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The No-Nonsense DAO Q&A with Kash Dhanda
What you need to know about DAOs but have been too afraid to ask. Straight talk, no hype.
I’m very excited to share my conversation with Kash Dhanda who works at Superteam DAO and built the website DiscoverDAOs. If you’ve asked yourself questions such as “why on earth should I care about what a DAO is?” or “are DAOs just the latest scheme to get rich quickly?” this Q&A is for you (it was for me!).
Kash offers a balanced perspective without the hype. I was most interested in his illustration of the three different categories of DAOs (eternal, ephemeral, enduring), his perspective on the strengths and weaknesses of DAOs vs. corporations, and the city states analogy. Kash was very generous with this time and I want to express my sincere gratitude to him. I learned a lot and I hope you will, too. Enjoy!
Frederik: How did you find your way into the world of DAOs, how long have you been working in it, and what makes it compelling to you?
Kash: The first toe I dipped into the murky pool of crypto came because of DAOs back in 2016. I was reading the ETH whitepaper, and to be honest most of it went over my head at the time. But in the paper, Vitalik mentioned this concept of DAOs as organizations that could run themselves. I was immediately seduced by this vision of work where power was redistributed away from rent-seekers, and I spent the next few days annoyingly telling everyone I knew that DAOs were the future. Until, of course, The DAO was hacked and the concept was put on the shelf for a few years.
Fast forward 5 years and DAOs were viable again. I was lucky to have a friend - Akshay BD - who grabbed me by the shoulders and told me to follow my passion. I ended up joining forces with him and a few other people to create the SuperteamDAO in October 2021.
Frederik: Vitalik Buterin wrote about DAOs as "an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do" and "contains some kind of internal property that is valuable in some way, and it has the ability to use that property as a mechanism for rewarding certain activities." How do you define a DAO?
Kash: Here’s the short answer: a DAO is an online community with a mission. That mission may be around investing, creating products, creating experiences, or even buying an NBA team.
Every DAO has at least a mission. Beyond that, there are a number of features they may or may not have, including:
Shared treasury (to hold the funds of the community)
Community ownership of that treasury (e.g. Tokens, NFTs, etc)
Working Groups (sometimes called “Guilds”) that contribute towards the execution of the mission
The term Decentralized Autonomous Organization is largely a misnomer when applied to today’s communities. Few DAOs today are actually either decentralized or autonomous. Frankly, many of them aren’t even organized. But as models for onboarding, project management, contribution, compensation, reputation, governance, and revenue generation are developed we’ll see more pure “DAO”s in the coming years.
Frederik: Superteam's mission is to "help the most promising projects in the Solana ecosystem in the ascending world." Why was this organized as a DAO? Why can't people organize informally or through a traditional legal structure like a corporation, partnership, or non-profit?
Kash: The DAO structure gives us three advantages over a traditional corporate model:
1. Fluidity attracts talent.
Unlike a traditional company, which would need to hire full-time and part-time contributors, a DAO is meant to provide a fluid working environment. Anyone can join the DAO, contribute as much or as little as they want to, and then get compensated accordingly. The upside is that it provides more flexibility than a traditional company, and should be able to attract a wide range of talent.
2. Decentralized decision-making leads to faster decisions.
In a traditional company, decision making is often fairly centralized. The leadership team makes the strategic decisions, and then others in the org are left to execute. This model worked well in Web2, where the pace of change was significantly slower than in Web3. In crypto, the entire space can change in the span of a week. Centralized decision- making processes are simply too slow to enable groups to respond to the rapid change. In a DAO, any member can assemble a working group to crack on a project without needing approval from the leadership team. They can either get funded up front or at the end of the project by submitting a funding request to the treasury, which is then approved/denied by the community itself. This should lead to better outcomes in the long term.
3. Community ownership leads to higher commitment.
In a traditional company, it’s operationally difficult to reward people with some type of equity based on specific tasks or projects. In a DAO, you can reward contributors on a micro-basis with a form of equity, particularly if the DAO has a token. This aligns long- term incentives really well and creates a group of evangelists who are all financially invested in the overall success of the DAO.
