Shaping Successful DAOs (Decentralized Autonomous Organizations) by Cosdec Alpha

PUBLICATION INFORMATION
Shaping Successful Decentralized Autonomous Organizations:
Your Entry Point to A Successful DAO Strategy
Authors:
Shreyash Mishra I Managing Partner
Neha Sharma I Consultant Analyst - Knowledge
Contributors:
Theresa Christeena Joy I Consultant Analyst - Publishing
Sohan Royston I Design Associate
Pulbished by:
Cosdec Alpha (https://cosdecalpha.com)
Bandra, Mumbai, India.
Copyright © 2022 Cosdec Alpha - A Unit of Shrex Group.
Registered as Bernini Ventures Pvt. Ltd.
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with no guarantee of completeness, accuracy, timeliness or of the results obtained from
the use of this information. The information doesn’t constitute professional financial
advice and any such suggestion must be vetted by accredited financial advisors.
The views, opinions, or analyses presented are to the best knowledge of the author(s)
and contributor(s) at the time of publication and do not necessarily reflect the official
policy, opinion, or position of Cosdec Alpha and its affiliates on a particular subject.
Cover by Sohan Royston for Cosdec Alpha.
Format: Digital (Print-Ready).
Approved by Office of the Managing Partner
Publication Serial Number: W3G/2022/005

Getting Started with DAOs
• Key Characteristics of a DAO
• Categories of DAO
• When Are DAOs Needed?
4
5
6
Pages
9
11
12
17
18
19
Decentralised & Autonomous Structures
• Elements of a DAO
Managing Risks of DAOs
• The Flipsides of DAO
• Considerations for Creation
Running a DAO
• Best practices after DAO creation
• DAO Proposal
• The Future
TABLE OF CONTENTS

Digital currencies are decentralized and cannot be
controlled by a single entity; inspired by this emerged
the concept of DAO, Decentralized Autonomous
Organization, an organization governed by a set of
rules written in smart contracts. This organization is
controlled by its participating members.
All of the financial records, decisions, and any decision-
making factors are transparent in a DAO because all of
its actions are recorded on the blockchain. DAOs are
typically formed to bring like-minded people together.
There is no CEO or manager, and all the decisions are
governed by the group’s approval. DAOs have a treasury
that is inaccessible to anyone without the permission of
the group.
2

“The sheer shift of traditional capitalistic ecosystems to
DAO-driven infrastructure will pave a way for a future
that is more equitable, transparent, community-driven,
and most of all - empowering.”
Shreyash Mishra
Managing Partner, Cosdec Alpha
3

The rules governing a DAO are encoded into smart
contracts by the ideators. And from there, changes can
be proposed by any DAO member. However, the weight
of the proposal and the courtesy of the voting rights are
determined by the number of governance tokens
that any member holds.
Here are some of the key characteristics of DAO that
separate it from any traditional organization:
• The notion is developed by a small group of people.
• It’s a completely visible framework.
• No individual is in charge, and it can be verified at
multiple points.
• Any DAO member can view any financial aspect
of the firm without difficulty, making it publicly
auditable.
• Any changes to the framework or protocol must be
put to vote in a transparent process.
• DeFi, NFT, and utilitarian use cases can all be built
into the system.
Key Characteristics of
a DAO
4

Following are the different categories that a DAO can fall
into, depending on its structure, modus operandi, and
technology:
DAO Operating Systems – Standalone platforms that
allow organizations to create their own DAOs. Key
projects include Aragon, Orca, XDAO and Colony.
Protocol DAOs – Protocol DAOs are decentralised
autonomous organisations that use tokens as a voting
metric to implement the protocol and financial changes.
Key projects include Uniswap, Maker, Yearn, Synthetic,
Curve, and more.
Investment DAOs – They support capital pooling for
various DeFi operations and investments such as
investing in digital assets, NFTs, start-up equity and
what not! Key projects include Syndicate, The LAO,
BitDAO, and more.
Grants DAOs – These are more like decentralised
Venture Capitalists with communities, where governance
tokens are used to vote on capital allocation. Key
projects include Audius Grants, MolochDAO, and more.
Collector DAOs – These are meant for NFTs and artists
to support fractional or complete ownership of art and
content. Key projects include Flamingo.
Service DAOs – Talent hunting and acquisition model
for agencies and individuals. Key projects include
MetaverseDAO, DaoHaus, and more.
Social DAOs – These are decentralised platforms for
interactions like social networking. Key projects include
Seed Club, FWB, and more.
Media DAOs - These are more like a decentralised
news aggregator that is transparent and works in the
consumers’ common interest. Key projects include
Mirror.
Investors should pay special attention to the tokens
associated with these DAOs, as they will influence
their position and decision-making authority in the
ecosystem.
Categories of DAO
5

