Bankless: Understanding the Concept and Characteristics of subDAO in One Article

Author: Bankless

Compiled by: The Way of DeFi

Decentralized Autonomous Organizations (DAOs) have exploded in popularity over the past year.

They have grown from niche projects with only a few contributors to behemoths with billions in funding and thousands of enthusiastic community members, all striving to achieve their missions.

We are beginning to see these new forms of social structure realize their potential as the future way of working. Anyone, anywhere can join a DAO and start getting paid.

Recently, we have seen the rise of subDAOs, which are smaller, autonomous working groups and projects within a broader DAO. We believe these are the way for DAOs to scale without burdening the community with bureaucracy.

DAOs have already been a significant experiment in cryptocurrency, but subDAOs represent a very new frontier in the DAO space.

Fortunately, we have had an excellent opportunity to learn about subDAOs through BanklessDAO.

Our native and core contributor at BanklessDAO, Frogmonkee, has dissected what we have learned about subDAOs so far.

For those who are deep in the DAO rabbit hole, this is an introductory lesson.

Let’s dive in.

• RSA
  

2021 was a big year for cryptocurrency.

Across the space, we saw the adoption of Non-Fungible Tokens (NFTs), Decentralized Finance (DeFi), Alt-Layer 1 networks, Layer 2 networks, and DAOs.

According to data from DeepDAO, an analytics platform focused on DAOs, the treasury of DAOs grew from $400 million to $16 billion, a 40-fold increase, while the number of participants swelled from 13,000 to 1.6 million.

2021: Was it the first year of DAOs?
Here’s how the DAO ecosystem has evolved over the past 12 months.
The treasury of DAOs listed on @DeepDAO_io grew 40 times, from $400 million in January to $16 billion in December 2021.
The number of DAO participants increased 130 times, from 13,000 in January to 1.6 million in December 2021.

With such attention, DAOs have reached a turning point in their development. As they adapt to the growing pressures of new ideas, new contributors, and new funding, DAOs need to scale their coordination capabilities and best leverage newfound interest.

First, we must recognize that the switching costs for joining a DAO are nearly zero.

In traditional companies, you go through an extensive hiring process to land a salaried position with benefits. In a DAO, this doesn’t often happen. In many cases, you can simply join a Discord server, start providing value, and get paid.

This makes DAOs well-suited for low-risk experimentation. People join DAOs, propose ideas, organize teams, secure funding, and execute in a relatively autonomous manner. However, once bureaucracy creeps in, people leave, taking their ideas elsewhere, and the DAO loses talent.

To capture the value of new ideas, DAOs have been experimenting with the concept of subDAOs, a way for superDAOs (also known as parentDAOs) to localize experiments with enough autonomy while keeping them economically and relationally aligned with the superDAO.

As superDAOs experiment with subDAOs, we need to learn how to:

• Support experiments of new ideas with measurable ROI.
• Align subDAOs economically with superDAOs to create and capture new value.
• Template various subDAO models and define their ownership structures and relationships with superDAOs, as not all subDAOs are the same.

So what exactly is a subDAO?

The definition, categorization, and conceptualization of subDAOs is an evolving discussion. The following content is merely my perspective and the mental model I have formed. Of course, these are likely to change at any moment.

As companies grow, they add new departments, products, business verticals, teams, and initiatives within the organization. SubDAOs are like these new organizational structures, except that they operate autonomously while remaining aligned with the superDAO, without following a hierarchical management model. They are more like subsidiary relationships.

Let’s delve deeper into this statement: subDAOs operate autonomously while remaining aligned with superDAOs.

Autonomy

Let’s first explore the on-chain aspect of subDAOs.

In general, DAOs exist on a spectrum. Some "DAOs" are quite immature, consisting of minimal on-chain capabilities and primarily coordinating at the social level.

In a previous article, Lucas referred to these structures as Minimum Viable DAOs:

1. Establish a mission (this part is open!).
2. Create a community on Discord or Telegram paired with Collab Land.
3. Create a shared treasury using Gnosis Multisig (multi-signature).
4. Build a governance framework using Snapshot.
5. Allocate ownership using Mirror or Coinvise.

On the other end, protocol DAOs like Uniswap and Compound have quite complex on-chain governance frameworks, such as Governor Bravo.