Frederik: What types of DAOs are there? What 'missions' do people organize around? What are DAOs well-suited to do (and what not)?
Kash: There are as many DAOs as there are types of companies, and we’re only scratching the surface. The early standout use cases have been around group investing (e.g. PleasrDAO), social clubs (e.g. Friends with Benefits), media publications (e.g. Forefront and Bankless), and providing services (e.g. SuperteamDAO).
As an organizational model, DAOs are best suited to accomplish missions where a community is the driving factor of success. For projects where only a few people are needed and the work is relatively straightforward, traditional companies are still likely better. But if you’re trying to accomplish something at scale (like buying an NBA team), a DAO is the perfect option.
Outside of the mission of the DAO, you can also categorize DAOs by their tenure. Some DAOs are eternal, others enduring, and others still are ephemeral.
Frederik: Can you expand on that tenure-based categorization of DAOs? What are some successful examples?
Kash: An “eternal” DAO will last forever. These DAOs are built to support a protocol which will run on the blockchain as long as there is a blockchain running. Examples include the Sushi DAO, Compound DAO, and many other DeFi protocol DAOs. As just one example, Sushi will continue to exist even if it has 0 users. The code is eternal. These DAOs are the most proven use case as of 2021. The protocol revenues generate a treasury, which then funds the DAO’s operations.
An “enduring” DAO aims to last as long as possible. These DAOs have a mission, but don’t have a particular timeline or a specific objective that will mark their success. Most DAOs at the time of this writing are included in this category, including Friends with Benefits, Forefront, and SuperteamDAO. In the Superteam example, we’re coordinating a community to develop the Solana ecosystem and plan to work towards that mission for as long as we can.
An “ephemeral” DAO lasts as long as needed. These DAOs have very specific objectives and are created to coordinate a community of people to complete that objective. Of course, the DAO may continue to exist even after the objective is achieved, but in principle the goal is not to build a large and lasting community. Examples include ConstitutionDAO, which was created to buy a copy of the US constitution, and DAOMasters, which built the MakerPad of DAO tooling. In the future, my hunch is that this will likely be the dominant format for DAOs. Small groups of people will band together in Web3 to accomplish particular missions with a shared treasury before separating again. Think about these almost like bank heist crews, assembling for a job.
Frederik: The enduring DAO seems to be the most challenging since it has to sustain itself through community-driven value creation? How do you think about the viability of this model?
Kash: The easiest way to think about community-driven value creation is through a comparison to countries. Like a country, a DAO needs to:
Rely on its community to continuously generate value
Author a constitution which creates the laws of the land. For DAOs this constitution is written into the rules of the Smart Contract.
Determine it’s political structure, with associated governance and power distribution.
Foster an emergent culture, which springs from the community members themselves.
Create borders, either through an application process or token-gating.
Develop a vibrant economy, whether through a token or other revenue-generating processes.
Due to their size, it’s probably more appropriate to consider DAOs as city states. Most countries aim to cover a large geographic area and house a large population, while most city states are geographically constrained. In the last ten years, we’ve seen how city-states like Singapore and Dubai have been able to outgrow their geographic competitors and attract talent and capital away from larger countries. By virtue of being small, nimble, and semi-open, they’ve been able to respond quickly to crises like Covid. Of course, this analogy is not perfect. City states are predominantly authoritarian, while DAOs tend towards being democratic.
To return to your question, enduring DAOs have to create value in the same way as countries. They must make themselves attractive to people who want to work and live in that region. That means creating a compelling vision for where the DAO will go. It requires providing the necessary infrastructure to make work easy. And it requires DAOs to build a flexible set of rules that foster innovation and prevent the calcification of power.
Frederik: What misconceptions have you seen about DAOs in general?
Kash: There has been a tsunami wave of essays from crypto “thought leaders” about how DAOs will inevitably replace corporations. That might happen, but it’s much more likely that they exist alongside each other.
