Decentralized Autonomous Organizations (DAOs) have been around for a while, but they have only recently gained prominence as more and more blockchain-powered projects seek to be fully decentralized at all levels, which also touches on governance.
For those unfamiliar, DAOs are blockchain-powered and community-driven organizations with no hierarchy whatsoever. They propose a mechanism that allows individuals to come together as a group to collectively make decisions in the digital world. The two main approaches that DAOs employ are the rules, which are based on “if/then” statements encoded directly on a blockchain, and voting shares, which are issued to stakeholders in the form of proprietary governance tokens.
DAOs appear to be a promising new ecosystem for startups, but many of them fail or don’t grow as expected. If you are managing a blockchain startup and want to turn it into a DAO to let it flow independently, you should be aware of these top 5 factors that can hinder the progress of your project:
#1 Excessive Fully Diluted Valuation (FDV)
If the governance token has a high discrepancy between the FDV number and the current market cap, stakeholders may not be as keen on holding it long-term and participating in the governance process.
A token’s FDV refers to its market cap once all supply has been released. It happens that a large part of the token supply is locked and gradually released in order to fund certain players (e.g. stakers) and stimulate certain processes within the ecosystem. However, an inflated FDV figure that is many times the current market cap does not bode well as it indicates inflationary pressures in the future, which could discourage those who own the governance token.
#2 Bad market making
Another major factor negatively impacting the growth of a DAO ecosystem is poor market making related to the governance token. In short, market makers generate liquidity that makes the governance tokens available to potential new entrants.
Focusing on proper market making can help the DAO project grow its community faster by making the governance token available to buyers.
Some governance tokens may be listed on decentralized exchanges (DEXes) based on what is known as the Automated Market Maker (AMM) model, which does not require a traditional order book to match buyers and sellers. In this case, the DAO project needs to ensure that its token is in large enough liquidity pools to ensure sufficient liquidity and avoid a price slide.
#3 Poorly negotiated CEX listing
Another factor related to the liquidity of the governance token is its poorly negotiated listing on the centralized exchange (CEX). To save money, some DAO projects choose to list on illiquid CEXs, but this move is not a good strategy as it will limit the potential growth of the DAO community.
Even with a listing on a major exchange, a DAO project must ensure that it takes the location of the community into account. For example, if a DAO is targeting the European community, it would make less sense to list its token on Gemini, a US-based CEX.
#4 Bad Website Design and Bad Brand Aesthetics
Of course, a DAO project must have a distinctive image and voice. From the website design to the Twitter profile, everything has to be of the highest standard. This will bring a sense of quality and professionalism to the community, which would encourage stakeholders to actively participate in the ecosystem.
A good brand would definitely attract more new members, which will have a long-term positive impact on the price of the governance token, the health of the project, and trust from stakeholders.
#5 Bad metrics
Any DAO project that is serious about staying in the game should take care of their token’s key metrics, including market cap, trading volume, and circulation and total supply. Of course, in order to improve the metrics, the DAO must primarily focus on building a community.
Still, a good start with a decent FDV can contribute to better overall metrics, including current market cap and trading volume.
The final note
These are some technical aspects that can hinder the growth of a DAO, even if they already have a great product offering and a clear product strategy. Without a dedicated product design department and a solid marketing campaign, a DAO cannot be successful in the long run, even if it puts a lot of emphasis on the technical aspects discussed above.
Besides everything, there are external factors that may not be under the control of DAO communities, and regulations are the most relevant example. The DAO concept is new and governments are just beginning to integrate these decentralized organizations into their legal frameworks.
Despite the diverse challenges they face, many DAOs thrive and manage to build strong communities, which are the most important milestone for any DAO.
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