Token-based communities can take various forms, and not all communities need to transition to DAO.

Original Title: "Web3 Communities — To DAO or not to DAO?"
Author: DocTom
Translator: Sissi
Originally published in English on March 24, 2022

Translator's Note:

The rise of Web3 not only signifies technological advancement, but also a reimagining of human collaboration, innovation, and value creation. In the context of Web3, communities are no longer just gathering points around common interests, but have become platforms for value exchange and innovation. For reference, see previous articles "Web3 Communities: The Fusion of Personal Feelings and Collective Belonging" and "Community First: Building Sustainable Growth for Web3".

Decentralization is not only the technological foundation of Web3; it reshapes our understanding of organization and collaboration at a deeper level. DAO, as a combination of technology and ideology, demonstrates a high-dimensional governance system through blockchain, tokens, and smart contracts.

In this context, tokenized Web3 communities are facing a choice: whether to transition to DAO, hoping to consolidate the community's strength and wisdom through it, to achieve transparent and effective decision-making and value creation. This is not just a technological revolution, but also represents a significant shift in culture and mindset, emphasizing collaboration, transparency, and collective value creation.

Token-based communities can take various forms, and not all communities need to transition to DAO

Although community building and participation are killer applications of Web3, and token mechanisms can stimulate reciprocity and subjectivity within the community, no matter how groundbreaking the technology is, it is only a means to an end. Therefore, when starting to study DAO and understanding its early attempts, the main focus is: where can DAO play a role? How can they better address specific community issues and use cases?

Diversity of Tokenized Communities

In tokenized communities, it is expected that using community tokens as the primary way to gain access to the community, participate in community activities, and coordinate within the community will turn members into active participants and stakeholders. Community tokens integrate elements of fan culture (sense of belonging and connection), sponsorship (membership and support), and investment (transferable ownership and economic gains). Depending on the purpose and scope of the community, not all elements need to come into play. The value of community tokens is related to both direct community value (member access, benefits, and privileges; social capital and status) and the long-term scope and influence of the community (financial value driven by community profits and token demand and supply).

This is a form of ownership economy that gives members and stakeholders the opportunity to experience the growth potential of the community and to help shape that potential. By using community or social tokens as equity, members can directly benefit from the community's growth, motivating them to actively help and contribute. These same tokens may eventually be used as governance tokens for decision-making, thus becoming a means of controlling the direction, resources, and outcomes of the community.

Tokenized Communities vs. DAO

However, this does not mean that every tokenized community is a fully decentralized autonomous organization (DAO). While there may be a certain degree of collective governance and decision-making, token holders do not need to vote on every decision within the community. Even though token categories often overlap, the inherent community value and specific status conferred by community tokens distinguish them significantly from pure governance and ownership tokens.

Before delving into how DAOs function and where they are effective, let us first understand their differences from other tokenized communities. At its core, DAOs demonstrate how they utilize blockchain, tokens, and smart contracts to decentralize and automate community governance, decision-making, and value distribution.

DAOs advocate the core philosophy of decentralization and pursue innovation in autonomy, democracy, and collective decision-making. To achieve this, they coordinate through a set of shared rules executed on the blockchain, driven by code embedded in smart contracts and controlled by token ownership, to allocate decision-making power and financial capital. Ownership and decision-making are distributed more equally and fairly among token holders, without any one participant or party holding a disproportionate share. Community activities are often coordinated by transparent mechanisms within smart contracts, which are essentially programs running on publicly accessible blockchains and trigger actions when certain conditions are met, without the need for human intervention (i.e., automation and trustlessness).

Importantly, DAOs also have their own treasury. In its simplest form, a DAO is an internet community with a shared fund account that sets its own rules for operation, i.e., how to allocate community resources and distribute financial rewards. In summary, compared to regular tokenized communities, DAOs are more decentralized, autonomous, and financialized.

Tokenized communities and DAO share the common goal of rallying like-minded people through blockchain to accomplish a shared mission. Both aim to use Web3 technology to incentivize and maximize member participation and initiative. Typically, they achieve this by issuing tokens based on participation, contribution, and investment. These tokens often come with certain rights, such as exclusive membership privileges or the ability to vote on certain decisions.

Building and Optimizing DAO

Basic Principles and Concepts

For a community to become a DAO, the key is whether it is truly owned and managed by its members. This ownership is achieved through tokenization, representing a true cooperative membership system. In this system, members or token holders actively participate in decision-making and profit sharing, supervising resource allocation through proposal submission, decision execution through voting, collective fund management, profit sharing, and more, thus maximizing the collective long-term value.

Tokens can be encoded to automatically receive sponsorship dividends when there is income flow, giving cooperative members or token holders the ability to capture the value they create. From the perspectives of decentralization, democratization, and economic participation, DAO is the purest form of community in Web3, embodying the key principles of the new ownership economy.

Building DAO

Purity comes with a cost. Due to its decentralized nature, DAOs require extra effort to build and nurture a successful foundation. Like any influential community, DAOs need to clearly and transparently articulate their Community 6P: Purpose, People, Principles, Processes, Platform, and Proceeds.

In this process, breaking down the goals of a DAO into 1) "Big P" (grand, transformative vision), 2) "Medium P" (the role and scope of the community in achieving the grand vision), and 3) "Small P" (benefits to each contributor) is essential. Since DAOs will be operated by their members, recruiting members who are aligned and committed to its mission is crucial. This is especially true when documenting operational principles and governance processes, as most of these principles and processes will be encoded into automated programs through smart contracts: from the token economics of the DAO, to member roles and incentives, to its decision-making and voting systems, and how value (proceeds) is created and distributed.

