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DAOs need to turn incentives into feasible rewards  

12/22/2022

For many, decentralized autonomous organizations represent the future of organizing people on the internet. To make a difference in the long run, they must focus on users’ interests 

 

The idea of a new kind of organizational structure, that is built with decentralized blockchains, has emerged in recent years as a core component of Web3. It is called DAO (decentralized autonomous organization), a term that, for many, embodies the future of organizing people on the internet. Among the various forms of Web3, like decentralized crypto platforms or social networks, play-to-earn video games that reward players with tokens, and NFT platforms, DAOs usher in a new era of the digital economy, middleman-free and owned by builders and users. 

 

In short, a DAO is a community-driven governance model based on smart contracts (computer programs that are hosted and executed on a blockchain network). Broadly speaking, DAOs are established and run by groups of individuals with a common purpose. This purpose could include investing in startups, building a decentralized company or nonprofit organization, creating and selling NFTs, etc.. Anything is possible. 

 

But what matters most about DAOs isn’t their definition. The crucial thing here is how they can achieve their goals, leveraging breakthrough ideas and transformative businesses. 

 

How DAOs operate 

 

There are two basic principles governing a decentralized autonomous organization when it comes to cooperation and value creation for members: 

 

  • Anyone can join and participate.
  • Members are rewarded for their participation through tokens. 

 

Tokens are digital assets that allow data and value to be transferred, stored, and verified securely, thanks to the blockchain technology involved. In a DAO, tokens constitute a means to reward the contributions one makes to the DAO’s purpose. The more tokens members get and accumulate in their blockchain wallets, the more they expand their voting rights on matters critical for the DAO. Therefore, individuals with a DAO’s tokens are the organization’s stakeholders. 

 

To better understand how DAOs work, we can look into an example provided by authors QuHarrison Terry and Scott Keeney in their book  “The Metaverse Handbook: Innovating for the Internet's Next Tectonic Shift,” in which they discuss several innovations emerging from blockchain and Web3, including DAOs. Krause House, a DAO organizing around the mission of owning an NBA team, is mentioned in the book as a prototype of the incredible things a decentralized autonomous organization can achieve. 

 

More than simply raising funds, the purpose of this DAO involves several actions. They need systems for marketing and for growing the network of participants. They need to make effective pitch decks for NBA teams and current owners, create an internal organization and define how Krause House rewards participants. So, they have developed the $KRAUSE token, which for the time being, can be earned only by contributing to the DAO’s internal projects. For example, you earn a token if you are a registered member and make a blog post about Krause House. Or, should you create or contribute some design work to the DAO’s pitch deck, you earn a token. And so on….

 

As planned, when Krause House is sufficiently organized and ready for the next step, it will begin to sell off a portion of the DAO’s token to raise funds needed to buy an NBA team. Everyone who has purchased this token or earned it due to contributions to Krause House’s mission will have a corresponding share of the NBA team they eventually buy. The whole project might sound utopic or unrealistic to some, but it demonstrates how even an extremely ambitious DAO could translate into profits over time. 

 

Challenges to overcome 

 

There are challenges and a significant gap between theory and practice when transforming the concept of DAOs into a feasible organization. For example, take governance issues. With a token-based governance model, in which participants with more tokens have more voting power, a few or only one wealthy participant could launch a “hostile takeover” strategy —completely undermining a DAO’s philosophy. 

 

That’s what happened recently at a DAO named Build Finance. A member who had accumulated a significant amount of tokens proposed and used their disproportionate voting rights to take control of the DAO’s treasury. According to Build Finance, the perpetrator then transferred the DAO’s tokens and made off with around $470,000 in funds. 

 

To avoid such a scenario, DAOs must adopt rules and a decision-making process that protects the organization from risks and hazards. An alternative resides in a model where voting rights also take into account performance indicators about what a member is providing to the community and prevent decisions that are not in the broader interest of the organization.

 

Incentives and rewards

 

While there are challenging tasks ahead, it is helpful to consider past obstacles that confronted the evolution of software and the internet itself. Two decades ago, gathering people to create something online, in real-time, was simply not achievable. Today, it is commonplace. Technology and governance models evolve to meet needs. 

 

DAOs are so appealing because of the idea they embody: making incentives to early adopters and crowdsourcing the efforts needed to build something truly revolutionary. Today’s most popular social networks could have evolved differently if they were DAOs, benefiting many of its users alongside the founders. Imagine if the necessary technology were available then: every time users got more people to join or create viral content, they would be rewarded with tokens that would end up as shares. 

 

This scenario is possible today for new emerging social platforms or metaverse services as long as they adopt a systematic approach to determine feasible rewards. 

 

Developing a decentralized internet is a work in progress, and DAOs can undoubtedly be responsible for major shifts in how new services or businesses are created. To do so, they must ensure they are truly community-driven, open, and transparent, making them trustworthy for those who may wish to join them. 

 

Above all, as with every Web3 project, DAOs need to meet a premise of Web3: to give creators and users a concrete way to monetize their contributions and simultaneously democratize the rewards to everyone involved.

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