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Decentralised Autonomous Organisations Part 2 : How to start a DAO?

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With all the legal mumbo-jumbo in the first part of this article, starting your own DAO can be intimidating, especially if you’re new to the scene. In addition, there is the complicated technology involved in a DAO. Thankfully, there are a number of tech tools to simplify the technology part of the process. At the end of this article, in Step 5, we give you some hints as to how best to navigate the legal issues.

Step 1 – Set out the goals of the DAO

As in all new businesses, you start with setting out the goals of the DAO. It doesn’t have to be complicated but needs to be thought through properly if you want the DAO to be successful. A bad idea that nobody wants is a sure sign of failure.  

DAOs can be about novel DeFi protocols, collecting NFTs, or social networks. Having a solid goal helps you with the steps that will follow.

Step 2 – Build a community and find funding

To create a DAO that will last and sustain itself, you need a community. Having clear goals helps you identify that community.

It can be slow at first, especially if you are starting from scratch around a novel idea that needs lots of explaining before people understand. You can start through various social media and online communities. Tweet your idea, make a Reddit post, or message people on a Discord server. Facebook and Instagram still have many users. For more business-related ideas, try LinkedIn.

Aside from growing your membership, you’ll also need to collect funds. Creating tokens for your DAO would require an initial cryptocurrency investment. You can do this via crowdfunding or looking for early-stage investors. There might be some members of your community who are already familiar with this. Ask them for help.

Step 3 – Encode the DAO rules

Once you have your community and funding, the next step is to build the rules into the smart-contract of the DAO as to how the DAO is to operate. You can hire and pay for a team of developers to do so. For simpler DAOs, you can use an all-in-one DAO creator tool or code your own smart-contract. One popular DAO creator platform is Aragon. It allows users to set up and govern DAOs on the Ethereum blockchain and create your DAO tokens for you.

Things that your DAO rules need to cover include (and here I am only listing some of the key considerations)

What is your DAO governance, that is who can make decisions for the DAO and how those decisions are made?

Can all DAO token holders make a proposal for voting or only certain authorised wallets can propose? Or would this be only token holders who hold tokens above a certain threshold?

Is there any restrictions to what can go into the proposal? Can the governance of a DAO be changed?

Next would be the question of who can vote on the proposal? Is one token equal to one vote? Do holders of authorised wallets have greater voting power, say one token, five votes?

Is there a minimum quorum before a vote can be considered effective? How long should a vote be opened for? Would there be different thresholds for different kinds of proposals? As an example, a proposal to change the governance of the DAO will require 75% of ALL token holders to vote in favour of the change before it becomes effective.

How would the DAO tokens be minted, and distributed? How is the DAO’s treasury managed?

As can be seen from the about, who holds the DAO tokens is very important. In addition to governance of the DAO, tokens are also used for rewards and incentives to encourage members of the DAO’s community to contribute to the success of the DAO. It encourages developers to give their time to code changes to the DAO and to maintain the DAO. It can be used to reward people to make proposals and vote on such proposals.

Fundraising for the DAO can also be done using tokens. Investors can send money (usually cryptocurrency, such as ether or stablecoins) to a DAO’s on-chain treasury from anywhere at any time. The blockchain can provide transparency with respect to what money has come in and where the money goes. The investor can realise his profit through an increase in the value of tokens the investor holds if the DAO does well (typically enabled through a mechanism whereby profits are used to buy back tokens on the secondary market), or through distributions of the DAO’s profits to the members (similar to corporate stock dividends).

Other Considerations

There are many other considerations that you need to think about for the DAO rules. Much will depend on what you want the DAO to do. You don’t need to get everything right at the onset. It’s You can iterate as you go, especially when your DAO is still small and the stakes are lower. However, remember the lesson of “The DAO” and build flexibility into the rules to allow for changes in the event the unexpected happens.

You don’t have to start entirely from scratch, though. There are open-source rules available online, which you can customize yourself. One example is the Standard DAO Framework found that https://github.com/blockchainsllc/DAO (accessed on 20 June 2023).

Step 4 – Deploy the DAO

Once the setup is done, double-check everything! If everything checks out, pay the gas fees and deploy to DAO. You can now test and deploy your DAO to the world and to the community you built before its launch.

How you expand your DAO will depend on the DAO’s goals. Some good places to start are Discord servers, subreddits, or other DAOs you are already a member of. 

At this stage, the DAO is, in theory, its own entity with no ownership or central leadership, everything relying on the community.

Step 5 – Wrapping or registering the DAO (Optional)

As explained in an earlier article, it is likely that an ‘unregistered’ or ‘unwrapped’ DAO is an unincorporated association or a general partnership. A major consequence of this is that each and every member may face unlimited liability should anything go wrong with the DAO.

So, while this step is optional if you want your DAO to enjoy certain protections and benefits, it is a good idea to do this.  

A Singapore Company DAO

Some DAOs seeking legal status have made a home in Singapore making use of Singapore’s corporate structures. Although the corporate structure is not perfect for DAOs, with some retooling they provide sufficient private ordering, at least until new laws are introduced. 

In Singapore, the most common legal entity is a company limited by shares. Incorporation in Singapore is efficient with template constitutions provided by the regulating body, the Accounting and Corporate Regulatory Authority (ACRA). Shareholders or members of a Singapore company must be identified. There must be at least one director ordinarily resident in Singapore. Changes to its shareholders or directors must be notified to ACRA. Annual audited accounts must be filed unless the company meets certain requirements. Therefore, what this means is that organisers of a DAO with a Singapore company wrapper must be aware that the information about the DAO is available to anyone who can search for and purchase the profile of the company from ACRA.

To overcome some of these limitations, especially for non-profit DAOs, a Singapore company limited by guarantee is sometimes used as the wrapper.  

Further, it may not be necessary for the entire DAO to be wrapped in a legal entity. Only those parts that need to hold real-world assets or contract in the real-world. As an example, the Singapore company DAO can have as its members or shareholders the project team of the DAO. The project team can then appoint from among its members a board of directors for the Singapore company DAO. The constitution will require the board of directors to establish an advisory board represented by token holders. The board of directors will be obliged to execute the wishes of this advisory board. The initiation and voting on proposals by the advisory board will be according to the DAO’s protocol.

Should you need help with wrapping your DAO under Singapore law, do contact us at OTP Law Corporation.