Rethink the value of DAOs or how DAO culture creates value in cryptocurrency

Decentralized autonomous organizations (DAOs) are a fair and efficient means of distributing stakeholder power and resources. Eliminating the need for a central authority, they align with Web3's decentralized, egalitarian ethos.

Since the original DAO, or The DAO for short, crowdraised $150 million worth of Ether (ETH) in 2016, we've heard about their potential to change everything from politics to philanthropy. However, the early buzz has subsided and participation in existing DAOs remains low.

Rick Porter is the CEO and co-founder of DSCVRR, a Web3 social platform.

So why has this revolutionary model of governance failed to deliver on its promises?

The answer lies in how and why each DAO is built. Most are created by individuals or groups who trust others to share goals. But they often find that members either don't show up at all or don't stay when they do.

We need to reverse this cycle: first build communities, then create DAOs to support and serve their interests.

The DAO origin story highlights weaknesses

The DAO, which aims to fund emerging Web3 projects, emerged before cryptocurrencies hit the mainstream radar. It provides a novel collaborative governance model in which token holders are able to vote on different ideas to support and distribute rewards.

Record fundraising levels were a testament to the power and widespread appeal of collective management – until a $600,000 hack crashed The DAO, almost taking Ethereum with it. The solution was a hard fork that brought the network back to a point before the exploit, split Ethereum in two, and changed the course of blockchain history.

The DAO initially seemed to work in its favor, with a clear purpose and ample funding. Some people blame bad luck for their failures. But that's ignoring a similarity in a recent example: ConstitutionDAO, the so-called "financial flash mob," behind the failure to buy a copy of the U.S. Constitution.

In the week after its inception, ConstitutionDAO raised $5 million from nearly 47,17 contributors, but overbid at auction. Returning funds has proven challenging and difficult. High gas fees and administrative hurdles mean that most contributors receive only a fraction of what they stake. The attempt to maintain the DAO and turn attention to some new goal was quickly abandoned.

The constitutional DAO organizers' acknowledgement that "we cannot focus on carefully considering the technical aspects of the DAO's governance mechanisms and considering the community deliberations required for this topic" speaks volumes. Still, the idea of a DAO seems appealing.

Start with Community

Personally, I don't believe that the type of ad hoc campaign is the best use of the huge capabilities of the DAO model. In fact, these high-profile experiments have demonstrated how not to deploy one. Let's review what they taught us.

• A well-defined goal is good, but it does not guarantee success or longevity.
• There is no money either. Not even a lot.
• Publicity will attract more members. But no amount of hype will keep them staying.

The glue that unites everyone and is on the same page is as binding as the bond between the members. That's why crypto builders need to start building communities before we create DAOs.

When the DAO comes first, social interactions are automatically forced and unreal – in part because of the economic incentives created by tokens. In contrast, a thriving community must be made up of individuals connected by a common interest, not a monetary interest. A typical scenario is to first merge on social media, perhaps evolving from Discord or Telegram groups, where people can chat, share ideas, offer tips, and ask each other for help. They grow together, create shared values and build trust. At some point, a common goal will emerge naturally. Maybe it's to host an event, set up a committee, define roles. Perhaps the purpose is to monetize skills.

A DAO is a framework that can help achieve these goals. They provide financial and structural authority, bringing the organizational tools that make everything work. Smart contracts dictate roles and operate community sales and payments. DAO tokens provide liquidity and provide an efficient voting mechanism.

When the DAO's sole purpose is a defined external target, the trajectory is very different. Once implemented or abandoned, DAOs are redundant. No matter how ambitious the ambitions, the members have no incentive to stay.

DAOs can lead us out of the crypto winter

Fortunately, we are now entering an era of widespread adoption of DAOs by truly engaged social communities. The cynic may disagree, pointing to today's cold crypto climate. But that's my point. We have been here before, more than once. We know how it works.

Remember when non-fungible tokens (NFTs) were new and exciting? Sales soared and fortunes were made. The downturn in <> 2021 saw some people prepare to write their obituaries, but higher peaks are yet to come, especially with the launch of the Bored Ape Yacht Club pushing OpenSea to a single-day trading record.

This volatility in the market embodies a fundamental economic principle: the hype cycle is a symptom of shallow community connections. Something caught our attention, we took a look and dipped our toes in the water. But when there is nothing to sustain our interest, we move on.

Deeper engagement fosters continued value – just like the type of building that happens today. Real communities rooted in online or offline social interactions have always been a natural source of economic activity. Those who contribute the most will get more.

Common purpose

The core purpose of a DAO is effective governance, but this structure cannot succeed without a high level of sustained engagement.

When DAOs emerge from engaged communities built on trust and shared interests, we will begin to see them contribute to real, sustained change in the world.