This past year has been one big growth spurt for DAOs (decentralized autonomous organizations) but not everyone in the space is convinced that they’re being formed properly or in a way that ensures success.
Before we get into it, it’s important to know that DAOs are community-led entities with no central leadership. Decisions are made by members of the group voting on governance proposals in an automated and decentralized manner.
It could be as big as running a decentralized exchange like Uniswap or as small as a group of friends pooling funds for parties or vacations.
Many are political or mission driven, but they all exist for a purpose, Parker McCurley, CEO of Decent Labs, said to TechCrunch.
Right now, there are over 1.7 million governance token holders across almost 5,000 DAO organizations, according to data on DeepDAO. Across the organizations, there’s over $10 billion wrapped up in DAO treasuries, up $552.4 million month on month, the data showed.
Even though the total treasury is higher on the month, it’s down from a November 2021 peak of $13.2 billion.
But what happens when the hype fades? People stop voting, treasuries can wither and abandoned, dead communities turn into “DAO graveyards.”
“I wouldn’t call DAOs any more frothy than startups in the tech industry,” McCurley said. “I think it’s identical to startups. There’s a lot of great concepts that don’t have good product-market fit, and for one reason or another, they don’t scale or achieve long-term success.”
To prevent that from happening, there needs to be a restructuring of the way community members look at — and form — DAOs, Imran Khan, a core contributor for the DAO and web3 accelerator Alliance, told TechCrunch.
Building with a purpose
“DAOs that are launching should have a product in mind,” Khan said. “Without a product and team behind it, it’ll be hard to be self-sustainable.”
For reference, Alliance, previously known as DeFi Alliance, shifted to a DAO structure in January after 18 months in existence so it could give up centralized ownership of its accelerator program to its community of over 150 companies and 400 individual members. Some Alliance DAO members include Gemini co-founders Cameron and Tyler Winklevoss, OpenSea co-founder and CEO Devin Finzer, and Circle co-founder and CEO Jeremy Allaire, among others.
“The way to think about it is, when you think about building a DAO, you’re in fact building a startup, and that’s the primary area of focus people should think about when launching DAOs,” Khan said. “If I’m launching a startup that’s fixing a problem, [I’m asking], what is it that we can leverage or build that can help monetize the product and self-sustain the community?”
An example of a DAO working is Uniswap. The decentralized exchange launched in late 2018 with a cult following but without a token or community governance system. Now, after transitioning to a DAO format, it is composed of over 332,900 members with a $2.2 billion treasury, according to DeepDAO data.
“It had a natural pull that allowed people to use its product because people loved it, and over time, it formed a DAO and community and token, and that represented the community focus of what Uniswap is trying to build, and that’s what we should see with DAOs as well,” Khan said.
Too much of a good thing can kill
Even as this subsector of crypto grows, the market is overloaded, Khan noted. In the past two months, he has seen 10 to 15 DAOs focused on building and developing the web3 ecosystem launch.
“It’s so easy now to launch a DAO,” Khan said. “The friction of launching one has lost its luster and I think that’s also a big part of the issue with DAOs.”
And there’s cannibalization happening in the industry — people want to attract the same users into their DAO and are eating into each other’s businesses.
“They’re all attacking the same problem the wrong way by bringing people together first and then addressing the problem together. Going forward, the success of DAOs will rely on identifying the problem first and being surrounded by product and monetization,” Khan said.
“Sometimes the slower the growth, the better, because it gives products or entities the time to build a meaningful community,” he added.
In the past few months, a number of DAO-driven entities have fundraised capital to expand the space, like Syndicate’s “informal” $6 million round from over 50 partners and the “data DAO” Delphia raising $60 million to give retail investors an edge against hedge funds.
“I feel like we’re going to see graveyards for everything really; DAOs are just one category,” Khan said. “If there isn’t a product or community keeping people together, it can easily die.”