Need some DAO?
Everything you need to know before stepping into an another upcoming DAO just because FOMO is hitting you.
This article was created by motivation over the knowledge presented by the community, on the results of the last spaces, and on how creators are behaving in the face of good volumes in their own projects. As Cute Dumb Orcs purpose is to encourage DYOR, this article is basically a basket, each red flag goes to that basket, and the fuller the basket, perhaps, the further away you should be.
DAO as most already know is a Decentralized Autonomous Organization, based on the primary interest of an entity, such as a joint venture for example, or an NFTs vault, a launchpad, an investment group for tooling/dApps, an investment group for tokens/crypto, etc is basically a company that everyone owns essentially because the initial value of the company is made with EVERYONE'S money
Basically, a DAO is not made by ONE person and can never be commanded by just one person or team, even, a DAO can vote to expel founders as long as they have a multi-sig wallet and control over the funds, so the wallet cannot be controlled by just one person, neither voting nor vetoing proposals, decentralization is that. As we say “not your keys not your crypto” for DAO we have “not on-chain voting + multi-sig wallet = not your DAO”, if you are minting a token from a DAO directly to an unsecured wallet of a team member, you can add a red flag to the flag basket.
How DAOs works?
DAO works around a governance token, which means that this token usually equals 1 vote. If a DAO has 500 tokens, a vote needs 51% or 251 votes to be approved, usually, this vote is done through a smart contract that, after denied or approved, releases the necessary funds for the integration that the DAO has (purchase from an NFT for example), or, to the designated wallet.
So a necessary summary about DAOs is that;
The community (holders) actively participate in voting
Voting is THE FINAL WORD of the community, there is no council vetoing its decisions
Proposals can and must be submitted by ANY member
There is no central authority of the DAO; instead, power is distributed across tokenholders who collectively cast votes.
All votes and activity through the DAO are posted on a blockchain, making all actions of users publicly viewable.
DAO SC + infrastructure NEEDS a security engineer taking care of servers, dApp and auditions on SC
DAOs are usually created to fill gaps in centralized entities and innovate to build an active and functional business model that is developed together with the community, in this sense, a member with less market awareness who has 1 token can make a bad proposal, and the entire community votes for it, and yet he MUST have the right to have the proposal accepted, otherwise it will be a centralized decision.
As we recently had a turbo proposal in the catalyst and until then it was necessary to proceed with the approval, it is necessary to comply with the idea of decentralization even if there are flaws in it.
There are specific points to look for in a DAO and I will try to separate each point by structure, and each structure is important for the functioning of the DAO, the investment of resources, the maintenance of the team, and the return for the holders. Failing one of them, for example, is having a CAO, and a CAO is basically putting your money in a treasury wallet where the creator can play trading and damage your investment, or, collect 2kk ADA and use your own hype project to create something he is not prepared to manage.
So I'm going to create MEOW DAO here as an example, it's a DAO that proposes to invest in NFTs and assets and make 50% of the profits revert to donations to cat shelters, the governance token supply is 1000 NFTs and we want to buy a BAYC to make the project's treasury wallet more attractive.
Governance Token
For MEOW to become a DAO it needs a token that is used for voting, and a supply token that makes sense (not millions of tokens) that can be used to create transactions that do not favor whales in FTs, which can lead the DAO to a withdrawal disaster.
The role of the governance token is MEMBERSHIP + VOTE, where 1 token = 1 vote
if you have 10 tokens, you can vote 10 times, the incentive of having more than one token is to understand that every membership NFT gives you access to something, and that access may be reason enough for people in the future to want to join, that's where you can sell the entry point for the actual value of the governance token.
So MEOW DAO will have a set of 1k NFTs called “Paws” and each “paws” can cast a vote, you are also free to sell your Paws whenever you want.
If your DAO uses FT for Governance (and just governance) it's another red flag for the basket, and here we count two.
