Blog posts

Building DAOs on Hedera

July 05, 2022

Status: Third draft, July 5, 2022

Feedback can be sent to cooperakunz@gmail.com

After releasing Calaxy’s open source governance tools on Hedera, back on March 30th, 2022, I have received an incredible amount of interest from the community. Projects, foundations, individuals, and anons have all expressed interest in building DAOs (or at least on-chain voting systems) on Hedera utilizing these tools. In an effort to answer some of our most frequently asked questions, I wanted to put together a longer form post that highlights how I’m thinking about not only the tools I’m building, but how the DAO tooling space on Hedera is evolving more broadly.

What is a DAO?

I would feel quite bad about writing a post around DAO tools without at least a primer on what a DAO even is. It stands for Decentralized Autonomous Organization, and is a novel way to build structures that are closest in analog to traditional businesses or co-ops, however, they leverage the benefits of ”web3” such as direct participation, auditability, and transparency.

You can start a DAO to give grants, buy golf courses, NBA teams, or even the constitution. Currently, DAOs manage tens (maybe even hundreds) of billions of dollars, and are not likely to go anywhere anytime soon.

So, you want to start a DAO.. What does that look like?

Generally, I think that if you want to start a DAO you will likely need to consider whether or not the following categories apply to you and are necessary to achieve your project’s goals:

Fundraising
Membership
Proposals
Voting
Operations
Legal & Finance Structure

Each of these unique categories has different requirements, and a variety of solutions, each ranging from simple to more complicated. I thought it would be helpful to start by taking a look at the successful DAO ecosystem that has been built on Ethereum, and identify which projects are building critical pieces of their ”DAO tooling” ecosystem. Then we’ll discuss what is available within the Hedera ecosystem (this article is written assuming you’re familiar with Hedera and likely interested in building on that particular public network, as I used to work there). A general rule of thumb is that systems have a sliding scale of simplicity versus complexity, with distinct trade-offs at each decision, and that a DAO does not need to be static, its position on that sliding scale can change overtime, assuming that it was built with future-flexibility in mind.

Fundraising

Though this is not the case for all DAOs, some are spun up for the purpose of fundraising to achieve a shared goal. For example, the Constitution DAO aimed to purchase one of the original copies of the U.S. Constitution, and LinksDAO is aiming to buy a golf course.

Constitution DAO effectively put Juicebox on the map, which is an easy-to-use system to fundraise. You can create an ERC-20 token that will be distributed to ”donors” or individuals who send other cryptocurrencies into your juicebox. In Constitution DAO’s case, you received $PEOPLE tokens in exchange for other, more established cryptocurrencies (like $ETH).

Many other projects seem to be taking a more traditional fundraising approach, likely through a SAFT (Simple Agreement for Future Tokens), or a TPA (Token Purchase Agreement), and sometimes additionally through their own NFT offering(s).

Membership

DAOs typically have requirements for membership and some even take a tiered approach where meeting different requirements designate different types of memberships. In the simplest model, anyone who holds a particular type of token can be considered a participant or contributor. This could be a fungible asset on Hedera’s Token Service (like an ERC-20 token). Or, if you wanted to do something a bit fancier, you could require ownership of a particular NFT from a collection to participate. This is a straightforward approach that could resonate with anyone, but there are also even more complicated membership mechanisms out there within the Ethereum DAO community, such as Moloch, which requires users to hold and effectively stake a certain quantity of tokens to be able to participate. This model creates a higher barrier for entry and thus likely results in members having a more passionate interest in the project’s success. These models can evolve over time as the DAO itself makes decisions and takes action. So, it’s entirely possible for a DAO to start with a simple membership mechanism that becomes more complex over time as its early supporters participate in the DAO.

