Understand the multi-layer structure and scalability of DAOs
Review: Owen；Shawn Lin @1PAR
As mentioned in the last article，Dao as an evolutionary organization, spontaneously evolved into a multi-layer structure as it scales up. This structure, like the bureaucracy in the company, it is fundamentally different from the bureaucracy but to solve the problem of scalability. In this article, we’ll take a closer look at the multi-layer structure of the DAO.
Last year, we’ve seen an explosion of DAO’s adoptions, dramatically on both the amount of fund managed and the tenfold size of DAO members . Currently, the total amount of funds managed in DAOs is around $9.8 billion, and there are more than 80 DAOs with more than $1 million AUM.
Over time, however, DAOs have begun to face scalability issues:
First, a DAO takes democracy as the most basic principle, but as more participants are involved in a DAO and more proposals and issues are under processing, it would fall into the dilemma that “everyone has to decide everything together”. Many DAO members have become overwhelmed with various votings and do not have enough background knowledge to make an informed decision, resulting in low participation rates and a centralization tendency.
Secondly, DAO naturally evolved into different project teams, all of which needed financial support from DAO, thus falling into the dilemma of “everything must be decided by everyone”. Each group’s funding decisions had to try to convince the majority of DAO voters, and a lot of communication and back and forth was required between project founders and DAO voters, which made DAOs inefficient and inflexible.
As a result, in help with the governance frameworks, DAOs evolve a multi-layer model to address these challenges. Governance frameworks that support multi-layer models include Moloch V2 and Orca.
Moloch V2 and Orca both chose to build a sub-group for DAOs. The DAO delegates a portion of its funding and some specific authority to a small team of trusted individuals for acting with relative initiative. Such a small, trusted team is known as Minion in Moloch V2 and Pod in Orca, which takes the form of a multi-sig wallet, despite the difference in the designation. The multi-sig wallet is funded by a vote of the DAO members who also vote to appoint a multi-sig committee which will be referred to as Pod throughout this article.
DAO itself is also a multi-sig wallet but has its own governance layer and persist in its governance independency through its own governance token and rules. While Pod has no governance token and relies on the multi-sig committee and relatively simple weight and threshold rules. Most importantly, the governance of a Pod is constrained by the parent DAO.
We distill the relationship between DAO and Pod into a “bounded delegation”
Entrusted by the parent DAO, Pod becomes a relatively independent financial entity. that can do the following things:
- Independently manage the funds in Pod, which can be used for external investment, donation, Swap, service procurement, etc.
- Initiate Coodinape rounds (a DAO tool used to distribute rewards and payrolls), or by other means, allocate the compensation to the contributors internally.
- Pod vault can also be used for fund receivables, but the funds in the vault as one still belong to the parent DAO.
At the same time, Pods are subject to a number of constraints on the parent DAO, including:
- The ownership of Pod vault is vested in the parent DAO, with the multi-sig committee acting only as the authorized administrator.
- A Pod cannot change the multi-sig committee members and their respective multi-sig weights without authorization, nor can it change the multi-sig rules. Those rights are vested in the parent DAO.
- Parent DAO has the right to withdraw the Pod funds and cancel the Pod;
- Parent DAO may set certain limitations for the fund payment of Pod to reduce funding risks, such as single transaction limitations, daily transaction limitations, black and white lists of payments, etc..
In a constrained delegation structure, both constraint and delegation are indispensable. Delegation refers to the full authorization to Pod, while constraint defines the boundary of authorization. This structure takes the DAO out of the aforementioned dilemma of “everyone has to decide everything” and “everything must be decided by everyone “. this structure’s advantages include:
- By delegating Pods, significantly reduced the pressure on DAO governance, allowing DAO members to focus their voting efforts on core critical issues.
- By appointing multisign committees, it allows professionals to decide on professional affairs. Creating Pods that delegate out not just the right to manage funds, but the right to decide on affairs within a certain scope.
- By dividing Pods, small teams with small scale and tacit cooperation can control a part of the resources of the DAO, so as to realize fast decision making and quick actions, allowing DAO’s grassroots to obtain execution power comparable to that of a centralized organization.
- Make it easier for the DAO to manage its budget by depositing funds into the Pod.
- By creating a temporary Pod and electing an administrator, it is easy for DAOs to perform time-sensitive actions, such as external asset swaps and asset bids
A decentralized top level of decision making plus multiple execution teams with partial resources that can move quickly is an optimized form of DAO that allows the DAO to maintain democracy and agile at the same time.