Structure
The DAO structure is formed by the community, often the owners choose who will be part of the team this is not a decentralized structure, so periodically a vote is taken to keep or recruit new people for different jobs within the DAO, as in a company normal; marketing, human resources, moderation, finance, acquisition (attached to finance), product manager, head of technology, etc. These votes are what ensure that DAO members have an active participation on the team and that there is a way to not bias old members into DAO roles, such as a term limit in a presidential election. In case your DAO doesn't go well and the community decides to remove the founder from the position of “CEO”, supposedly the community MUST have the right to do so and choose what is best for the pool of funds collected. Once you found a DAO, it ceases to be yours.
In addition to the team, it is necessary to think about the technical part of how funds are managed, and released, how it is possible to have access to an average of treasury wallet holdings, transaction history, multi-chain access to wallets from other blockchains, etc. Usually, all this is done in a dApp that works as a platform where you sign your wallet, read the governance token and you receive access.
This structure guarantees transparency to verify votes, results, transactions, histories, acquisitions, wallet value, suggested value of the governance token, FT movements in the secondary, results of liquidity pools, proposals, and more, and this structure is the basic to have a decentralized entity, not a discord bot collecting votes.
Vote
Speaking of votes, there are several ways to participate in polls and DAOs usually have on-chain voting, which can be initiated by DAO members, voted on by review team members who will rotate so as not to corrupt the system, and who will go public with time. voting limit.
It is not done on discord where a member can send NFT to another connected account and increase the number of votes in a poll, nor with a bot that may or may not register the discord id or NFT of the linked user, this is not a decentralized practice that brings accountability.
These votes are usually released on the dApp, by categories (launchpad, acquisition, sale, etc), linked to smart contracts that will execute the holders' wishes and release funds, basically, the votes are multiple signatures that release or not transactions, being the proposed transaction votes. “Oh but there is a risk that the community will vote for something X or Y wrongly” is a risk of the decentralization proposal and it is natural not to get directly involved in it, if your community is thinking about doing shit, maybe you haven't created a good community.
So as a DAO member, you MUST have the right to submit, approve or deny project-related proposals, as well as the availability and easy transparency of results (not just a wallet address to lowkey check cardano scan with)
If you don't have an on-chain voting system in your DAO and this vote may go through a new board in the future where it can be vetoed, it's a red flag for the basket and you're not part of a DAO. If you don't vote for team maintenance and rotation of new members, you're not part of a DAO either. Basically playing decentralization on discord and using member funds to stuff a wallet with NFTs doesn't make a DAO a DAO, by definition it can add one more red flag to your basket.
Team
DAOs are founded by one person or initial teams that eventually lose the power of “founders” or “owners” simply because of the general nature of a DAO, so they are founders and core-team members.
Future members are not generally considered core-team members because they are not part of the initial or founding members, understanding both parties is important to know how tokenomics is distributed.
Important points to look for in a team of founders for a DAO:
History in the community (not as the project, but, an individual)
The founder mindset (whether he prioritizes his community or himself)
Skill set and history (individual skills and demonstrated capabilities to create or manage a DAO in the beginning)
Knowledge of tools available to maintain the DAO community
Community Knowledge
In general, it is necessary to understand the background of the team members, not necessarily publicly who they are, but what they have the knowledge to do and manage a project if your DAO or a project that you believe is creating a DAO does not manage to have the basics in a team, he probably won't have it in structure, and if you haven't seen a ready website with informative content and good user experience even though he lied several NFTs and received a lot in royalties, it's another red flag for the basket in the skill or management issue.
For example, at MEOW DAO we have a website with the team information, a preview of our app, a discord full of information, sneak peek of kittens, we are setting up using third-party KYC or the account to which the mint earnings will go first for an account with KYC from an exchange, such as binance for example, where they ask for our tax documents and know who we are, where we live and to the accounts from which we withdraw the money. THIS IS ACCOUNTABILITY.