Proposals

Community generated proposals are key to a thriving DAO - anyone participating should feel empowered to make changes, make decisions, and move the DAO forward in achieving its goals. Most often, you see proposals being initially generated on Discourse or a version controlled discussion thread, like GitHub (see Hedera’s Improvement Proposals, for one example). After enough discussion has taken place — and the community has had an opportunity to suggest changes — these proposals traditionally end up in a voting tool for the DAO to actually decide on. Again, the level of complexity here spans a broad spectrum from simple to quite complicated.

For example, some like Uniswap have a very sophisticated governance process that spans multiple steps:

Submit a forum post (Proposal Discussion section)
Get in touch with Uniswap Discord Admins to discuss your proposal in a community call and on Twitter Space as well
Create another forum post in the Temperature Check section and publish a snapshot (temperature check) vote with 2-5 days voting time. This action requires at least 1k UNI tokens delegated or self-delegated. For the snapshot to be valid, at least 25k UNI should participate. Please, provide TLDR process update on the top of your proposal so it is more easily accessible
Update the temperature check post with the community feedback
Publish a snapshot (consensus check). This action requires at least 1k UNI tokens delegated or self-delegated. The snapshot would be deemed valid if at least 50K UNI participates
Escalate the proposal to an on-chain vote. It is required to have at least 2.5M UNI delegated to do it. Projects like fish.vote gives smaller holders a chance to congregate and gather enough votes to push proposals on-chain

Voting

Most voting within the Ethereum DAO ecosystem occurs on snapshot.org. It hosts notable projects, including: Ethereum Name Service (ENS), Gitcoin, Uniswap, Aave, Curve, Decentraland, and more. It’s easy to see that snapshot.org has emerged a leader within the ”DAO voting systems” available on the Ethereum blockchain right now, with billions of dollars under management in these various projects. Snapshot notably enables multiple types of voting systems, such as single choice, ranked choice, quadratic voting, and more. It’s also important to note that snapshot.org is an entirely off-chain voting system…at no point does the vote actually end up on the Ethereum blockchain… even though it’s a DAO tool for Ethereum projects. This is one aspect that I think can be improved, and will touch upon later.

Operations

The Operational requirements of a DAO again have varying degrees of complexity. A simple DAO that’s built on Ethereum can use gnosis safe’s multisig wallet to distribute key ownership to the full group, if small enough, or a subset of DAO members. This way there is not a single point of failure that could effectively rugpull all other participants in the DAO. (And it provides some measure of confidence that the DAO will continue ”autonomous” operation even if a subset of users become inactive.) Constitution DAO implemented this model, using gnosis safe with the combination of Juicebox for fundraising (users or participants deposited tokens directly into a gnosis safe via Juicebox). On the other end of the spectrum, smart contracts like Moloch put the ”A” in ”DAO” by autonomously moving funds around as necessary, thus perpetuating their operational requirements even if there were not any active ”IRL” user participation.

The operational components of a DAO are typically very strongly correlated with its legal standing given that (in most jurisdictions) there isn’t a ton of regulatory clarity in the space.

Legal Structuring

Investment firm Andressen Horowitz (a16z) actually recently released a lot of good information on whether or not a DAO should incorporate or establish a real world legal entity to help manage things like signing checks and creating bank accounts (not to mention avoid potential individual legal liability).

Often you see DAOs incorporate via an offshore foundation. It is at this point your legal entity (foundation) can be created with a corporate charter that carries out the results of votes and ensures operations can bridge on-chain activity with off-chain, real-world requirements (like corporate taxes, for one example). Other common incorporation jurisdictions include Switzerland, Malta, Lichtenstein, and Panama (among many others).

Hedera’s DAO Ecosystem

Now, let’s compare this to what is being worked on within the Hedera ecosystem, and identify what tools are available if you’re looking to start your own DAO.

Perhaps it’s easiest, if we start with the example of Calaxy’s DAO…

Fundraising

Calaxy helped complete more traditional rounds of financing for bootstrapping it’s application and the broader Creator’s Galaxy ecosystem (SAFTE/TPA). However, we look forward to a world where there are Juicebox equivalents on Hedera. (Perhaps through the team at Headstarter?)