At the same time, creating a Pod and making a deposit in it is equivalent to creating a new asset package. DAO can directly take Pod as an asset for external exchange, transfer, mortgage, and other operations.
From Two-layer to Multi-layer
So far, we are talking about a two-layer organization of DAOs and Pods. In fact, both DAOs and Pods themselves can be multi-layered and form an infinite multi-layer system.
Any DAO is a kind of national entity, which does not subordinate to any jurisdiction, and to some extent, it has its own independent “sovereignty” and has the final say on all internal affairs. However, if one DAO holds the majority or even all of the governance tokens of another DAO, and has decisive influence in the governance vote, there will be a de facto subordination relationship.
The Pod directly created by the parent DAO is not the smallest unit in the DAO. Pods can also create and manage their own sub-Pods, which can achieve infinite layers of Pod technically. It’s like the “sand paradox” that you can find the smallest grain of sand in the world, but you can always smash it into more and smaller grain. For Pods, there’s no Planck scale.
Therefore, a multi-layer DAO system may look like this: DAO in DAO, Pod in Pod.
Pod to DAO
Formally, the only difference between a Pod and a DAO is that a Pod does not have its own governance token. If a Pod is authorized by the parent DAO to issue its own governance token, the Pod will no longer be a Pod but will have its own independent “sovereignty” and become a DAO eventually. Correspondingly, the Pod’s subordination to the parent DAO evolves into an investment relationship from one DAO to another DAO. In this case, we can think of the parent DAO as an incubator and the Pod as an incubated project, then at a point in time, the Pod can “start on its own” and become a new DAO. For example, indiGG, the Indian branch of YGG DAO, grew much faster than the other branches and started to operate independently, issued its own token and formed an investment relationship with. YGG DAO, which became a kind of “subsidiary” structure.
As mentioned above, there seems to be an assumption that a Pod must be created by a DAO and must be subordinate to a DAO. However, we believe that the concept of Pod should not be limited to this, as a Pod is essentially a multi-sig wallet so we can also argue that a multi-sig wallet is a Pod. If you created a multi-sig wallet using Gnosis Safe, you are created a Pod. In fact, the Pod vault in Orca is built using Gnosis Safe as its kernel.
We found that DAOs often start with a group chat plus a multisign address. A few members thought something was cool and created a multisign address, posted a vision, and started raising money. In the early days of a DAO, founding members tended not to want to overdo things that creating a multi-sig address is the priority rather than a complex governance layer. Well-known DAOs like Constitution DAO, FreeDAO, and PleasureDAO, started as a simple initiative to raise funds with multiple signed addresses and then evolved into DAOs.
As practice goes on, projects may fall silent due to failure, or they may attract more participants due to success. If the project is successful, there will come a point when multi-sig wallets are no longer enough to coordinate those many participants, and building a full governance layer becomes necessary. Thanks to the composability of crypto products, instead of creating a new DAO and transferring funds over, you can upgrade a Gnosis Safe multi-sign address directly to a DAO, meaning you upgrade a standalone Pod to a DAO.
Multi-layer structure makes DAO organizations more vitality
A multi-layered structure consisting of Pods and DAOs will always evolve according to business needs. Within a DAO, Pods that cannot effectively achieve business goals will be removed, while successful Pods will be retained and even evolve into a multi-layered Pod structure until they can be separated from the parent DAO and become a new DAO, which may combine with its parent DAO into a larger organism what we can call it a DAO community.
Unlike the rigid hierarchical setup of a hierarchy, the multi-layer structure of DAOs is always in the process of change and evolution is from the bottom up. Its layered-structure appears and dissipates according to the situation, and is self-organizing and self-adapting. In a bureaucratic system, subordinates are responsible to superiors and one level is responsible to the next, while in DAO, superiors delegate authority to subordinates and one level to the next. The bureaucratic system is a system of control, while DAO is an authorization system in that each level has full autonomy, and the hierarchical management structure is replaced with decentralized authority and collective intelligence.
The multi-layer structure gives the DAO almost unlimited scalability and creates a naturally evolving organizational form. Although there is no shortage of efforts to explore evolutionary organizational forms, traditional organizations are limited by the opacity of information, and they always prefer control not authorization. On the other hand, DAO organizations, as the native organizational form of cryptography which financial transparency as the fundamental characteristic. It makes monitoring and tracking much easier, and even if the organizational resources are decentralized controlled by various groups. There is no need to worry too much about fraud. We believe DAOs (or DAO communities) will scale far beyond traditional bureaucratic organizations and reach a new frontier of large-scale human cooperation. As BitDAO founder Ben Zhou put it: “If we want to take our business from billions to trillions, we can’t exist as a company, but as a ‘Soci-phenomenon on’.”