The widespread adoption of DAOs, as well as
the tremendous success of some of the most
inventive ones, has inevitably led to the belief that
a DAO structure is required for growth and network
engagement. Market dynamics make it simple to assume
that every business, community, or initiative needs a
DAO in times of ebullience, as we witnessed with crypto
tokens during the ICO bubble in 2017.
But that’s not necessarily true. DAOs work best when
the governance burden associated with curation,
security, and risk can be reduced quicker than the
inevitable increase in coordination costs that comes
with the need for members to vote on every decision
made. As a result, when considering whether or not to
construct a DAO, protocol builders must consider the
organization’s true aims.
Following are the governance areas that are common to
all DAOs.
• Collective asset ownership and management: DAO
treasuries and balance sheets should function like
decentralized corporations with considerations of
assets and liabilities, liquidity, income, and where to
allocate financial resources.
• Risk management for assets: Volatility, price, and
other market conditions necessitate continuous
monitoring.
• Asset curation: From collected artwork to collateral
for lending, all DAO assets benefit from goals and
processes around curation.
When Are DAOs Needed?
6

Only when it is evident that all of these governance
areas are established by a community can a DAO
be formed. It’s worth noting that, while a DAO may
specialise in one or more of these tasks, it still needs
to be able to perform all three. Consider the case of a
cultural DAO that owns an asset from which it now has
the opportunity to receive revenue or yield. Even if the
DAO had totally neglected risk management up until that
moment (for example, focusing solely on asset curation),
it would be confronted with this problem in the event of
a sale.
PleasrDAO’s $225 million sale of the $DOG token, which
represented fractionalized ownership in the original
Dogecoin meme NFT, was one of the most notable
examples of such an event. PleasrDAO has previously
focused only on asset curation, ignoring risk
management concerns. Because the token was
launched on Sushi’s Miso platform. The team had to
learn about various token distribution mechanics and
economics, which was especially important given
the nascent fractionalized NFT market structure. By
establishing a community development fund, the group
was able to ensure that community members had
genuine ownership of the NFT.
The key takeaway here is that when DAOs’ activities
change, they will need to incorporate new collective
abilities and governance processes and that effective
DAOs will spot flaws early.
7

The following vital characteristics should be kept in
mind by every DAO:
Function:
A decentralised autonomous organisation (DAO) is a
technique of gathering funds or managing a project
that is decentralised, transparent, and secure. As a
result, each DAO must have a substantial, dynamic, and
engaging platform that encourages regular participation.
Community:
A DAO is nothing without a community. If you have a
great underlying project, the next stage is to create a
community of participants willing to join the DAO. The
ethos of decentralization grows stronger and more
secure with the number of people who participate and
engage with the DAO.
Voting Mechanism:
Third, and most crucially, every DAO requires a form
of voting mechanism. With the open-source nature of
blockchain, it is easy for developers to copy or innovate
on existing DAO models. In addition, there are DAO
operating systems such as Aragona and Colony for
non-developers who want to create their own DAO.
This means that setting up a DAO is easier than ever,
without the need for learning any code! However, every
DAO must have some form of reliable and secure voting
mechanism in place, to begin with. There are various
types of Voting Mechanisms including:
• Holographic Consensus
• Lazy Consensus
• Token-based quorum voting
• Permissioned relative majority
• Conviction Voting
• Multisig
• And more…
Governance Token:
After you’ve set up a voting mechanism, you’ll need
a way for participants to validate their eligibility to
contribute to the DAO. Typically, projects will grant
controlling rights to asset holders in exchange for a
multi-utility token. However, projects sometimes have
separate governance tokens, such as Rarible (RARI) and
the Rari governance token (RGT).
DAO Treasury:
Every DAO does not have its own treasury. Every DAO,
however, requires some type of financial management.
Normally, the DAO funds are held by a treasury, which
requires the collective security of numerous individuals
to access or move the assets. A multi-signature
wallet can be used to complete a transaction if a project
does not have a treasury. For the transaction to be
successful, at least two participants must agree and
provide their own private keys. Furthermore, all fund
transactions are visible to the public on the blockchain.
Elements of a DAO
9

