific tasks are completed, contributors are awarded a medal that with non-financial value and non-transferable but with social value within the community and as a proof of you have completed a particular challenge. These medals may as a proof of competency across organizations and as part of your Web3 resume.
There are many tools used to run a DAO, Discord is the most important one at present which is a very scalable community management tool that can easily manage a community of hundreds of thousands of people. Almost every DAO has its own Discord group.
Various other tools are used, such as Gnosis Safe, a multi-signature wallet for managing funds, and Rabit Hole, a tool for creating bounty tasks. As the DAO grows, more tools will emerge. We believe that a platform that integrates many useful tools and enables one-stop money management, task management, and contribution value management, is what DAO needs most. DAO framework providers such as Aragon, DAOstack, Moloch, and SubDAO are working hard for this.
3. Talent Inventory for DAO
The way DAOs operate reminds us of the “gamified organization” proposed by Kevin Werbach and Dan Hunter in their book “Gamified Thinking”. With instant feedback, quantifiable achievements, and honorable socialization to make work more interesting, which Dao is closer to gamified organizations.
At the same time, we should note that DAO is a boundary model organization where members are recognized according to their participation level. Although members of the DAO are spread across guilds and projects, their level of invovment is not uniform, and some of them are just potential participants. To gain a deeper understanding of DAO organizations, we need to make an inventory of DAO members based on their level of involvement.
We divide them into explicit human resources, which include full-time employees, deep contributors, and peripheral contributors (bounty hunters), and potential human resources, which include token holders, users and other stakeholders, and community watchers. As shown in the figure below.
3.1 Explicit Human Resources
- Full-time employees
Full-time employees usually appointed by a vote of the DAO or by the Chief Community Officer who slected by the Dao, they take specific responsibilities and will be paid rewards or receive a dividence. This takes them an advantage to know DAO’s contextual information, which may elicting malfeasance or arbitrage by them, to aviod this, full-time employees are monitored and held accountable by other DAO members in the same way as public officials.
The internal coordination costs of full-time employees should be as small as possible, so the unmber of employees not as many as there should be. A healthy and efficient DAO structure should be more like a lean full-time team + a large contributor base. Friends With Benefits (FWB) provides a good example: a remarkable full-time community officer + 200 active contributors has created a multi-billion dollar market cap project and be an example of a successful DAO organization.
- Deep Contributors
Deep contributors, while not necessarily working full-time for the DAO, spend a significant amount of time extensively participating in DAO meetings, executing and completing important tasks of the DAO. Deep contributors tend to be highly aligned with the DAO’s goals and culture, and devote their energy to the DAO, perhaps even more than full-time employees. They do not have an employment relationship with the DAO, nor assume responsibility for the post, but they have a strong sense of ownership. Deep contributors who are excellent contributors and have some irreplaceability can gain no less influence in the community than full-time employees.
Deep contributors’ accountability may resulting from holding the DAO’s token or from the DAO’s value recognition. In addition to actively completing the work of the DAO, they may also think deeply about the future development of the DAO, and gives suggestions, even spontaneously initiate projects and actions that are beneficial to the development of the DAO.
- External Contributors (Bounty Hunters)
In order to fully mobilize community power and community wisdom, DAOs tend to break down some of the works into a large number of bounty tasks and complete them through crowdsourcing. Bounty tasks, such as article writing, promotional material design, translation, social media promotion, etc, are jobs with clear delivery and short-circle. Bounty hunters are usually looking for bounty tasks across multiple DAOs to cash in on their skills or resources. Not all jobs are suitable for crowdsourcing to bounty hunters, such as feature development and project management, which require close collaboration and are more suitable for deep contributors and full-time employees.
A portion of bounty hunters prefer the freelance lifestyle and work as bounty hunters for a long time. But they may also be a transition stage for some newbies who want to become deep contributors, they are trying to get closer to the core of the organization by completing some peripheral work to accumulate contribution value.
3.2 Potential Human Resources
- Token Holder
Whether you are a full-time employee, a deep contributor, or a peripheral contributor, if you hold some tokens of a Dao and are more willing to contribute to the organization and are more likely to become contributors, and active contributors tend to get more token rewards and thus become token holders. Token holders are an important force in the DAO, except to participating in governance voting, token holders can also provide essential resources and contributions to the organization.
DAOs tend to be open (though not all are), anyone can access the DAO’s discord community or forums, see the organization’s documentation, browse chat logs, and meeting minutes. Observers interest in DAO and enter the community, but not ready to become a contributor and just hang out. If they are attracted to the organization’s culture or a particular project or event, they are likely to become a contributor.