It seems very bureaucratic, but dumping 2kk of ADA from the community, in addition to a rug pull, can help with red candles in the overall value of the currency and encourage new sellers to move the market negatively, so here we are transparent, likely, we are MEOW DAO but we don’t like Fishbowl Gangs on the place.
Resources
Resources are results of fundraising, for example, at MEOW DAO we have 1000 NFTS being sold for 500 ADA each, so the total funds collected is 500,000 ADA.
It is necessary to pay attention to the distribution of these funds and understand how the project will maintain this value, simply saying that “70% goes to the treasury wallet and 30% to the team” is not acceptable.
It is acceptable to understand that a DAO needs different wallets to take care of different aspects, one of which is the acquisition treasury, the wallet that will be linked to the SC that will make purchases from community voting results, in MEOW DAO 60% of the mint goes to this wallet. Another important wallet is one that is not used to take care of the core team, but of new people in the team, so 20% of the mint will be allocated to this wallet to make payments to teams and new members in the future, the remaining 20% here is divided in 10% time and 10% structure cost (servers and the like).
It is important to distribute the value of wallets for transparency and management, from a financial point of view you MUST know the limit of funds available for acquisitions by members, so a wallet is only for acquisitions/investments.
Usually, the core team takes ALL the money at once, not much left for future team members, who are MULTIPLE people and not 3 founders. That's why it's important to have a good amount of money saved just for that, devs aren't cheap.
the 10% of the team has a simple proposal to pay initial costs and also keep 10% of the supply of the tokens, as explained in tokenomics, in this way the team has a division of the tokens and a form of profit IF the project is successful, otherwise, why should a team walk away with 200K ADA for doing nothing?
Do the math yourself and add this red flag to the basket, does your project correctly split the DAO structure, or… do you copy other projects thinking it's done the same way?
Tokenomics
DAO funds as explained above play an important role here, it is necessary to understand, in addition to the investments made, the final proposal of the funds. For example, MEOW wants to donate 50% of profits to animal shelters, so there must be a fixed calculation of profits made every month, keep 50% for the treasury wallet and send the other 50% to the proposal made.
Royalties should not be paid to teams but to portfolios related to the project, such as the wallet that pays the team, it is not fair that 1 month of work is rewarded with 200 thousand ADA (+ NFTs) and that this same team (which can be rotated if the community wants it) has eternal access to royalty funds. The movement of the secondary market needs to return to the community to be of interest to the community, and as you well know, royalties are not all about money, returning this to the team makes it even less.
We want to create a token on MEOW, this means that this token can be used to give utility to our 1000 NFTs and we will not use a liquidity pool for you to receive these tokens, so the red flags are;
you will get a token that has 0 value if there is no liquidity
we have not previously placed any type of value in the liquidity pool of this token in the earnings division
we cannot and will not sell most of the treasury wallet just to add liquidity to this token
because there is no liquidity in this token, using it as governance can end up being a giant stupidity, showing that we don't know what we are doing, that a whale can buy and manipulate a huge amount of our supply, and that our funds will be at risk.
there is also the option of the team, not to make direct use of the treasury (and drain the initial value of the NFT) by reserving 10% of the supply for the core team and withdrawing from here, in the future, the profits. Usually, this supply is locked for a period (6 months for example).
That's why it's important for a DAO to have:
Token emission curve, utility, way to return the token to the ecosystem and redistribute it again, not only an earn and dump mechanism to flip the token by ADA, all these processes are usually studied for a long time to reach an acceptable result and even then it is risky. Copying tokens from another project thinking it will fit acceptably into yours is unacceptable for a DAO.
If the only use of your token is to do what another DAO already does, there is no reason to create one and maybe you should launch and organize your content based on what the DAO wants to be done, even because, the principle of the DAO is not to make a decision on your own and alone, as I said before, it ceases to belong to the founder when he launches it. Without a token, your community still has the governance token and can continue to use it for voting, or sell it to return profit.