While the concept of a Digital Autonomous Organization
sounds liberating and progressive, there are a few
roadblocks that you must consider before jumping right
in:
• DAOs are still coded, and codes are sometimes
vulnerable.
• The majority of DAO-based products are still out of
sync with their centralized and offline counterparts.
• It is still in its infancy and requires a more critical
perspective.
• A few key processes can be slowed down by
consensus and voting mechanisms.
• Disputes could lead to a hard fork.
The Flipsides of DAO
11

DAOs are fully decentralized autonomous organizations
and are not based on a hierarchical management
structure:
The corporate hierarchy with a Board of Directors and
corporate executives at the top and employees at the
bottom does not apply to DAOs. DAOs do not have a
hierarchical structure. With traditional entities such as
corporations, one must have incorporators, promoters,
articles of incorporation, bylaws, a board of directors,
and so on. This is a centralized management system.
Further, most corporations are private entities. DAOs are
distinct. A DAO´s organization is structured as a series
of code, or smart contracts, on the blockchain that
automatically executes the entity´s decisions. No single
individual or group of individuals owns or controls
a DAO. Because DAOs use blockchain technology,
they are transparent to the public. This is a fully
decentralized management system.
Even though DAOs have no hierarchy, they can still
be successful and execute significant decision-
making authority by their members. If a member has a
management or operational idea, the process of getting
the idea heard is substantially easier when compared
with traditional corporate entities. With a DAO, members
merely need to share their proposal with the rest of the
DAO, and then everyone may consider and vote on it
democratically.
Most DAOs do not protect their members from
unlimited liability:
Members of decentralised autonomous organisations
(DAOs) do not have the same liability protections as
corporate shareholders. This is due to the fact that
a DAO is not ideally incorporated as a corporation
or limited liability company. As a result, each DAO
member’s potential culpability is unlimited.
Corporations were created as a way to conduct
business without subjecting each individual to infinite
personal liability. Only the capital input of shareholders
in a corporation or members in an LLC is at risk. In other
words, they are only responsible for the portion of the
ownership interest to which they contributed or are
entitled.
This is not the case with DAOs. They are exempted
from the legal requirements of incorporation, such as
registration, bylaws, and contracts because they are
unincorporated. DAOs are considered unincorporated
partnerships as a result. Each member in a partnership
has unlimited liability. As a result, if the DAO is hacked or
goes bankrupt, each member is personally liable for the
full sum. If a lawsuit is filed and the plaintiff is unable to
fully recover from the “DAO partnership”, the plaintiff will
proceed to the personal assets of each DAO member
until their claim is resolved. To solve this flaw, DAOs
would have to register as legal entities with limited
liability and be recognised as such.
Considerations for Creation
12

Decision-making in a DAO is carried out by DAO
members:
A DAO’s decision-making authority is built from the
ground up. Each DAO member has the right and power
to express an opinion or make a proposal regarding the
DAO’s governance or management. The proposal is then
considered and voted on by every member having a
stake in the DAO. Voting is based on the governance
tokens of the DAO, which are the cryptocurrency for
the specific DAO project at hand. In other words, every
member of a DAO has the ability to affect the DAO’s
future by voting on another member’s proposal or
proposing a new governance or management proposal.
This is in stark contrast to typical organisations, where
decision-making authority is based on authority or
position, and voting is conducted in a manner that is
subject to significant change.
Furthermore, when compared to traditional
organisations, a DAO’s financial resources are
better secured and utilised. Their treasuries are normally
only accessible with a DAO member agreement.
Because no single or a small number of individuals
has sole access to financial resources, DAOs are less
vulnerable to financial exploitation. A key resource to
help you create a DAO for management is Gnosis Safe-
A multi-sig wallet that is commonly used for community
treasury management.
DAOs are not recognized as legal entities in the majority
of the U.S. and other countries:
DAOs suffer substantial challenges in terms of public
knowledge and recognition, owing to the fact that the
DAO is not recognised as a legal entity in the majority
of jurisdictions. A DAO that lacks legal recognition is
exempt from the state’s registration requirements and,
as a result, is denied any corporate benefits—such as
limited liability—available to traditionally incorporated
entities. In addition to the possibility of unlimited
liability, a DAO´s lack of legal status may prevent it from
entering into certain commercial contracts with other
entities or with the government. This limits the type of
business the DAO can perform and can prevent
DAOs from achieving their full profit potential.
There are only a couple of notable exceptions to a
DAO´s legal recognition. Under Vermont´s Limited
Liability Company Act, a DAO can register as a
Blockchain Based LLC (“BBLLC”) and therefore provide
limited liability to its members. Additionally, Wyoming
passed legislation in April 2021 that allows a DAO to be
legally recognized as an LLC.
In the UK, there are several forms of limited liability
organizations:
• Companies limited by shares (LBS)
• Companies limited by guarantee (LBG)
13