Membership

Calaxy has, for the time being, implemented a simple membership (as is often needed to bootstrap involvement with new projects). To start, one $CLXY token can be used for one vote on a proposal. Any wallet can create a proposal. Because this model is maximally simple, Hedera accounts and the Hedera Token Service are all that’s needed to manage membership. In the future, the Calaxy DAO may decide to enact more complicated membership models that could rely on smart contracts, or other requirements such as a minimal $CLXY balance. However, Calaxy started building its DAO tools prior to the release of Hedera’s Smart Contracts 2.0, so we intend start with these initial primitives and see how the DAO chooses to evolve them over time - rather than further delay a launch.

Proposals

Changes within the Calaxy DAO can be made on GitHub, through The Creator’s Galaxy Improvement Proposals (CGIP) repository. It is quite possible that these discussions will move to Discourse, or another venue, if GitHub deems itself insufficient for whatever reason.

View existing proposals.

Voting

There was no voting system that supported Hedera when Calaxy was beginning its journey, so we decided to build an entirely custom voting system. It combines the familiar experience and frontend of snapshot.org with improved auditability due to its design decisions to record proposals, votes, and results on the Hedera Consensus Service. The result represents (in our opinion) a drastic improvement over snapshot.org’s off-chain system.

It is worth noting that your project can also benefit from having a type of on-chain or weight-based voting system even if the intention is not to strictly operate as a DAO.

View the source code.

We have recently released a version of this software on testnet - it’s currently hosted at testnet.gov.creatorsgalaxyfoundation.com - if you wish to check it out, you can sign up for this form and we’ll airdrop you some (worthless) testnet tokens!

Operations

Calaxy is expected to have a group of seven ”stewards,” all of whom have control of a multi-signature key to the DAO’s treasury wallet(s). These stewards and multisig owners will be nominated by the community (through a future CGIP) and can be replaced at any time based on voting criteria. Because gnosis safe does not yet support the Hedera network, and there is no easy-to-use alternative, we again chose to build our own tools for this requirement - the HTS-Distribution-Tool. The HTS-Distribution-Tool currently facilitates multi-sig token transfers (and bulk token transfers), with support coming in Q3-Q4 2022 for: updating multisig keys (adding or removing members from your DAOs operations), single token transfers (including NFTs), and direct governance participation through creation and voting on proposals (enabling interoperability to the other voting system we have built for multisig accounts). Eventually, I expect a majority of this management will be moved to more autonomous, smart contract based solutions… but hey, you gotta start somewhere.

View the source code.

Legal

In addition to having a community nominated group of stewards that is able to sign transactions and execute the decisions made within DAO proposals, Calaxy has also helped establish The Creator’s Galaxy Foundation, who has access to things like traditional bank accounts, etc. to carry out the will of the DAO & it’s community of $CLXY token holders.

Again, while a16z’s guide is helpful, this is a quickly evolving regulatory environment that I don’t think any particular jurisdiction has figured out yet - some are just better or more clearly defined than others. It is best to speak with legal experts before making decisions in this category.

Conclusion

Hopefully this information is helpful in starting your own DAO & understanding some of the decisions you may need to make along the way. Feel free to let me know on Twitter if you have any questions, or want to add your project to this list! I’m also looking for other topics that the community would appreciate me writing about - so feel free to shoot me a message.

There are also a lot of other projects in the community I would recommend you look into, such as:

DAOs & DAO tools in development on Hedera -

Acknowledgements

Thank you to the following folks for reviewing this post:

Mike Bertha - Calaxy
May Chan - Hashpack
Elisabeth Chase - HelloFutureBuzz
Rahul Kothari - Reddit

“The open source tools that Calaxy built for the community helps a ton of creators and developers get a great headstart in trying to build their own DAO. It successfully removes a lot of the learning curve and has a simple interface for non - technical users to easily access and interact with DAO voting” - Patches, CEO of Turtle Moon

Built by myself with ❤️ and Gatsby