In addition to these points, of course, you can use your tokens to do what any other DAO does, here at MEOW we want to copy what works, our focus is to drink milk and purr.
Redistribution of earnings
DAOs are generally not made to create profit and redistribute to the holders, just like a normal company, they are usually made to have their NFTs act as the company's shareholders and that as the company's value (treasury wallet) rises, the value of its Your NFT too. For this the need for on-chain control of; listings, and values, a buyback SC for any NFT below the treasury value in X hours after listing, and an incentive for holders to continue correctly maintaining how much an NFT is worth, which is the total value of your treasury wallet divided by the number of NFTs that you have.
Often this is even unnecessary since the community itself, when it is smart, values the project that participates and does not undercut it knowing that it has a membership of something in its hands and that it has the power to control who and when new members will have access to it.
Don't expect DAOs to return you in payment, if you entered with 500 ADA in a DAO and tokenomics makes your token start at 250 ADA at launch, know that the team you trust MUST HAVE THE ABILITY to do 2x the total amount of treasury and that if you don't, possibly your 250 tokens will start to be worth 200, 180, 150 and will fall. Basically, when it's decentralized, there's no need to worry about it that way as YOU and other members will be in control of the decisions made by the DAO.
In some cases, there are DAOs that distribute earnings and that is why it is important to understand, in each case, documentation is the most precious asset of a DAO, it is not hyped in a past collection, nor “will to make it work” on the part of the creators, it's simply understanding what you're doing and trusting what you're doing.
When a DAO, documented, indicates that there is the distribution of earnings, in this way it will be done based on profits, if your DAO is really a DAO, you will have access to this information from a dApp. In the event of the dissolution of the DAO, usually, the treasury is liquidated and the tokens distributed. And in most cases, your membership (governance token) is what will add value and is where you can have a higher exit point than the entry point (if all goes well).
Legal support
I personally recommend that before minting a token seek legal support on how DAOs work or are seen in your country, or that you ask the DAO creator to seek legal support and provide the necessary documentation to understand the risks.
In some countries, it is counted as a security, in 2017 "The DAO" was evaluated by the government and was considered security, essentially for selling tokens.
Basically, every type of purchase needs a report and if in your country there is no regulation, you will probably be safe, but if there is, check it before getting into something out of hype.
Demand, if possible, from the creator’s legal presentations that they sought information about the management of a DAO, how it should be done, advantages for the creators, and all additional information necessary for transparency not only with each buyer but with the entire community itself.
As Marco Santori said
"A lot of token sales pass this test. A lot of them don't. And that's important to realize. Folks who look at this thing and say. 'Oh. It looks like a security. It smells like a security. It must be a security … Walk away from them. That's arm-chairing lawyering at its worst. Some of these things are securities – some of these things are not." (font)
Wrapping Up
As you can see, due to the complexity of understanding the basic structure of a DAO, creating one is not as easy as it seems, and also not maintaining it, in addition, there are several issues that need a good team of developers, audit in smart contracts and in many cases multi-sig wallets so that members have control over the funds.
Be part of DAOs but understand the risks you run for not having the security of actually being on one, if blockchains were planets, DAOs on Cardano are on earth and, possibly due to the age of smart contracts, other solidity-based blockchains are years away light from here. Cover the necessary tooling with the creators and have access to a structure that you DESERVE for the money you will invest, investigate who is collecting millions from our liquidity and what is the capacity of the same team to maintain a DAO with what is presented in the documentation.
Before minting a DAO project, check if they have decent documentation, tokenomics well explained, a vision for the future, fair share for core-team members (depending on their skills), structure (website is BASIC stuff), and if they have a background on community, on Cardano, if they know the other projects here (since they’re going to spend the treasury on them) and the motivation behind the creation over hype.
And if Cardano needs some DAO, you should be able to have the answer by now.
ps. this article was written in less than 3 hours and has 19k characters, how long does it take to do.. a few lines?
demand more, you deserve it.