- Users, Vendors and Other Stakeholders
Except internal members, there are also upstream and downstream players (as stakeholders), such as users and consumers of the products or services provided by the DAO, vendors and infrastructure developers who support the operation of the DAO services. How to include them into the community and help each other to collaborate is an important issue for DAOs.
At the end of the inventory, we found that DAOs have a better human resource endowment than traditional corporate organizations, and have the ability to mobilize a wider and more diverse human resource, which is one of the sources of the vitality of DAO organizations. A good DAO organization can continuously turn the potential human resources into explicit human resources, and turn peripheral contributors into deep contributors.
This need DAOs to guide and train the members.
4. Orientation and Training
As DAO with blurred boundaries, members join into is not one step. The journey of a DAO contributor is like playing a game and going from a rookie to a master. As the journey progresses, contributors gain not only points, medals and ranks, but also somgthing more meaningful like sense of achievement and personal influence. A well-designed game will give players guidances and instructions on key steps, telling them what to do next, how to do it, and giving feedback timely .
4.1 How DAO guides newcomers to take their first steps
There are various DAOs with complicated channels and many members in Discord, new comers need the guidance to be involved in .
The DAO in discord generally have a “Onboarding Channel” that displays documentations for newcomers to read. But this is not enough.
Firstly, it is very important to degsin a newcomers task area where they can do some simple, low-threshold contributions, which are easy to accomplish could motivated them to join the DAO.
For experience aspect, new members should be allowed to gradually unlock more channels as they explore deeper and accumulate contributions, rather than presenting all the channels at the beginning, which may create too much cognitive load for new members. However, from the perspective of openness, it is in line with the spirit of DAO to public all the content at the beginning. Different DAO organizations may make different choices.
Second, it is better to leverage part of manpower to do newcomer guidance as an addition of BOT guidance and documentation guidance. If the newcomer endors the DAO’s value and completes some contribution tasks, then the DAO has gained a new contributor.
4.2 How DAO develops deep contributors
Once newcomers are familiar with the work, all they can do at the beginning are some bounty tasks that are clearly delivered and short cycle, which will helpe contributors’ understanding of DAO’s business model and strategic goals. Once the newcomer has completed the test at this stage, the path to be a deep contributor is at the corner, they can now take more collaborative project tasks.
Project tasks have a long cycle and a high degree of collaboration, which means that if someone is not competent and does not complete the task, it will slow down the whole project. DAOs can certainly demote or even cull such people through mechanisms, but we believe that a good DAO needs to be as accountable for the growth of its contributors as a good company.
Contributors at different stages need to learn different knowledge to be competent for the task at the next stage. Meanwhile, for DAOs, the production of learning materials and training can better develop the ability of contributors. Furthermore, professional Web3 educational institutions will emerge that will provide some general training content for different DAOs, which the DAO can directly import.
5. Contribution measurement and incentive
For the company, the goal is decomposed from the head office to each department, and then to each person. Finally, the company strategy is transformed into KPI of each person. There are two ways to evaluate KPI, one is objective evaluation, which is measured by quantitative indicators that. formulated in advance, and the other is subjective evaluation, which is mainly evaluated by direct leadership.
The DAO contribution measure will not jump out of the framework of subjective and objective measurement, but will take a different form.
In most cases, the DAO will pre-define a weight value for a piece of work in terms of the contribution value to complete such work. When evaluating a work, the contribution value you accumulated is your objective contribution. Both bounty tasks and project tasks can have predefined weight values. Govrn, for example, works with several independent DAOs to create an “action model”. The community can assign weight, but more often full-time employees are appointed to assign the weight, to different contribution types based on a set priority.
This approach is incomplete, and not all jobs can be weighted or integrated, especially communication and operations jobs. This kind of work will fall on the shoulders of full-time employees, which is one of the reasons why DAOs must have full-time employees.
The completion/non-completion is not an absolute evaluation criterion, and the quality of completion and the fluency of collaboration with others should be included in the evaluation. Therefore, subjective evaluation is indispensable. DAOs do not have the bureaucratic structure of a traditional company, and contributors do not have a clear direct supervisor. So the DAO tends to allows contributors to rate each other. SourceCred, Coordinape, Grattitude, and Common Stack are all effective tools for mutual evaluation.
Coordinape has proven its effectiveness in Bankless DAO, and at the end of each work cycle, Coordinape assigns some GIVE tokens to each project member, which are useless to keep in your own hands and must be distributed to other project members. The process of assigning GiVE tokens is how you score your collaborators, and the number of GIVE Tokens you received is your evaluation score.
Furthermore, based on contribution measurement, DAOs need to design mechanisms to distribute rewards fairly.
