How to build a DAO on blockchain?
In today’s internet-led world, online communities are capable of echoing powerful voices that can change the world for the better. Every business or institution recognizes the importance of community development and the strength of its influence. But how to build the right kind of community, one that encourages global participation, fosters trust among members who are strangers, ensures transparency in transaction, and assures that every member follows the community’s rules? A DAO provides the whole infrastructure necessary for building strongly-bonded online communities.
DAOs or decentralized autonomous organizations are automated democratic online communities that run through anonymous voting and participation. DAOs adopt a radically democratized and transparent way of decision-making. Every DAO decision is collective, publicly discussed, voted on, and documented; this builds trust in DAO-run governance.
Blockchain technology powers most of the DAOs, and helps keep them decentralized. The governance rules of DAOs live on the blockchain and can be changed only when the majority of DAO participants give consent through voting. Many companies are relying on the DAO approach to drive collaboration and trust from global communities. Also, organizations use DAOs to safely commit funds to specific causes, like building their products. Companies use the raised funds based on the collective voting by the DAO participants, thereby garnering trust from supporters, and succeeding in putting the fund to right utilization.
In this insight, you will read about DAOs in more detail, especially about how to build a DAO.
- What is a DAO?
- Why create a DAO?
- What are the pre-requisites for creating a DAO?
- How to create a DAO?
- Creating your own DAO on the Ethereum blockchain
What is a DAO?
A DAO is a decentralized decision-making body (an online community) that practices voting to achieve consensus on decisions. DAOs operate on blockchains, and each DAO is different. However, most follow the same basic principles. Smart contracts define the rules and regulations of a DAO, and anyone holding the DAO’s governance tokens can participate in the voting. A member’s voting power is proportional to the number of tokens he owns. Holders can also make proposals for changes in how the DAO operates. Any proposal within a DAO gets approved only if it receives support from a majority of the voters.
DAOs are created to organize funds, projects and communities. In a DAO model, there is no accountability for the real identities of the contributors. Blockchain technology maintains integrity in keeping the DAO community and its operations organized, transparent and verified. No one can do anything within DAO without getting noticed.
To understand the DAO model, think of a community built for managing donation funds. Here, the DAO can be seen as a community of people with a shared fund at its disposal. This fund belongs to everyone in the community, yet no one can individually decide to use the fund. The consensus on how to use the fund is achieved through token-denominated voting, and votes are executed via smart contracts.
- DAO has no hierarchy and is completely democratic.
- A change must be approved by a majority of the group members.
- Voting is carried out automatically, without the assistance of any central authority,
- It is open to the general public and decentralized.
The anatomy of DAOs can cut out much of the costs and bureaucracy of traditional organizations. They are gaining popularity among business organizations that seek for more flexible decision-making structure anchored in blockchain-powered decentralization and tokenization of governance.
Why build a DAO?
DAO models are certain to evolve over the years. Currently, DAOs are increasingly being adopted in crypto and decentralized finance (DeFi) projects such as charity, fundraising, investment, borrowing and NFT buying, all without intermediaries. For instance, a DAO can receive donations from anyone around the world without the involvement of any traditional institution, not even a bank. And through voting, the members can decide how to spend the donation funds.
DAOs are powered by smart contracts
DAOs are gaining popularity because they implement smart contracts and thus are less reliant on human inputs to operate. The firmness of a DAO is a smart contract that records DAO’s rules and financial transactions on the blockchain. For example, through a smart contract, DAO members can post a proposal of change on-chain and if consensus is achieved through voting, then the proposed change will automatically get triggered. Blockchain ensures everything in a DAO is documented and there is complete transparency so that no proposals get censored, and votes don’t get technically rigged.
DAOs can exist without legal status
In general, the majority of companies are backed by legal status. But a DAO can perfectly function without it. Also, the use of smart contracts eliminates the need to involve a third party or any traditional institutional body.
DAOs promote community-based governance over traditional private governance, where a handful of executives, board of directors or activist investors act in privacy to regulate the organization’s governance.
DAOs’ operations are fully transparent and global. Also, creating a DAO is much simpler than creating a traditional governance body because there is no need to trust the members.
A DAO is a cheaper option for its functionality of organizing people. It can be set up for free or for a small fee. The funding of DAOs comes from crowdfunding that issues tokens.
Before creating a DAO, organizations need to understand that adoption of DAO would mean complete decentralization of power. So, they won’t have total control over their project. Ignoring DAO’s governance decision-making may lead to negative consequences.
What are the pre-requisites for building a DAO?
Before building a DAO, it is essential to align with certain pre-requisites that help ensure the success of a DAO. Among many other things, here are five critical points that a DAO should cover:
A DAO is created as a governance body for organizing some projects or funds. So, it needs a purpose, an objective to run. Every DAO is built for a purpose, which also helps in defining the conditions of smart contracts.
A voting mechanism
As mentioned earlier, a DAO acts as a decision-making body where consensus on a matter is achieved through voting. Voting is the way of interaction among the members of a DAO. Thus, for its inception, every DAO needs to finalize a voting mechanism; it can be a self-created one or a third-party technique. A DAO can even vote to change the mechanism, but some kind of voting mechanism is a must to start with.
Governance tokens or a shared system
To prove the right to vote in a DAO, the members need governance tokens. Without these tokens, the members can neither propose any change nor put forward their opinion on any proposal made by others. Some DAOs use a shared system, where users deposit cryptocurrencies to participate in the voting.
