August 2022

Decoding DAO Tooling

One of the first blockchain trends to gain momentum was the concept of Decentralized Autonomous Organizations (DAOs). Today, according to the analytics tool Deep DAO, there are over 2260 DAOs with a total of – 3.9mn members managing ∼US$ 10bn in assets and growing rapidly.

With the growth of DeFi and NFTs, DAOs have become mainstream again, with millions of people participating and 1000s of people building tools for these organizations. 

But do we need these many tools? Even after so much buzz around DAOs and DAO tooling projects, why has tooling not taken off yet?

There are still many challenges facing DAOs that must be solved to form resilient communities. As DAOs get larger and more decentralized over time, it becomes much harder to organize teamwork effectively, track accountability, measure contributions, and maintain the same dedication and drive from participants.

What is the current landscape?

Traditional organizations have used bank accounts to manage funds and numerous enterprise software solutions to coordinate effectively (e.g., Slack, Zoom, Google Docs, Asana, DocuSign). Similarly, various tools have emerged to tackle different aspects of DAO management and ensure well-functioning communities.

Image – State of the DAOs, BanklessDAO

Despite the gaps mentioned above, several core tools help DAO ecosystems function and grow. These include governance frameworks, treasury management, controllers, aggregators, and organizing the talent and skills of contributors.
Governance and voting, treasury management, contribution, and compensation are some areas where DAO tools have found some adoption. However, the vast majority of DAOs are still struggling to build their community effectively and work towards a common goal. 

The problems with today’s DAO tools?

DAOs typically suffer from a disproportionate amount of centralization and lack of financial incentives, making it difficult for members to contribute proactively in the long term. Some challenges faced by DAOs currently – 

  • High fees and costs surrounding governance activities like DAO setup, voting, and delegation
  • A lack of effective management and practical incentives for new members 
  • In light of broader challenges like the blockchain trilemma, DAOs also have problems balancing their ability to govern at scale without compromising decentralization – ‘The DAO Dilemma.’
  • DAOs also face a number of regulatory grey areas with governance tokens that may be deemed as securities

And when it comes to the tools helping to solve the problems for DAOs, they have to deal with their own problems first –

  • There are no clear business models yet. Though this is a short-term concern, it has slowed the adoption and scaling of these tools.
  • There aren’t that many legit DAOs out there yet, and everyone is competing over the same handful of legitimate DAOs. 
  • While DAOs share a few core components, their needs vary based on their type and purpose. DAO tools need to address these niche requirements and solve specific use cases rather than building tools for all. 

What should the buidlers do?

As DAOs grow in both users and assets, the community requires a level of structure and operational execution to help the DAO operate. Tools are a necessary part of DAOs because they make it easier for users to contribute meaningfully, help maintain operational efficiency as DAOs grow, and centralize decision-making at scale without violating the decentralized nature of the DAO. 

source: pet3rpan.net

If someone is building a DAO tool today, they should think deeply about their go-to-market strategy. The ideal strategy is to start with a niche, become a dominant (go-to) solution in that category, and then expand from there. Position yourself horizontally and vertically. 

  • Vertical focus would be to focus on a specific type of DAO (e.g., protocol DAO, social DAO, NFT collector DAO, etc.), and
  • Horizontal focus would be a specific tool for different types of DAOs (e.g., governance, treasury management, payroll, contributor onboarding, etc.).

D’Arcy Coolican (Franktrusts) puts it right –

Once a product has found a market fit, the teams should then focus on extensive business development and retention. Talk to customers, take feedback and improve, build engagement loops and participate in a positive-sum game by helping people build more DAOs. 

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