Large scale cooperation is really difficult, and the models around decentralized decision making are still being developed. Often, centralized decision making is much more efficient than anything a DAO can provide. To borrow an analogy from open-source software development, it’s likely that corporations are best to build “cathedrals” - products that require long time horizons with strict quality control standards. DAOs might be better suited for building “bazaars” - products where a degree of chaos enables innovation.
The second big misconception is that full decentralization ought to be the ultimate objective of a DAO. Decentralization is useful for many things - agility, fairness, persistence - but it comes with downsides. As just one example, project management in a decentralized organization is particularly difficult.
Instead, my bet is that most DAOs will develop a polycentric structure, with multiple small centralized small groups. At Superteam, we’re using a Working Groups model with teams of 2-8 people. Each Working Group has a specific objective they are accountable for and an explicit leader who has ultimate decision making authority. The Working Groups themselves, however, are each independently autonomous and have no power over each other. This type of federation is useful for ensuring work gets done without aspiring for complete decentralization.
Frederik: How do DAOs raise capital for their mission?
Kash: Typically DAOs raise capital in three ways:
Token Issuance, where the token is sold in a private or public sale from the DAO treasury to other stakeholders. This is the “standard” model of raising funds.
NFT sales, where an NFT collection is released and all fees go directly into the DAO treasury. This is why many NFT projects also call themselves DAOs.
Revenue from an existing protocol, where some kind of profit-generating organization already existed and a portion of the funds are distributed to the DAO treasury. This is how protocols like Uniswap, Compound, and others have become DAOs.
Frederik: Can you explain the use cases of DAO tokens? Is this about governance, incentives to participate, capturing value created by the DAO's activity?
Kash: In short, all of the above!
A token is fundamentally a way of making incentives tangible. A DAO which issues a token is simply creating an avenue through which it can get community members or the world at large to act in certain ways.
Chris Dixon likes to say that tokens are a new digital primitive, and I think he’s right. They are a building block that can be used in a variety of ways for a variety of purposes. We’ll see many experiments in this area, but as of today there are four dominant reasons to issue a token.
Fundraising is the most obvious, as described above.
Governance is the next most obvious. You can also use the token as a way to attribute the “weight” of a community member’s vote within the DAO. The logic here is that the more tokens you hold, the more economically aligned your motivations will be with the DAO’s, and therefore you should have a larger say in governance than others. There are other (better!) voting models, but token-weighted voting is the most popular at the moment.
Tokens can also serve as an access pass. As a simple example, a DAO might create a token which is required to access the DAO. Friends with Benefits follows this model - to become a Member of the DAO, you have to hold 75 $FWB tokens. To gain access to their newsletter, you need 5 $FWB.
Finally, tokens can act as compensation for people who help build the DAO. But unlike USD compensation, the tokens can rise in value as the holder improves the DAO. This creates a compensation mechanism with a n inbuilt-in incentive alignment, much like equity grants to startup employees.
Frederik: Wait, does the token represent ownership of an asset or influence on governance (or both)?
Kash: Tokens can represent both, depending on how the DAO is set up.
Fractional ownership of the DAO treasury.
This model was pioneered by MolochDAO. Effectively, anyone could contribute funds to the Treasury. If you didn’t like how the DAO was operating, you could redeem your DAO tokens for a proportional share of the treasury in an act called “rage-quitting”. In this model, buying the token is literally buying a share of the community’s funds.
Some DAOs are using token holdings as a way to weigh governance proposals. The core concept is that those with skin in the game should be allowed to make the decisions within the DAO. There are a number of problems with this specific model (e.g. gatekeeping those who can’t afford membership, potential sybil attacks, etc), but it’s an easy way to ensure that community members are able to impact the DAO’s development.
Frederik: Is there a fundamental reason why a token should rise in value?
Kash: Let’s start with the obvious: a token’s price is just the measure of demand for the token in relation to the token supply. Price goes up as the demand goes up, assuming supply stays static. The question for DAO builders is: why should demand go up over time?
For some DAOs (particularly protocol DAOs like Curve or Sushiswap), demand may go up as the protocol becomes more valuable. The more valuable the protocol, the more valuable the governance rights over that protocol may be. Those with governance rights can edge the protocol to reward behaviors in their interest.