Building the operational architecture of a DAO can be very complex and challenging. Before reaching a state of self-regulation and harmonious collaboration, a DAO is likely to undergo multiple adjustments and repositioning, making numerous iterations to achieve a basic healthy state (or "minimum viable community"). Like startups pursuing a minimum viable product, DAOs can use a basic, evolving canvas plan to define and optimize all key processes of the DAO. This community canvas should guide the design, testing, and optimization of all core processes of the DAO to create the conditions necessary for the DAO to have maximum impact and self-sustainability. This includes the necessary tools and predefined rules, which determine everything from member screening and onboarding to how many tokens each member can receive today and how tokens will be allocated in the future, to the economic and governance rights granted by token ownership, including the actual proposal and voting processes.

Optimizing DAO

Decentralization is a process, meaning that leadership shifts from tightly knit core purposes and principles to community empowerment and delegation. Therefore, many Web3 projects and communities follow a progressive decentralization process, initially adopting more centralized control to achieve community-market fit with a small, focused team, before fully transitioning to or exiting to a DAO structure. When transitioning from more centralized to fully decentralized structures, a balance needs to be struck between the returns to the core incubation team (and early adopters) and broader community participation and ownership. Some teams may consider a hybrid DAO model, where the core team retains control over high-risk returns or time-sensitive business and community decisions, but the DAO makes decisions on other aspects of the community through voting.

Regardless of the ultimate purpose and scope of a DAO, its success depends on its genuine recognition of the power of the people and its ability to harness that collective energy to achieve the right outcomes. Additionally, the underlying value model needs to be community-scalable, not extractive, i.e., 100% by the community and for the community. True grassroots empowerment and ownership begin with identifying and incorporating members who are truly aligned and committed to the community. DAOs need high member participation and vibrant communities to ensure the development and improvement of good ideas, so optimizing incentive participation will be another governance challenge. This will require ongoing information dissemination and community participation to ensure that everyone fully aligns with the core mission and roadmap of the DAO and provides the conditions to ensure inclusive sharing and constructive discussions among community members. It will depend on effective token incentive mechanisms to ensure that DAO members follow more of a contribution-based "play to earn" model rather than a traditional restrictive "pay to play" membership model. But most importantly, introducing innovative, fair, and inclusive voting paradigms to optimize democratic participation and high-quality outcomes.

In a DAO, your voting power depends on whether you have voting rights and the weight of your voting rights. Typically, your voting rights are based on the number and type of tokens you own, which you either purchased or earned. Ideally, you contribute to the DAO in exchange for ownership, represented by tokens, which in turn gives you governance rights to participate in proposal voting and other token holder privileges. The submission, review, and voting processes need to be optimized for access (or inclusivity), scale (allowing large-scale participation), and quality (value and impact).

While there is no single correct formula, a suitable combination can be found by adjusting multiple parameters to fit the specific goals and scope of a DAO. Before formal voting, a preliminary screening or check of the proposal submission process can be conducted. In actual voting, a minimum participation threshold (i.e., quorum) and a minimum threshold for majority votes required can be set. However, most custom adjustments will need to be applied to the way token ownership maps to voting rights. There are various variants of equity-based voting: from 1 token = 1 vote (1T1V) to 1 person = 1 vote (1P1V), to more complex equity-based voting (such as quadratic). Other options include weighting based on the reputation or community role of token holders, or allowing delegated voting, i.e., transferring voting rights to other (more professional) community members.

In conclusion, DAOs require a lot of adjustments and tools to achieve true decentralized ownership and autonomous self-regulation. Not all tokenized communities need to fully transition to DAOs in order to create a stronger sense of member participation, belonging, or active involvement. Many communities may want to adopt a hybrid approach, decentralizing governance and financial power for a subset of community activities, achieving a win-win result by continuing to build and activate the community while delegating some control and ownership to the members. Or, as mentioned earlier, activating your members to become executors and making your most active and contributing executors co-owners and key members.

Original Source References:

1/https://blog.cryptostars.is/web3-communities-to-dao-or-not-to-dao-c93260c8b32b

2/https://blog.cryptostars.is/web3-tokenising-fandoms-5d7211eb1e85

3/https://forefront.mirror.xyz/LCPVlxuOHJ2yCHvL5hJ9ErCwjwvJ2-Fk1lnOyHviIPc

4/https://linda.mirror.xyz/Vh8K4leCGEO06_qSGx-vS5lvgUqhqkCz9ut81WwCP2o

5/https://www.notboring.co/p/the-dao-of-daos?s=r

6/https://mirror.xyz/swood.eth/3Awo5CZqTE9sifljz8Dd2ysbPBe3btqJSNsaQrUBHzk

7/https://www.fwb.help/editorial/what-co-ops-and-daos-can-learn-from-each-other

8/https://maxlenderman.substack.com/p/the-purposes-of-daos?s=r

9/https://community-canvas.org/

10/https://a16zcrypto.com/posts/article/progressive-decentralization-crypto-product-management/?msclkid=ae228e7ba9fb11ec9e484f5220b7ede4

11/https://blog.cryptostars.is/web3-go-to-or-exit-to-community-443e65712871

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