The true essence of a DAO is decentralization. If a handful of people with a focused intention, participate in DAO voting, they are likely to create a biased decision. A DAO gets stronger when the decision power is spread across a larger group of distributed stakeholders. The greater the number of people who join and engage in a DAO, the better is the decentralization of opinion.
The majority of DAOs are in charge of some treasury or funds acquired through crowdfunding. These funds are usually held in a multi-signature wallet. So, it is like having a shared account, but no member has the proprietary right to use the fund. Thus, a DAO needs a way to manage its funds through which all participants can agree to use the fund rightly.
How to build a DAO?
Technically, to create a DAO, you need a mechanism to handle the votes and proposals. A DAO can be developed through various open source platforms, and can also be built from scratch with customized dApps, wallets and smart contracts. There are various open-source solutions to develop and deploy DAOs on a blockchain. Aragon is popular for building DAOs on the Ethereum blockchain, and Snapshot works over multiple blockchains. The ways of DAO systems vary from platform to platform, but they roughly have the same structure. While some DAO systems work with on-chain polling, others render off-chain methods.
Keeping it simple, here is a quick tutorial on how to build a DAO on the Ethereum blockchain with Aragon.
Build a DAO with Argon
Aragon is an open-source Ethereum dApp to build and launch a DAO on the Ethereum blockchain. The perquisites for using Aragon are:
- An Ethereum node.
- Some Rinkeby test ETH (tokens)
Getting ready with the pre-requisites
1. Booting an Ethereum node
You will first require deploying your DAO on the Rinkeby Testnet, for which you will need a Rinkeby Node, which you can obtain from QuickNode. QuickNode is a platform offering tools and APIs for building high-quality blockchain applications.
2. Setting up QuickNode on Metamask
To facilitate transactions in your DAO, you will require a cryptocurrency wallet, and Metamask is the best choice for Ethereum. However, you can set up QuickNode as the custom RPC provider in your MetaMask wallet to ensure faster transactions.
- To start with, go to QuickNode, simply select a plan, choose a chain, select a network, and create your free trial endpoint node.
- Once your free trial endpoint gets created, copy your HTTP Provider URL and save it, you will need it later.
- If you don’t have the MetaMask browser extension, then download it, make an account and save your seed phrase.
- Open MetaMask, click on the ‘Network’ menu on top and select ‘Custom RPC.’
- Next, you will have a form to fill up. Here, enter a network name of your choice. For the section ‘New RPC URL’, paste the QuickNode endpoint URL that you had saved. Then, enter the ‘Chain ID’ or network id and click on save.
- With that, your Quick Node will get set up in your MetaMask wallet, and you can view it under the available networks in your MetaMask wallet.
3. Getting test ETH
Next, you will need some test ETH, necessary for making transactions. It is simple, just head over to the Rinkeby faucet and follow the self-explanatory instructions to get yourself some test ETH.
Building your own DAO on the Ethereum blockchain
Now that all your pre-requisites are in place, let’s get started with building and launching your DAO on the Ethereum blockchain
Head over to the Aragon dApp and follow these steps:
1. Connect account
- Select your QuickNode Rinkeby Node in your MetaMask wallet. Make sure you have some test ETH in your wallet at this point.
- Click on the ‘Connect account’ button on the top right side of Aragon homepage, and select ‘MetaMask.
- Approve the request from MetaMask.
- Next, select your network as Rinkeby testnet
- Now, you should see your MetaMask wallet details on your top right side.
- Next, click on ‘Create an organization.’
2. Configure template
- On the next page, you will see many templates to choose from. Depending on the purpose of your DAO, you can select a template of your choice, click on ‘Use the template’ and then give a name to your DAO.
Next, you need to configure your template by setting ‘Voting,’ ‘Tokens,’ and ‘Finance.’
3. Configure voting settings
You need to set the following to specify the voting rules for your DAO.
This percentage specifies how many votes are required to approve a proposal. For example, if the support percentage is set to 60%, then more than 60% votes from the overall votes have to be ‘yes’ to get the proposal passed.
Minimum approval percentage
This percentage specifies how many tokens are required to approve a vote in favor of a yes.
Participating members can vote within the vote duration only.
4. Configure Tokens
Next, give a desired name and symbol to your DAO token.
Next, add the account (wallet) address of the members of the DAO, and allocate the test ETH (tokens) to them. At this point, the MetaMask window will pop up for transaction approval; confirm the transaction.
Click on ‘Review information,’ check the details, and hit ‘Launch your organization.’
5.Test the DAO
Your DAO gets successfully launched, with the flashing of the following window:
- Click on ‘Get started’ and create your first proposal question to begin the voting process.
- From the left menu, select ‘Voting’ and then click on ‘New vote.’
- Draft your new proposal question and open it for voting
- The proposal question will be live and open for voting till the voting duration as specified in the earlier steps. Members can vote ‘yes’ or ‘no’ during that voting period.
There is a huge buzz around how web3 can disrupt the legacy organizational culture and bring prosperity through decentralization. As we talk about Web3 and decentralization, DAO is a very popular frontier in this space.
DAOs break away from traditional hierarchy system; there is no CEO, no boss, and no superior or inferior member. Within DAOs, every member has equal power. These are member-owned communities without centralized leadership and are governed by a set of rules written in smart contracts. In a DAO, all the financial records, decisions, and decision-making factors are transparently recorded on the blockchain for everyone to view and verify.
LeewayHertz offers tailored solutions for businesses looking to implement a DAO into their systems, including node development, dApp development and smart contract development. Our experts also offer customized white-label DAO solutions.
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