LBS:
In general, a corporation limited by shares is formed
with the express purpose of producing a profit for its
stockholders. Members of the DAO are shareholders,
and they must buy shares in the firm when they are
offered for sale or when it is formed (as part of the
founding share capital). The main disadvantages of a
DAO limited by shares are that the DAO’s corporate
control can be purchased simply by purchasing enough
shares to achieve a simple majority.
Despite the DAO regulations’ best efforts to avoid
centralization of power, this might place
the majority of owners of the organisation in control of
DAO-owned, non-blockchain based
assets (such as IP, property, listed stocks, and so on).
LBG:
Companies limited by guarantee (LBG) are not designed
explicitly for profit and are normally formed as social
enterprises or community organisations. Instead
of investing capital into the company to become a
shareholder and thus looking for a return on that
investment, companies limited by guarantee (LBG) are
instead limited by the guarantee of its members. This
is done to ensure that, in the event of the company’s
closure, the members are only accountable for the
amount of the guarantee. Generally, this is a nominal
amount like £1 per member.
LBG corporations appear to be particularly appealing
to organisations such as DAO. For starters, they are
not officially founded for profit, but rather to achieve
a “mission.” Instead of making every member of the
DAO a stakeholder in the LBG, you can rather opt for a
simpler option. You can elect designated members to
handle the LBG on behalf of, and in cooperation with the
entire DAO. Giving everyone a voice in both frameworks
without too much hassle. It allows the issue of corporate
legal control to be separated from the ownership/rights
to earnings in the DAO. For example, a DAO could be
incorporated as an LBG, but then issue and sell tokens
to members that give them rights to profits made by the
DAO (eg. crypto shares such as those that startup Slock.
it plans to issue). This effectively creates a for-profit
DAO, but it is harder to undo by a majority ownership-
style attack. For profit-making DAOs, it makes sense for
the size of your
membership or vote in the LBG and the size of your
stake in the DAO to be linked for initial investors.
Once that stake is sold on, however, the subsequent
transaction does not add any value to the DAO. Certain
DAOs may then choose for membership rights to have
an earn-back period to help reduce the incentive for
speculative and malicious third parties to purchase
shares in order to gain control of the DAO, while also
safeguarding the DAO’s purpose and longer-term
members.
14

DAOs are inconsistently regulated, exposing their
formation and operation to various legal challenges:
There is no consistent regulatory framework for DAOs.
Because they are unincorporated, many DAO default to
partnership status—which imposes unlimited liability
on its members and creates various legal issues. Many
traditional corporate firms, for example, are required
to follow anti-money laundering and know your
customer (“AML/KYC”) regulations. These are
safeguards that ensure that the corporate entity is
dealing only with customers, token holders, as well as
members that pass various identity verification checks
and that, pose low money laundering risks.
With a DAO, individuals are often anonymous. As a
result, adhering to AML/KYC policies is extremely
difficult, if not impossible. These responsibilities can
sometimes prohibit a DAO from being founded in the
first place. Furthermore, because DAOs can involve
people from all over the world, various governments’
laws are in play. Understanding the international
policy and governance framework can be difficult and
is likely to result in protracted legal battles if a dispute
arises.
This regulatory uncertainty can also lead to internal
federal investigations. The most notorious example
involved the SEC´s 2017 investigative report on “The
DAO”. In this report, the SEC concluded that The DAO
sold DAO tokens as “securities” without being properly
registered, thus violating multiple federal securities law
provisions.
15

