How to create DAO on blockchain?

Finding investors is every founder’s dream. This dream, while opening up more avenues of innovation and business scaling for the founders, usually comes with a seat for investors as board members.

While the focus of the founders is to gather famous people across the boardroom table, these members can start a power play with egos to show who is in control. In such cases, entrepreneurs understandably find it difficult to put their foot down and be pressured into making the wrong decisions for their business.

Between these ego clashes and the inability to put a strong voice forward, the day-to-day running of a business and its future are at risk.

This example is just one way of explaining how fatal mistakes or pressured decisions can be. To address these issues across a variety of other use cases, businesses have slowly begun to turn to the comfort of transparency and equal rights that the DAO blockchain offers.

If you are here reading this, it is safe to assume that you already know how DAOs on the blockchain are 100% automated democratic communities that run on anonymous participation and voting. They rely heavily on smart contracts that determine the decision-making power among the users who have voting rights (usually whoever has more tokens has more voting rights).

Ultimately, within the multifaceted elements, the answer to how a DAO works brings it to a stark opposite end of a traditional organization that works.

Now before we get down to the step-by-step details of setting up a DAO, let’s give you some options when it comes to the types of DAO blockchains you can invest in. While we started our article by drawing the lines between how a DAO-like model can be useful in an organizational setup, the reality is that the use cases are much more widespread.

Types of DAO blockchain

Based on the end goal, technology and structure, DAOs can be segregated into several types.

Protocol DAOs

When tokens act as a voting metric to implement changes in any protocol, the governance structure presents protocol DAOs. For example, Uniswap – it allocates native tokens to the liquidity pool contributors, which can then be used to vote in the DEX’s governance related decisions.

Collecting DAOs

Artists using non-fungible tokens (NFTs) to create art rely on collector DAOs to establish ownership of the art. An example of this can be found in Flamingo and PleasrDAO.

Investment DAOs

Also known as Venture DAOs, they enable capital pooling to democratize investment in more DeFi operations. Krause House is a leading example of venture DAO controlled by basketball fans to run the National Basketball Association.

Provide DAOs

In this type of DAO blockchain, the community contributes to the grant and votes on fund allocations for investments in innovative DeFi projects. An example of this lies in the Aave protocol which uses the infrastructure to grow its DeFi initiatives.

Entertainment DAOs

These DAOs allow creators to bring innovation to the digital world by giving them control over governance.

Choosing between these or other DAOs on the blockchain will have a big impact on the next section we’ll cover – how to create a DAO. However, if there is one thing that these use cases convey, it is the indisputable fact that DAOs are gaining popularity at scale, and here are some statistics to validate it –

How to build DAO on blockchain?

At their center, DAOs consist of four critical elements – goals, governance, voting and rewards. Understanding them is critical to getting a handle on the process of building a DAO.

To begin with, the basics of how to create a DAO lies in having a deep understanding of DAO smart contracts, as they would construct all the rules set by the community members and determine how the protocol would work. This is where governance becomes very important.

The next step in building a DAO will be figuring out funding and how to provide governance after the rules are written onto the blockchain. Typically, a token issuance method is introduced here where the protocol sells tokens to replenish the DAO’s coffers. Here, the token holders get voting rights proportional to the number of holdings.

Once funding is complete, the DAO becomes ready for deployment on the Ethereum blockchain, which once deployed in production needs Ether (ETH) to perform Ethereum transactions. After this, ETH is given to the DAO smart contract address in the initial creation phase as specified in the codes.

Understanding how the model works will help you answer how to form a DAO, but you still need to plan the four elements we’ve mentioned at a detailed level. So let’s get down to the steps to build DAO on blockchain.

1. Determine the purpose and build a foundation

The primary step in building a DAO is to decide why it is needed, what role it will play, and how it works. It would be important for you to find the opportunity, run a market validation test on the need to have DAO and complete processes that can be inserted into smart contracts.

Once this foundation is set up, you need to create:

• An encrypted wallet to allow token storage and transactions
• A smart contract with automated processes
• A community of interested members
• A specified voting timeline
• A forum or chat room option for members to know what’s going on

2. Plan ownership and voting mechanism

After agreeing on the goal of the DAO, the next step that comes to the fore is establishing ownership and deciding the voting mechanisms among the members. Typically, when you create a DAO, you need to transfer ownership to its members – which can be achieved in three ways – Airdrops, Rewards and Token purchases.

In case of airdrops, tokens are given to the members on the basis of their contribution in the community. Rewards, on the other hand, are bonuses paid to members who achieve their goals or duties. The third option is to list your tokens on decentralized exchanges and let members buy them.

Now since we’re talking about membership so much, let’s briefly look at the role of membership in setting up a DAO. When you start a decentralized autonomous organization, you will need members who will vote for approval or rejection of the decisions your DAO works around.

To achieve this, there are two types of membership – one is token-based (people who own the DAO token will become members) and the other is share-based. In the case of the latter, people must submit a proposal indicating that they have the expertise to make valuable decisions.

Once ownership is planned and in place, you need to create a voting mechanism. A popular way of approaching this is to decide the vote on the basis of the number of pieces and not the number of voters. The page that gets the most tokens will be the final score.

3. Establish a management structure

This is the most critical aspect when answering how to create a DAO. This phase describes how decisions will be made when the DAO is set up. It will have information about the voting mechanism, several use cases about the process, and clarifications about the essential components of the DAO network, including the exchange, which will hold the transaction, the validator – the one who will verify all the transaction, the developers who will build the code, and the users who will participate in the community.

You can get an idea of ​​DAO governance structure through Maker DAO documentation. It contains details on things like – proper use of the wallets, use of IOU tokens to lock in the votes, duration of how long the token holder has to hold the token before they become eligible to vote, how to unlock the votes, the solution to what happens to the token value i, and the danger of whales etc.

In the governance structure document that you create, it would be beneficial to add a section on how the DAO will make money. While it is a given that the DAO will profit from the sale of their initial tokens (which will give members voting rights), members can also give it capital in return to buy an early-stage project that will share the profits with them as part of the investors parts.

4. Set up rewards and incentives

The final step in how to start a DAO lies in setting up rewards for the DAO members for their contributions. Typically, native governance tokens are distributed to contributors using the DeFi protocol for consideration. These represent the ownership rights they have. You can also reward them through cryptocurrencies such as USD Coin (USDC), ETH, Tether (USDT), or through grades and titles.

5. Start the DAO

Once you’ve covered all the steps, you’ll reach a stage where you’ve answered how to build a DAO and are now ready to launch. While there may be several ways to solve this, the quickest would be to set up a Discord and Telegram community to raise awareness and then direct members to your DAO platform.

With this, we have taken a closer look at the several stages of how to create a DAO. Now, I’m sure the more you research, the more you’ll come across platforms that will provide a DIY answer to how to set up a DAO like Aragon, Syndicate, DAOstack and more.

However, these articles rarely mention the challenges – those that will need a strategic solution. Remember the 2021 incident where a simple UI flaw helped hackers extort $120 million from BadgerDAO? So while these low-code platforms provide convenience, online threats like Badgers can tear away your brand’s future.

The solution?

Partnering with a blockchain development company that not only has expertise in how to build DAOs on the blockchain from scratch, but has also resolved complications arising from centralization caused by masternodes (those who own the most tokens), shadow voting, code vulnerability, and the extension of the time led by getting each member’s vote.

At Appinventiv, we specialize in creating time-sensitive, hack-proof DAO platforms that enable the world to connect and decide what they care about. do you want to know more? Contact us to create a DAO.

THE AUTHOR

chirag

Blockchain Evangelist