Scaling DAOs Won't Be Easy: Five Major Challenges to Overcome

The only thing cooler than working for one DAO is working for all the DAOs. But to do that you need to figure out what all DAOs need. That sounded tricky to us, too. So we asked! We gathered together some of the leading DAO founders, operators, and investors at the DAO Summit. We then…

By: Connor Spelliscy Loading...

Scaling DAOs Won't Be Easy: Five Major Challenges to Overcome

The only thing cooler than working for one DAO is working for all the DAOs. But to do that you need to figure out what all DAOs need. That sounded tricky to us, too.

So we asked! We gathered together some of the leading DAO founders, operators, and investors at the DAO Summit. We then separately interviewed more than 20 other brilliant DAO stakeholders, and asked them what they needed most. And here it is: a list of five of the most pressing questions for DAOs. So you can level up and get working right now.

With DAOs starting to research legal, governance, diversity, treasury management, tax, and other issues, much of the foundational learnings and research of DAO stakeholders remain siloed within their own communities. By doing open source work, you’ll accelerate the functionality of all DAOs, rather than just one. Your work can go so much further.

But if you’re not working directly for a DAO, can you get paid? That’s where we (and many others) come in.

The DAO Research Collective was built to fund open source crypto research. So if you think you may be the right fit to answer the questions below, we’re here to help you. Scale your DAO work by 100x. Reach out to @c_spelliscy.

If we’re not the right fit, there are many other great organizations that also support open source research in crypto, including Gitcoin, Smart Contract Research Forum, and grants programs like those at Compound, Uniswap, and Aave.

Five of the Most Pressing Questions for DAOs (in no particular order):

1. How can the community achieve legal clarity for DAOs?

Almost unanimously, interviewees identified legal uncertainty as the biggest issue for DAOs. While these are specific legal questions that lawyers might address, there are broader outstanding legal queries related to operations, treasury management, taxation, and other areas that require new policy or regulation to achieve clarity.

As such, DAOs need answers to how they can engage with regulators and policymakers to establish and protect their rights. This issue is particularly relevant given the advocacy campaigns the cryptocurrency industry has run recently in response to the infrastructure bill.

2. What are best practices for DAOs to maintain legally compliant relationships with the individuals and organizations that work for them?

DAO operators face this issue daily as they organize and enter into novel relationships with talent that do not necessarily have any legal precedents.

Relationships with employees and contractors are relatively straightforward when you have an entity through which to contract but they’re much more complicated when you don’t. This is made all the more complicated as DAO talent are located in jurisdictions around the world with a variety of different employment laws.

3. What are best practices for limiting the liability of DAO stakeholders? Including founders, workers, and token holders?

Potential liability for DAO stakeholders was, unsurprisingly, top of mind for many of our interviewees. Crypto teams generally have a high tolerance for risk, but given the breadth of legal uncertainty around DAOs, they seem particularly eager to figure out how they can limit their liability. Many others are operating in the space without any thought of the potential liability associated with their actions.

One of the most obvious and direct paths to limiting liability is to incorporate legal entities. Which type of entity and the scope of that entity’s work are open questions, however. Most teams that have started legal entities hope to dissolve those entities when they feel more comfortable with the legal environment.

Another way of limiting liability for DAOs could be to form mutuals or indemnity funds that protect organizations and talent from the cost of legal action.

4. How do you develop an equitable, scalable, and decentralized governance system for DAOs?

Interviewees were wrestling with how to use mechanisms like proposals, elections, delegation, and voting thresholds to create ideal governance systems. Many DAOs simply mimic the systems of their high-signal predecessors without assessing whether that strategy is optimal for their specific project.

So how do you develop a system that can be both scalable and decentralized? Interviewees observed that a DAO could scale more easily if it centralized to some extent and wrapped itself in a legal entity, or simply used a legal entity for some of its operations. While flawed, some legal entities were designed, at least in part, to more efficiently coordinate decision making between persons with a shared financial interest. Interviewees suggested they wanted to extract the good parts from these legacy systems while omitting the bad. By way of a simple example, most larger DAOs have created workstreams or committees and delegated decision-making at some level to those groups, like treasury management, marketing, and grants programs.

If DAO founders and operators want to centralize portions of their organization, they should be ready to make the case to their community as that idea tends to receive substantial pushback from those in the community that value transparency and decentralization over everything else.

Equitable DAO governance is another major consideration that should not be overlooked. We are making decisions today about systems that could be the precedent for DAOs going forward and, if we bake in norms that discriminate against certain types of individuals or effectively centralize power among a small group of decision makers and whales, we may fall into the same traps as legacy corporate structures and Web 2.0.

A few interviewees made the point that DAOs would benefit substantially from looking to past precedent when it came to things like governance systems. This is an area with an extensive amount of useful scholarship that DAOs could apply when creating these systems.

5. What are the best practices for hiring, onboarding, and managing talent at a DAO?

Beyond the legal questions of hiring talent to work for your DAO, there are also the practical questions regarding the best practices for hiring, onboarding, and managing a workforce.

Given the novelty of DAOs, it is difficult to find and vet talent that is well-suited to work in the generally nebulous and self-directed roles available in DAOs. DAOs without associated entities must also determine how to handle the legal logistics of entering a relationship with talent when there is no counterparty to enter into employment or contractor agreements, or to ensure talent does not disclose confidential information.

Once hired, DAO teams find it time consuming to transfer institutional knowledge to new workers, so DAO core teams often end up responsible for the majority of operations. Given the transparency of DAOs this seems counterintuitive but given the pace DAOs have evolved, these organizations have had a difficult time documenting their internal operations, making it hard to onboard new workers.

Once onboarded, DAO core teams must decide on how to manage talent, which can be tricky in a flat structure, and even more loaded when an organization is trying to establish itself as highly decentralized.

Want to make a difference?

So, can you bring expertise or creativity to any of the above issues? In a space as new and full of potential as DAOs, every decision is crucial. And we’d like to be able to make the best ones, not just for one DAO, but the future of all these organizations. If you think you might be the person for the job, contact @c_spelliscy.

Connor Spelliscy is the founder of the DAO Research Collective and co-founder of the Blockchain Association.

Author’s note: This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services.

Thanks to Aaron Wright, Brian Avello, Daniel Ospina, David Kerr, Derek Hsue, Eugene Leventhal, Ivan Farttunov, Jack Du Rose, James Waugh, Jake Chervinsky, Jay Stolken, Julia Rosenberg, Kinjal Shah, Kyle Weiss, Larry Sukernik, Marc Boiron, Maria Gomez, Mario Laul, Marta Belcher, Matthew Graham, Marvin Ammori, Miles Jennings, Min Teo, Nathan Schneider, Peter Pan, Rafael Solari, Reuben Bramanathan, Rich Brown, Scott Moore, Shreyas Hariharan, and Vishal Kankani for providing background, and Sam Vance-Law + Conor McNamee for reviewing/editing!