Rewards for full-time employees are primarily in the form of salary, supplemented by performance bonuses and dividends. It is not different from the company, so we will not go into details here. We will focus on how the DAO rewards its contributors, whose rewards can be summarized into. four levels: project layer, contribution layer, bounty layer, and participation layer.
The DAO runs multiple projects for which it allocates a budget or funds in the form of grants that are directly allocated to projects rather than individuals, which is the project layer . Within projects, rewards are then allocated to project members through the Contribution Assessment described above, which is the Contribution layer. The bounty layer rewards peripheral contributors or outsourced service providers with bounties, which may come from the project or from the DAO’s direct expenses. Finally, the DAO also sets aside a portion of flexible funds to reward the participants who may not complete bounty tasks or project tasks, but who actively participate in DAO’s meetings and online discussions and active in the Discord group, they may also receivea small percentage of the reward, which incentivizes these potential contributors to stay in the community.
6. Fractal structure and Scalability of DAO
We know that due to the scale effect, a company scales up until the boundary benefit of the scale effect is less than the boundary cost from increased internal coordination cost. Companies enhance scalability by bureaucracy, but having too many layers also bring a series of management issues. So do DAOs run into scalability problems? How will the structure of a DAO evolve as it scales up?
Practice shows that DAOs will spontaneously evolve a fractal structure. Things will start from the unbalanced development of DAO’s various guilds and projects. In DAOs, individual projects or guilds could gather a large number of contributors and grow rapidly. For example, the development guild of Bankless DAO is particularly large and exceeds the number of other guilds combined, that mean the existing projects and tasks cannot meet their work needs, resulting in the development guild creates its own projects. The Indian branch of YGG DAO, indiGG, grew much faster than the other branches, so indiGG started to operate independently, issued its own Token, and formed an investment relationship with YGG DAO, becoming a “subsidiary” structure.
DAO in DAO and project in project, this is the fractal structure of DAO. It enhances the scalability of the DAO and keeps the project team lean. According to the “team theory”, a close project team should be less than12 people, and the number of projects in a DAO should not be too many, otherwise it will lead to the internalization of resource competition
Structures adapt naturally is one of the most interesting thing about DAOs. In Frederic Laloux’s book “Reinventing Organizations”, organizations are divided into several categories, including red organizations, amber organizations, orange organizations, green organizations, and Frederic believes that cyan organizations (Teal Organization) are evolution direction of future organizations.
In a cyan organization, members are able to manage themselves and make progress contiunally according to their needs and then become “super-individuals”. The DAO organization undoubtedly conforms to the meaning of cyan organization, and the widespread application of DAO is also a large-scale practice of cyan organization.
7. DAO in future
We are pleased to see that some of the advanced management ideas, such as collegiality, gamified organization, and evolutionary organization, are fully implemented in DAO. Even though the DAO is a groundbreaking mode of coordination that is completely different from our usual perception of the organizational forms.
We also need to recognize that the DAO is still young, and there are still many problems. The coordination model of DAOs described in the previous section are all empirical based on an examination of existing DAO organizations. DAOs will continue to develop and evolve in ways that are beyond our expectations, and is still far from its end.
What excites us is that DAOs offer the possibility of enabling people to work in a friendly way. From the agricultural society to the industrial society, accompanied with the great material enrichment, we also take huge psychological and physical pressures from works but get disproportionate compensations. The emergence of DAO may put an end to this trend.
Perhaps one day we will see employees leaving companies in droves and making strides toward the Web3 native organization, the DAO.
Nichanan Kesonpat | Organization Legos: The State of DAO Tooling
Kassen Qian | DAO Essentials: 6 Key Onboarding Practices
Ben Schecter | The Future of Work is Not Corporate — It’s DAOs and Crypto Networks
王超 | DAO的生产力
王超 | Bankless DAO:去中心化协作的宝贵样本
SeeDAO | 自下而上的薪资发放工具 Coordinape
Frederic Laloux | Reinventing Organizations：A Guide to Creating Organizations Inspired by the Next Stage in Human Consciousness
Brian J. Robertson | Holacracy: The New Management System for a Rapidly Changing World
Kevin Werbach & Dan Hunter | For the Win, Revised and Updated Edition: The Power of Gamification and Game Thinking in Business, Education, Government, and Social Impact
PAKA is a starter’s fund in the Polkadot ecosystem, a DAO Venture co-founded by a group of parachain initiators, aiming to discover and help innovative teams in the Polkadot ecosystem. We hope to bring our experience in entrepreneurship and technology to the Polkadot ecosystem and help the next generation of entrepreneurs through the form of DAO while promoting the vision of Web3.0.