Compound Finance's governance framework—note how voting decisions are automatically queued as transactions, unlike human-operated multi-signatures that require manual execution.

Like DAOs, subDAOs also exist on this spectrum.

Their complexity depends on their maturity and the need for decentralization. SubDAOs may start centralized but gradually decentralize over time, which is a good thing.

At a minimum, a subDAO is a multi-signature with social governance. However, they can do more.

Consistency

Consistency refers to the relationship and interface between a subDAO and its superDAO. What is the mutually beneficial relationship between subDAOs and superDAOs, and can it catalyze the emergence of new subDAOs?

This can be broken down into two important levers: economic alignment and relational alignment.

• Economic Consistency: How tightly are the economic incentives between the superDAO and subDAO aligned? (e.g., token swaps, revenue sharing, buybacks)
• Relational Consistency: What intangible benefits does the subDAO receive from the superDAO, and vice versa? (e.g., branding, promotion, access to fresh talent)

Earlier, I mentioned that not all subDAOs are the same. What I mean is that subDAOs will differ in their consistency with superDAOs depending on what their economic and relational agreements look like.

Consider the following scenarios:

• The BanklessDAO Writers Guild is paid in BANK (the token of BanklessDAO) and receives all funding from the BanklessDAO treasury; if the Writers Guild is not aligned with BanklessDAO, it can cut off or misappropriate funds. (Most aligned with BanklessDAO)
• Bankless Brazil does not receive funding from BanklessDAO but still uses BANK tokens in exchange for formal recognition and branding rights.
• Bankless Consulting pays a 10% tax on all revenue to BanklessDAO in exchange for direct access to the professional labor included in each BanklessDAO guild.
• DAO Dash agrees to issue their own token and send 33% of its supply to the BanklessDAO treasury in exchange for initial funding and inclusion in their product suite. (Least aligned with BanklessDAO)

The key point here is that the way subDAOs interface with superDAOs will vary based on their intended purpose. For example, internally-focused subDAOs (like guilds) may have a stronger connection to the superDAO, while externally-focused subDAOs (revenue-generating initiatives) may have a looser connection to the superDAO.

It’s important to note that before the number of subDAOs balloons out of control, superDAOs need to establish these relationships. Without some form of standardization, superDAOs risk spinning off groups that create significant value without a way to capture that value back.

Accountability

The final important aspect of this subDAO mental model is accountability. As emphasized in the adjustments section above, the value that subDAOs and superDAOs provide to each other is highly correlated. Sometimes, these relationships can become one-sided, with one party gaining more value than the other.

More commonly, this situation arises when subDAOs become a burden on the superDAO treasury without a clear ROI. After all, many subDAOs are initially funded by the superDAO. When this happens, the superDAO must have a clear method to mitigate its losses. Without a clear method, ending a subDAO will inevitably become chaotic and set a bad precedent.

Pet3rpan and James Young wrote a great blog post on this topic.

Some thoughts:
By horizontally scaling KPI-driven subDAOs. Governance is minimized, and we need to focus on two areas:
What are the KPIs/metrics and OKRs for the DAO?
Which work proposals should be funded?
Hope to have more ideas/feedback.
mirror.xyz/pet3rpan.eth/5…

In the description, he emphasizes that funding and support need to be tied to KPIs and OKRs. In other words, to maintain the relationship between subDAOs and superDAOs, there should be tangible progress in creating value.

This is a good model that holds subDAOs accountable for delivering on their commitments to superDAOs while also allowing superDAOs to make informed judgments about ongoing support for any subDAO.

The Future of subDAOs

As I write this article, I realize that our understanding of subDAOs is still in its infancy. DAOs themselves are still in a state of constant evolution, let alone this newly introduced, relationship-complex subcategory.

In our Bankless 2022 predictions article, I wrote:

DAOs are the simplest way for people to participate in cryptocurrency with low risk (the cost is just time). As tooling, onboarding, and compensation continue to evolve, DAOs will take off in 2022. But that doesn’t necessarily mean their tokens will skyrocket.

I want to adjust this prediction. I believe 2022 will be the year of subDAOs.

DAOs can only scale so far before being forced to introduce bureaucracy. All the new talent and ideas need to flow into an outlet.

That outlet will be subDAOs.