#64: Managing uncertainty in DAOs | Timeless Ethereum Guide

How to build a resilient, great company by pre-empting failure

Artist: ​​​​​​​​​​​​​​Vidyasagar Setu

Hey friends -

My work with Foster DAO is moving along, but it sure is a bumpy ride.

Last week, in our weekly meeting, Dan, Foster’s co-founder and one of the DAOs leaders, shared this nugget:

Building a DAO is way harder than building a company, which is already really f’n hard.

After we all acknowledged this truth and shared a little laugh, Dan went on to present a deck with insights he took away at DAO Camp: a retreat for DAO leaders. One of the slides, DAO Failure Modes, was particularly illuminating and made me think about how pre-empting failure is a business strategy for managing uncertainty.

Common wisdom supports this claim with the following colloquial phrase:

Learn from other peoples mistakes.

Of course, I’m not saying that pre-empting failure is a surefire way to not fail. The future is uncertain. I am saying that being thoughtful about the ways that a new DAO, or a new company may fail, by learning from failure patterns in the DAOs and the companies that came before, is a powerfully prudent way to build something great.

Before I share DAO Failure Modes, I need to pull on a few threads first, one of which is the thread on building something great. I want to expand on it because if left as-is, it can seem ego driven and grandiose — the opposite of what I am trying to convey.

I’ll get to DAO Failure Modes at the end. Thank you for your patience!

In the crypto world, where my sole focus is on Ethereum, thus it is the only crypto platform I am qualified to opine on, building something great means creating products and services that transform users into owners.

The hypothesis is that such a paradigm shift would encourage innovation. We’re all so incredibly connected to the Internet, and that’s obviously not going away, so it seems logical that the next evolution of the Internet is to open it up and reallocate power and control away from gatekeepers like Facebook, Netflix, Microsoft, etc. to developers and users —so developers can own the code they write, content creators can own they content they create, and even end-users, regular people like me and you, can have a positive role and a purpose in the ubiquitous applications that have become the lifeblood of our modern world.

No doubt, this paradigm shift will not happen overnight. It will be a long journey filled with short-term profit seekers looking to extract maximum riches and then dip out to retire in some remote island. This is okay — I’m not judging—as speculation can be useful for financial markets, but it’s not the game that I play.

In this new world: the world of DAOs, we are still in the wild west. People working to build DAOs and DAO contributors — we are the pioneers, teetering on the bleeding edge of innovation. I say this with no ego or grandiosity —my short term (or rather, lack thereof) of financial rewards are a testament to my long-term strategy and belief that building a DAO is building something great.

Here’s some illuminating data about the vastness of DAOs:

• There are over 1,000 DAOs, and counting

• In these DAOs alone, there are 1.7 million holders of governance tokens, and about 500,000 of these holders actively participate in DAO governance. And some of these DAOs are quite large: 69 of the 180 have more than 1,000 members.

To put these numbers into perspective, during the height of the dot come bubble, in 1996, 677 companies in the United States went public; this was followed by 474 in 1997, 281 in 1998, 476 in 1999 and 380 in 2000.

DAOs will probably never go public (it’s against the crypto ethos, but I’m also wary of saying never, as anything can happen in the future) — but as the numbers indicate, DAOs are quickly becoming a massive force in the land of tech. As my friend who I had coffee with today, who works as a developer at xBox, said to me:

Crypto is becoming too big to ignore. How can I start to learn more?

Important note: DAOs are not to be confused with centralized cryptocurrency projects. Coinbase vs. Uniswap is a great case study. The former is a popular mainstream centralized exchange that went public in 2021, and the latter is a decentralized exchange that is part of decentralized finance and the ownership economy.

As highlighted in the analysis done by Variant fund, there are some stark differences between centralized crypto exchanges and decentralized crypto exchanges that are part of the ownership economy:

• Coinbase was founded in 2012, and employs 3,730 people as of 2021. In contrast, Uniswap was founded in 2018, and has less than 100 employees. With just 3% of the headcount of Coinbase, Uniswap does 73% of its trading volume.

• Uniswap makes its users owners via governance tokens and LP shares and users have the ability to add any token

• Coinbase went public in April 2021 and after its first private investment round, it’s valuation multiplied by 40,809x. But every retail investor who purchased and held Coinbase stock since its public listing has lost money on their investment as of April 2022.

Unlike Coinbase, whose direct listing meant no new shares were issued when it went public, 60% of the UNI genesis supply was allocated to Uniswap users. This profile is commonly seen with projects in the ownership economy.

What can we takeaway from all of this?

Number One: relationships really matter. The DAO teams that survive in the long term will be ones that establish trust amongst team member. This means creating rituals for team members to be vulnerable and share hardships with one another because, to quote Dan again, “building a DAO is way harder than building a company, which is already really f’n hard.”

Number Two: DAOs must be built with care and thoughtfulness rather than impulsivity and short-term thinking. A bottoms-up approach is key, where decisions are driven by data from frequent experimentation, rather than by assumptions in long-term project plans that create illusions of certainty but are dis-attached from reality.

Number Three: related to number two, and to tie this whole piece together — uncertainty about the future needs to be mitigated by creating a safe space to talk about fears and what can go wrong.

Finally (thank you for your patience), I present to you, without further ado, DAO Failure Modes:

Building a successful DAO and doing something great means focusing on ONE thing and avoiding distractions that diffuse attention. In order to do a lot with a little, self-organization is paramount. DAO members need to form smaller autonomous teams that drive towards a common, shared mission.

Our hyperconnected attention economy world makes focusing on ONE thing really hard, but we need to do it if we are going to achieve great things.

As always, work hard but don’t forget the other side of the coin: rest and play. We need both for balance, otherwise we risk becoming lopsided, burnt out and unfocused robots.

Take good care!

This essay was inspired by Variant Funds writing on The Ownership Economy.