• Timely updates: Just like any other organization,
there are certain practices the creators and
contributors of a DAO should be mindful about. An
incorporated entity needs timely renovation of its
building, similarly, a DAO needs regular changes or
updates to its framework and code depending on
the needs of the contributor and aligned with the
goal of the organization.
• Collective ownership: It may so happen that one
contributor feels the need to change or modify the
vision and considering the fact that decentralization
and collective ownership has been some of the
key motivation behind starting a decentralized
autonomous organization, the contributor should
always opt for a voting mechanism to reach any
conclusion. There should be transparency and
democracy in the system.
• Background of the organization: All the past records
and history of the organization, motivation behind
starting the organization, its aim and governing
rules should be made available to the contributors.
This should be done to ensure that the community
is joined by like-minded folks and is in the best
interest of the organization and the participants.
• Exit Mechanism: Now, there might be a time when
the participant does not agree with the current
working of the organization or is not interested in
contributing towards the goal of the organization.
This is the time when you need a proper exit
mechanism. Effective exit mechanisms are a crucial
aspect of an optimal governance system. The
possibility of exit can both incentivize a group to
collaborate successfully and allow for the organic
formation of like-minded communities. If the exit
is too easy, then a community could face the lack
of a strong, long-term participant base. Therefore,
an exit mechanism could be intentionally designed
to force slower group evolution. While it may be
beneficial to design exit mechanisms that support
lasting participation, it’s also important to be able to
leave a group that you don’t agree with. As with all
governance mechanisms, exit mechanisms should
be designed intentionally and differently for diverse
organization types.
Best practices after DAO
creation
17

A DAO proposal usually outlines what action a DAO
should take, add/remove members, allocate shares
and loot, distribute funds, and even interact with other
applications and communities. A proposal could be a
statement of mission and values. For example, COSDEC
ALPHA (assuming it’s a DAO) should focus on building
customer relations and enterprise value or COSDEC
ALPHA should start a podcast on WEB3.0. Decisions in
a DAO are governed by proposals. Generally speaking,
community members create proposals about the future
operations of the protocol and then come together to
vote on each proposal. Proposals that achieve some
predefined level of consensus are then accepted and
enforced by the rules instantiated within the smart
contract.
How to Write a DAO Proposal:
Following are some of the common elements you
might encounter while creating a proposal on any DAO
provider platform.
**Summary**:
>Describe what the proposal is about
**Abstract**:
>Explain the proposal, what it entails and details
around what would change should the proposal be
implemented.
**Motivation**:
>Describe the motivation behind the proposal, the
problem(s) it solves and the value it adds.
**Specification**:
>Technical details applicable
**For**:
>Reasons why the participant should vote in favour of
the proposal. Point out the core benefits of the proposal
implementation and how it will affect the DAO.
**Against**:
>Reasons why a participant should vote against the
proposal. Highlight if there are any
drawbacks of implementing the proposal and points to
ponder upon.
DAO Proposal
18

Later on, all things considered, the average individual
won’t work for an organization. All things considered,
individuals will earn in progressive ways by playing
games, learning new skills, creating art, or curating
content. This sort of shift in the way we work is not
particularly unforeseen. After all, the possibility that a
great many people would be hired by enormous
organizations would have appeared to be insane to
somebody in the year 1800.
This new fate of work is empowered by the
organizations that structure around Web 3.0 patterns
that are arising as better approaches for planning,
estimating, and compensating contributions to complex
corporate systems. This shift is, as of now, opening new
earning potentials for people, and it is leading toward a
massive transfer of value from organizations to people
participating as individuals in the Web 3.0 systems and
networks.
The customary method for bringing in cash at home
was to “work-to-earn,” however the fate of modern
capitalism relies on “x-to-earn” - play to earn, learn to
earn, create to learn and work to earn.
These changes are not sudden but will require new
Decentralized Autonomous Organizations (DAOs) that
can facilitate this new movement outside the setting of
corporate frameworks. What’s more, the opportunities
in DAOs will be self-fulfilling and sustainable when done
right. The next generation of the internet and capitalism
will be shaped by DAOs and we’re building it with you!
The Future
19

Key Questions Every DAO Founder Should Ask - CoinDesk
5 Things to Consider When Creating a DAO | Oberheiden P.C. - JDSupra
Building and Running a DAO: Why Governance Matters | Future (a16z.com)
How to create your own DAO with Aragon explained - step-by-step beginners guides | QuickNode
Creating Your First DAO - Tips & Tricks - Moralis Academy
In-depth analysis: 7 common voting mechanisms of DAO - CoinYuppie
https://resources.curve.fi/governance/proposals/creating-a-dao-proposal
https://commonwealth.im/edgeware/proposal/discussion/147-designing-dao-primitives-the-exit-mechanism
Resources
20

+91 93720 68008
info@cosdecalpha.com
Cosdec Alpha is a Global Web 3.0 Consulting & Innovation
company. We help organizational leaders navigate and build
their firm’s future in Web 3.0 backed by our research, network,
and domain expertise to drive deeper consumer relations and
enterprise value.
21

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