As a simple example, the Curve DAO decides what pools should be added to their protocol and what the liquidity incentives ought to be. Imagine I hold a large number of $KASH tokens. I may want to get enough $CRV (the Curve DAO token) such that I’m able to lobby for a proposal that provides large platform rewards for contributing to the $KASH liquidity pool. If that proposal passes, I stand to make more money with my $KASH tokens. This is not unlike the life of a traditional lobbyist, and already we are seeing “Protocol Politicians” emerge.
Demand may also increase due to the non-governance utility of the token itself. Binance, though not a DAO, is the simplest example of this. Using their token, BNB, gives traders on their platform a discount on trading fees. The more you trade, the more BNB you’ll want, since it saves you money on fees.
Clever DAO builders can create similar dynamics within their ecosystem. For example, Raid Guild is a service DAO that builds Web3 products. In order to get your project higher up on their priority list, you can buy and stake RAID tokens. As more projects want to work with Raid Guild, the value of their token should increase.
Frederik: Does having a token just make a DAO an enrichment scheme for early insiders who get an allocation when the token is created?
Kash: If done carelessly, this is absolutely possible.
But if the token allocation is done thoughtfully, then this is avoidable. The key is to ensure that the founding team is not taking the lion’s share of the tokens. Reputable projects tend to give only about 10-20% of the token supply to early insiders. That leaves the vast majority of tokens in the hands of the community and other ecosystem partners that can build the DAO’s value over time.
Frederik: A lot of projects are being launched which can make web3 disorienting for newcomers. What do you think makes for a 'successful' DAO? Why do DAOs fail? Is there a risk that “enduring” DAOs launched today will fizzle out if the community is pulled into new projects or if crypto experiences a bear market?
Kash: At a high level, the key component of a successful DAO is the people within it. Without a group of people who are interested and able to complete the mission, the DAO will fail.
A lot is needed to get people to care, including community culture, ease of onboarding, project management best practices, compensation schemes, and rituals that make contributors feel at home. DAOs that don’t have thoughtful solutions in these domains are likely to see enthusiasm dissipate rapidly.
In general, my belief is that 90+% of projects launched during a bull market will die in the next bear market. We saw this in the 2017 ICO craze, and I’d be willing to bet we’ll see the same once the current bull run ends. The 10% of DAOs that survive and create lasting value will be those that have a community that cares more about the DAO’s mission than the price of the token.
Frederik: Can a DAO be created/used for illegal purposes? Can people in a DAO steal the money that is being contributed?
Kash: A DAO is just a way of organizing people. In the same way an LLC might have illegal aspirations, so can a DAO. We haven’t seen any examples of this yet that I’m aware of, but it’s certainly possible in theory. Mafia DAO, coming 2022!
The more important question is your 2nd - can a DAO steal the money that is contributed? The answer is “yes, but it’s very difficult”. DAO’s funds are typically held in a treasury that acts as a “multi-signature wallet”. For any transaction to be approved in this wallet, a certain quorum of the signatories must approve the transaction. In order for any one member to steal the funds, they’d need to convince all the other signatories to act in the same way.
This isn’t impossible, but it’s difficult. Signatories typically are large holders of the DAO token, or are otherwise deeply committed to the mission of the DAO. Stealing the funds would decimate their token’s value (thereby costing the bad actors money) and would effectively kill the DAO itself.
As a further guardrail, some DAOs are experimenting with rotating groups of elected signatories. That way if a particular signatory on the multi-sig wallet is not acting in accordance with the DAO’s best interest, they can be replaced by the community with a new representative.
Frederik: What links would you recommend for people interested in learning more about the structure or understanding/tracking the different DAOs?
Kash: I’ve collected the best essays on DAOs and a directory of important DAOs over at DiscoverDAOs.com.
If any of your readers have specific questions about DAOs, I’m also happy to answer them personally. DM me on Twitter @kashdhanda anytime.
Thank you so much, Kash!🙏
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