The significance of a multi-layer structure goes beyond giving the DAO scalability and also enables the DAO to achieve better decentralization. If the DAO needs to decide numerous affairs through governance votes, then it will lead to a decline in participation because participants cannot invest enough time in governance affairs. By delegating to Pods, the DAO strips out those high-frequency daily decisions saving the bandwidth of governance participants’ minds and allowing them to be more actively involved in the governance of the DAO’s core affairs.
Activating the power of “squad”
In social collaboration, one of the most basic units of collaboration is often not an individual, nor a large organization with a ponderous structure, but a small, relatively flat, closely collaborating team. Such a team has its size limit that is considered in the “squad theory” to be 12 people or less, as the size of a soccer team.
If it is too small and there is not enough momentum; if it is too large and it can easily split into multiple groups or evolve into a one-to-many communication pattern. More than 12 people mean that it exceeds the management scope of a team leader and may require something like hierarchical management. For a squad in DAO, more than 12 people may lead to the failure of a coordinape-style mutual evaluation system.
Within the squad, there has an open communication environment, naturally formed team norms, and collective memory. Furthermore, members fully understand each other with a tacit understanding that they do not even have to communicate every time. Collaboration within the squad is not loose, but tight. A larger organizational network may surround a squad, blurring its boundaries and making it appear larger, but for the core squad members, there is always an invisible circle that divides the boundaries of internal and external affinity.
From a military coup to the development of an Internet product, a squad has worked closely together at its core. In a successful squad, everyone can find a valuable position.
Pods endow its squad with appropriate financial resources and a certain degree of autonomy, which will further stimulate the squad’s creativity and execution. The squad can take care of everyone in it, so individuals will feel a greater degree of respect, freedom, and sense of belonging, and will be better engaged in value creation.
Catalyzing DAO to DAO Collaboration
A DAO is a network that participates in extensive collaboration and high-frequency interaction. The most basic form of interaction between DAO and DAO is financial interaction. Some financial interactions involve a large share of the DAO’s treasury and often require a vote by the DAO’s owners. However, more financial interactions tend to involve a smaller share of funds with relatively high frequency that may require significant communication efforts by negotiators. The latter one is not suitable for implent vote resolution, and it is more appropriate to authorize a Pod to complete it. We could build an interim Pod to manage every D2D cooperation involving financial interaction.
In addition, as we mentioned earlier, the Pod itself is an asset package of the DAO. The effect of asset packaging could be realized by injecting different types of assets into the Pod. “Trading Pod” can have the same effect as “trading Pod assets”, with significant savings in Gas compared to trading the assets in the Pod directly. At the same time, DAOs can transfer their Pod to another DAO for or without compensation, or exchange its Pods with other DAOs’ Pods to realize business combination and grafting.
As mentioned above, we have gained insight into the unique concept of Pods from several perspectives:
- From a technical perspective, a Pod is a multisign wallet, which can be subordinated to a DAO or another Pod or can exist independently, and a Pod can be upgraded to a DAO by creating a governance layer.
- From the perspective of organization, a Pod is an organizational unit, with Pods at the grassroots level often being a squad of close collaboration, in which individuals can give full play to their talents.
- From a financial perspective, a Pod is a set of packaged assets that can be exchanged, transferred, and mortgaged. Packaging assets into Pods simplifies the transaction process for multiple assets and saves Gas costs.
- From a business perspective, a Pod is a project, or business unit, under a DAO, which may be temporary or long-lived.
Observation from different perspectives gives us a deeper interpretation of Pods and more application scenarios to explore.
At the same time, we see that the nature of the DAO-Pod relationship is “bounded delegation”, and the infinite extension and natural rheology of the DAO-Pod structure. We found that the DAO-Pod structure not only enables great scalability for DAOs but also allows DAOs to become truly revolutionary organizations. We believe that the DAO-Pod structure will become a. new paradigm for DAOs and that a multi-layer, fractal, and rheological structure composed of DAOs and Pods will be the future of DAOs.
 Pods: The DAOnfall of Token Voting
 How ENS DAO Brought Working Groups On-Chain
 Charting the Path to Unaccredited DAOs with Minion
 Squad Wealth
PAKA is a DAO Venture co-founded by a group of Polkadot parachain initiators, aiming to discover and help innovative teams in the Polkadot and other Web 3 ecosystems. We hope to bring our experience in entrepreneurship and technology to help the next generation of entrepreneurs through the form of DAO while promoting the vision of Web3.0.