How to Create a DAO in 8 Steps

Current data indicates that the leading decentralized autonomous organizations (DAOs) collectively possess treasury holdings valued at $28.3 billion. Of this amount, $24.3 billion is in liquid form, while $4 billion is vested. As of January 24, 2024, there are 2,420 organizations in existence.

While many companies are currently considering creating DAOs, it’s important to recognize that this is a rather complex mechanism, which includes comprehensive functionality and multiple factors that should be taken into account. Many aspects can influence the success of your DAO — from errors in smart contracts to the wrong choice of blockchain platform for implementation.

For instance, we recently assisted a client in enhancing the performance of their Mantra DAO solution by correcting inefficiencies and helping them transition from Ethereum to Solana, which was more efficient for their project. This allowed the platform to improve its performance and scalability.

There are also many other nuances to consider when developing a DAO, which we will also share in our article. To provide a comprehensive understanding, we will delve into the essential components every decentralized autonomous organization should have. We’ll also highlight potential pitfalls to consider and share deeper insights from our experience in enhancing DAO solutions.

Furthermore, in the video below, you’ll uncover important insights about the DAO creation process and find an answer to the burning question of whether a DAO can be profitable.

How can you create a DAO in 8 steps?

To ensure you create a robust DAO with no crucial aspect left out, we recommend following this eight-step plan:

Step 1. Determine DAO’s purpose and goals

You should provide a clear and concise vision for starting a decentralized autonomous organization. Create a white paper that potential investors and partners can review to understand the project’s goals and appreciate its benefits for both them and your users.

Step 2. Define DAO’s tokenomics strategy

A decentralized autonomous organization requires a sturdy tokenomics model to attract users and investors. You need to clearly state how your DAO will accumulate revenue, and also explain the terms and conditions for participating in the project’s financial activities, such as token distribution, contribution to liquidity pools, staking, lending and more.

Besides this, you should determine and outline what tokens and coins, apart from the DAO’s native token, will be supported.

Step 3. Build a community

A newly-created DAO needs devoted users who will help it grow and guide its further development. To build a community, you will need to establish your presence on social media such as Twitter and Discord, as well as run marketing and social media/PR campaigns, and also offer exclusive benefits to early members.

Step 4. Specify the governance structure

Set the rules on how users can participate in the DAO’s governance. The most common method is token-weighted voting, with one token representing one vote. Consequently, the more tokens a user owns, the more voting power they have.

Step 5. Define the type of DAO

You need to define the type of your decentralized autonomous organization, in accordance with your goals. The most common types include the following:

• Protocol DAO implies that the project’s tokens provide their holders with governance rights and allow them to propose changes and to vote for or against.
• Collector DAO unites admirers of non-fungible tokens (NFTs) and allows creators to demonstrate ownership of their work.
• Investment DAO is a transparent and universally available space enabling capital raising for DeFi projects and startups.
• Grant DAO allows users to accumulate funds in the grant pool and vote their allocation and distribution.
• Entertainment DAO makes it possible for token creators to establish a stronger community around their collections and allocate funds for new projects, such as play-to-earn games and metaverse activities.
• Social DAOs reinforce social networking within the crypto community and offer a space for unrestricted communication, idea-sharing, and fundraising. However, to become a member of a social DAO, the individual needs to own a specific number of tokens or have a personal invitation.

Step 6. Build a DAO

Partner up with a team of well-versed blockchain consultants and developers capable of delivering a top-notch decentralized solution. They will help you select a suitable blockchain that will be the base for your DAO and advise you on what networks you will need to provide support to. The same applies to crypto wallets. You will also need to create robust smart contracts that will be fault-tolerant and swift.

Step 7. Test a DAO

To make sure everything runs as it should, with no hidden bugs threatening to degrade the user experience or even expose the platform to dangers, you need to conduct thorough testing. In this process, the keen eye of QA engineers plays a subtle yet pivotal role in fine-tuning the system’s performance and safeguarding its integrity.

Step 8. Deploy a DAO

Once everything works fine, you can release your DAO to the mainnet. However, you will need to gather feedback from your users to understand their concerns and preferences and thus be able to upgrade accordingly. And don’t forget to run quality assurance tests on a regular basis to ensure the smooth functioning of the platform.

Risks associated with creating a DAO

Once you decide to create your own DAO, you need to carefully consider certain risks and limitations so that you are ready to handle them if necessary. These include:

Governance power imbalance

The governance systems of DAOs suppose that decisions of users with higher amounts of tokens are prioritized and carry more weight. This contributes greatly to strengthening loyalty, since large-scale holders of a project’s tokens are highly interested and invested in the DAOs prosperity.

However, it also creates a disproportion, with a sizable percentage of users being underrepresented. As a result, the platform becomes more centralized, with essential decisions taken by the powerful minority.

Such power distribution can also expose a decentralized autonomous organization to greater danger, resulting in high-level violations of the platform.

For example, Build Finance DAO lost all the funds from its treasury, amounting to $470,000, due to a “hostile governance takeover” when a user initiated and voted through a proposal granting them access to the treasury. This was made possible because the fraudster accumulated a great number of the DAO’s tokens, enough to swing the vote for their own benefit.

Front running

Front running occurs when a person buys or sells assets based on insider information, thus getting ahead of the “public” market. Decentralized autonomous organizations are markedly prone to front running. This is because their members know what assets are going to be invested in, and some users can take advantage of their knowledge in order to (for instance) double their profit by buying the assets before the rise in the price.

If front running is discovered, it may come to dog the reputation of the DAO. And that’s not to mention the financial losses the platform faces if front-runners provoke a price increase before the DAO manages to acquire the assets.

Operational costs

Decentralized autonomous organizations require crypto transactions, and these come with gas fees for transaction validation and storage on the blockchain. The price of gas varies depending on the network and fluctuates throughout the day based on supply and demand.

For example, at the time of writing, Ethereum’s average transaction fee is $3.84, but it can more than double when the network is heavily loaded.

PixelPlex success story: Mantra DAO

Our client had a vision of a community-governed DeFi platform which would allow users to take back control of their finances by participating in lending, staking, governing, and launchpad activities. Our team eagerly took the opportunity to bring this idea to life and create a powerful dApp solution.

Initially, the client worked with another third-party service provider on the development of the platform. However, a variety of inefficiencies and bugs prevented the DAO from functioning smoothly and securely. Therefore the client required our team to both fix the existing bugs and to create new smart contracts and staking pools.

In addition, we conducted the platform’s successful transition from Ethereum to Solana, which empowered Mantra DAO to improve scalability, boost transaction speed, and lower transaction costs. Our blockchain developers also added support in the form of Binance Smart Chain and Polygon, expanding the platform’s customer outreach.

As a result of our hard work, Mantra DAO managed to deploy more than 60 staking pools and accumulate $23 million in stacked assets.

Conclusion

We have witnessed a big shift in the way the financial world operates, with more and more people getting interested in blockchain, as well as a growing trend for investing in decentralized DeFi projects rather than traditional centralized corporations.

So now might be the perfect moment to create your own decentralized autonomous organization to draw attention to your blockchain-based project and gather a supportive community. At the same time, though, you should be very careful in your choice of tech stack and development team — the success of your DAO will largely depend on these two factors.

At PixelPlex we will gladly assist you in DAO creation, guiding you all the way through the development process from idea validation to the very moment of mainnet release. Feel free to drop us a line.

 

Disclaimer: The information provided in the article is for educational purposes only. It does not constitute advice or recommendations for embracing or investing in DAOs. Please seek professional advice before taking financial risks.