DAOs: Communities of the Future
To say that there has been a lot of excitement around Web3 lately would be an understatement. If you live in New York like I do, you may have noticed that the city was absolutely buzzing with activity (read: parties) last week around NFT.NYC. It certainly feels like we are in the midst of a technological and cultural movement and at the forefront of something truly big.
Ultimately, everyone will explore and enter the Web3 ecosystem in their own way. For me, what has been most fascinating in Web3 has been the communities. Earlier this year I wrote about the importance of community teams and software in the modern enterprise, as well as the opportunity for infrastructure to democratize digital community building.
In the context of Web3, communities are decentralized and they have a name: DAOs. DAO stands for Decentralized Autonomous Organization, and they are communities that are hosted on the blockchain and collectively owned by their members. In the past year, many community DAOs have risen to prominence, ranging from digitally native social clubs to NFT curator groups to professional guilds (for more on DAOs, check out this great beginners’ guide by Linda Xie).
While I am still learning along my Web3 journey, I wanted to share some of my early thoughts on DAOs and why I am so excited about them from a community perspective.
The DAO boom
DAOs have grown rapidly in the past year — there are now 1.3M DAO members globally, and DAOs manage over $14B in assets. Dan Wu coined the term “DAO boom” to describe this explosion of the DAO ecosystem.
Fundamentally, the growth of DAOs has been driven by many of the same tailwinds that Web2 communities are experiencing. Amid rising loneliness, people are increasingly searching for connection within digital communities — a trend that was only accelerated by pandemic lockdowns. On top of this, people are dramatically rethinking their relationship with work and consumer adoption of crypto is accelerating — all of which is driving more people into DAOs.
DAOs are not just another use case of Ethereum — they are organizations that give users a home to explore the entire Web3 ecosystem. Packy McCormick wrote in The Dao of DAOs: “If blockchains, NFTs, smart contracts, DeFi protocols, and DApps are the what, DAOs are the how.”
The same forces that make Web2 communities so powerful (network effects, organic growth, collective wisdom, etc.) are the reason DAOs will ultimately play such a big role in Web3 discovery, exploration, and creation.
Web2 vs. Web3 communities
In the context of Web2, I generally thought about two types of organizations:
- Community-led businesses: Companies that invest in their community as an important moat or asset to the business, but make money from a separate product or service
- Communities as businesses: Communities that are expanding their monetization (i.e., paid communities), creating business models around community as the product
With Web3, DAOs combine the best of both constructs. They are communities at their core, so building a successful community is a first priority of the organization (unlike in traditional companies, where community can be one of many priorities). They also have a sustainable businesses model built-in because tokenization unlocks a multitude of potential revenue streams.
David Spinks wrote a great Twitter thread on how DAOs solve important community problems, including contribution compensation (DAO members get financial upside for creating more value for the community), member decision-making (DAO members have real influence through voting), and measuring community value (the value of the DAO is reflected in the value of the token).
As I thought about all of the other challenges facing Web2 community builders, I really got excited about the potential of DAOs:
- Monetization — Monetizing is a huge challenge for Web2 communities (creators still rely on brand deals and ads for 80%+ of their income) and requires a different skill set than building a community. With DAOs, every community member can earn through the value of their membership tokens. DAO monetization is still in its early days, but there are already many widely used strategies, including NFT drops, membership fees, and token investments. This enables niche communities to become real businesses that earn income.
- Membership — Web2 communities often struggle to define who is a member vs. a follower or subscriber (the age old community vs. audience debate). This ambiguity around membership makes it difficult for community builders to understand and serve their core communities. With DAOs, membership (and ownership) is measured in tokens, which gives members access to gated content, voting rights, etc. and a clear way for DAOs to think about their core membership.
- Scalability — Community builders think a lot about how to maintain the quality and sense of intimacy of a community as it grows. I think this will be a challenge across both Web2 and Web3 communities, but the concept of working groups in DAOs helps with scalability. Within a working group, active contributors can make decisions within a specific purview, which means that groups of members can stay highly engaged and have clear impact even as the broader community scales.
- Engagement — Many Web2 community leaders have talked about the concept of a “Dunbar’s numbers for communities” —that is, there are only so many communities that each person can meaningfully engage in. As a result, many communities have to invest significant resources and put in active effort (content, events, etc.) to keep their members engaged. With DAOs, members who hold tokens should be financially incentivized to contribute to the community on an ongoing basis.
- Data — Web2 community data often lives in siloes, and entity resolution is difficult as members may use various aliases (names, email addresses, etc.) across different platforms. With Web3, digital identity is tied to a user’s wallet, which serves as their username and login to every platform, including DAOs. This (along with open-source data) should enable DAO leaders to have much greater data visibility across their communities.
Clearly, many of the advantages of DAOs stem from the promise of ownership, which blockchain enables. This is why many have called DAOs the next evolution in online communities.
Observations and opportunities
With the explosion of DAOs, dozens of tools have already emerged to serve their growing needs. While it is true that DAO tooling is nascent and insufficient today, I have been struck by how quickly DAO platforms have emerged.
With Web2, community operating systems like Commsor, Orbit, and Common Room came about to solve the data and workflow problems that already existed in the community tech stack and to coordinate across hundreds of existing point solutions. In contrast, even in the earliest days of DAOs, there are already many operating systems available (Aragon, DAOstack, Colony, Syndicate, and Orca, to name a few). This is no doubt because DAOs require plenty of complex infrastructure (on-chain governance, treasury management, compensation, etc.) in order to launch compared to Web2 communities, which can develop more organically and with less technical involvement. In any case, these DAO operating systems have become the central platforms for DAOs, which would imply that the ecosystem of DAO tools that is emerging should have a strong foundation to plug into.
One thing that DAOs have in common with Web2 communities is that each community has its own unique goals and needs. Consequently, there is no one-size-fits-all solution that will work for every community. As noted in the Tweet above, modularity will be critical for DAO infrastructure long-term. Like Web2 communities, DAOs must be able to plug and play different solutions over time as their needs evolve. Given the existence of robust operating systems today, this type of flexible ecosystem should be very viable for DAOs.
What seems to be a big gap right now between Web2 and Web3 communities is thinking about the end-to-end member journey. There is loads of friction throughout the process of joining a DAO. For new Web3 users, some of this friction comes from just setting up their basics (wallet, ENS domain, etc.) and getting educated on Web3 in general. But even for existing Web3 users, joining a DAO is a difficult and confusing journey. From my own experience, lack of context seems to be a major problem (i.e., what is this DAO and why should I join?).
There is a lot of opportunity for DAOs to implement some of the best practices that Web2 communities are already doing around onboarding, cohort-based learning, member management and connection, content production and delivery, etc. — all of which makes joining a community more approachable and more fun.
As the DAO ecosystem matures, not all DAOs will find product-market fit. Right now, there is a lot of hype around DAOs, but every DAO will need to build a sustainable community in the long run — especially as competition for high quality members increases. To that end, there is a huge opportunity to bring Web2 community leaders into Web3 (which may also become inevitable as more Web2 communities turn into DAOs).
Final thoughts — I think DAOs are an incredibly powerful way of bringing people into the Web3 ecosystem. People are more willing to explore new things when they are a part of a community, and that is exactly what DAOs promise. I am incredibly excited to continue to exploring the space as DAOs become the online communities of the future.
I am still learning and building my knowledge and network in Web3, and I would welcome the opportunity to connect with more people in the space. If you are building for DAOs or have feedback on this piece, please reach out by email (lisa@firstmarkcap.com) or on Twitter (@lisamxu).
Special thanks to Jenna Clemens for her design help!
