Overview of Service-oriented DAO Ecosystem, Challenges, and Solutions

Author: Terry Chung, 1kx network

Compiled by: Yangz, The Way of DeFi

Traditional companies seek advice from consulting firms, while protocols and DAOs often have completely different needs, operating mechanisms, and cultures. Therefore, it is best to have services provided by other crypto-native contributors. Service DAOs are on the rise and are positioned to tap into the 263B consulting market for crypto protocols and DAOs.

In the past month, we interviewed various operators of service DAOs. We aim to provide an overview of the biggest challenges they face and community-sourced ideas that have proven effective in practice to alleviate these challenges.

Service DAO Ecosystem

Service DAO ecosystem as of April 1, 2022

First, why do they form?

The service DAO operators we spoke with identified three key advantages compared to traditional consulting firms.

1. Contributors gain direct ownership of the organization

Contributors to service DAOs can receive a share of the value they create for each client, as well as a share of the entire organization—its reputation or future revenue streams.

According to the operators, ownership fundamentally changes people's attitudes towards the organization. It better aligns incentives and fosters a more collaborative and open culture.

2. Open contribution culture

Some service DAOs are structured to allow anyone to join and contribute.

If you have skills and can add value to the DAO, almost no one can stop you from working on an account. For those DAOs that screen applicants (through interviews, reviewing past work), they value a person's ability to add value rather than their credentials—anonymous contributors are quite common among those we interviewed.

3. Better understanding of the problems they are trying to solve

The primary clients of service DAOs are other DAOs and crypto protocols. These clients face unique challenges in development, operations, management, compensation, public relations, legal matters, etc., which are best addressed by other DAOs.

For example, salespeople in DAO2DAO are more familiar with the challenges surrounding lobbying token holders through governance proposals, multi-signatures, and other factors that may affect the service cycle.

4. Reducing income volatility for contributors

Contributors are compensated with stablecoins, service DAO governance tokens, and client project tokens. Because a portion of the client project tokens is allocated to all stakeholders in the organization, individual contributors can smooth out income fluctuations over time.

Challenges Faced by Service DAOs

We categorized the most frequently mentioned issues from the interviews into four interrelated categories:

People

1. Difficulty in finding and retaining contributors

Experienced contributors tend to jump between different DAOs, making it hard to retain them long-term.

Retention of contributors is one of the most important metrics for a DAO.
DAOs make contribution and collaboration fluid. This means attracting top talent is easier than retaining them.
------Llama DAO Co-founder Shreyas

Service DAOs are experiencing demand far exceeding their capacity. As a result, many service DAOs struggle to find talent that aligns with their values, fits their culture, and is sufficiently familiar with the work at hand to output without managerial oversight.

2. Difficulty in activating potential community talent

Even for DAOs that can access talent, getting individuals in the network to make meaningful contributions is challenging.

Operators believe shyness and confusion are two main reasons for this issue. Talents either do not understand the DAO culture (where becoming a contributor is common) and wait for instructions, or they are uncertain about standardized processes, whom to communicate with, and whether they will be compensated, which prevents them from actively participating in projects.

New DAO contributors trying to take action

3. Difficulty in maintaining cultural and value alignment and spreading these values throughout the DAO

The most frequently mentioned difficulty is cultural building. Operators are striving to:

• Ensure contributors align with values
• Create internal processes, marketing, and documentation that are consistent with the culture

Operators emphasize that culture refers to the entire experience of being part of the DAO—including the language used, platforms, documentation, meeting formats, etc.

Every interaction a contributor has with the organization and its members reflects the organization's philosophy and culture, which has been cited as the most significant factor influencing talent retention, contribution quality, recruitment capability, and overall better operations.

One DAO operator cited the example of Amazon Door desks. In Amazon's early days, everyone in the office used recycled doors as desks, clearly to demonstrate that Amazon "only spends money where it can improve customer experience." This spirit then permeated every interaction within the company and between the company and its customers.

DAO operators are working to adjust tasks and create an overall DAO culture in a non-hierarchical, asynchronous, and remote environment.

Operations

1. Lack of standardized processes

Operators find it challenging to standardize processes and retain documentation for these processes.

Once processes are determined, it is difficult for the DAO to disseminate information to contributors, making it hard for them to continuously practice these processes in actual operations.

Some operators believe that the "bulkiness" of documentation and processes is a significant hurdle for newcomers wanting to start contributing, yet they have to wade through thick piles of documents. This stands in stark contrast to those who blame the lack of onboarding documentation as a direct reason for the lack of contributor activation.

Overall, most DAOs are struggling to achieve a balance between generating excessive communication, documentation, and process optimization overhead, and the differences in contributor work, which can delay tasks due to a lack of unified processes and confusion about how to participate/join.

2. Legal uncertainties

Many DAOs face numerous challenges in establishing companies (especially if they are not in the U.S.), selecting the best entity, issuing tokens, assisting contributors with taxes, and paying vendors/non-crypto external entities.

External Challenges

1. Inconsistent client experience

Aside from culture, the second most mentioned issue is the variability in client experience. Due to a lack of standardized processes and good communication, or due to the absence of hierarchical quality assurance, projects take longer to complete, and some clients do not have a good experience.

2. Friction at the end of services

In DAO2DAO sales, operators face friction after services end, especially for those DAOs that can only pay for services after voting and multi-signatures.

Until you've spent a week begging people to sign a multi-signature transaction, you haven't really worked for a DAO. ------Former Blockchain Capital Analyst Derek Hsue

Crowdsourced Solutions

Contributors outlined their biggest problems, and we also inquired about solutions within their DAOs that could alleviate these issues. Here are the crowdsourced solutions we compiled.

Please note that each solution is effective for at least one DAO we interviewed, so there may be contradictory solutions that work for different DAOs.

Since Medium does not allow for the insertion of charts, we included only 5 solutions per category. If you want to see the complete list, please refer to the full list of solutions.

Categories: Legal, People + Operations, Tech Stack, External Solutions

Legal

• Workers Co-op - The downside is it's hard to find lawyers who truly understand cooperatives.
• Limited Cooperative Association (LCA) - Allows for two-tiered investor levels.
• Limited Liability Company (LLC) - Makes sense for small development companies, but it's hard to have anonymous contributors.
• Series Limited Liability Company (Series LLC) - Easy to maintain, but the downside is centralization.
• Communicate with lawyers early, rather than when you need them.

People + Operations

1. Compensation structure

• Coordinape + Sourcecred combination for reward distribution. Slower but more decentralized.
• Salespeople receive 10%, DAO treasury receives 10%, and the remainder is distributed among contributors. Payments are divided based on roles for each project.
• Establish a "multi-contribution" culture early on. Sometimes external token holders are reluctant to pay DAO contributors, so it's important to build this culture early.

2. Recruiting and retaining talent

• Bring newcomers in and train them by requiring everyone in the community to mentor others in the project.
• Allow newcomers to shadow and learn.

From Deepwork Quick Start Guide

3. Building culture

• Encourage more 1:1 interactions (like Donut on Slack). It's crucial for people to get to know each other personally.
• Repeat tasks and narratives as much as possible.
• Limit your growth rate so that culture spreads before you hire. Ideally, the DAO should always find someone more experienced than the newcomers.
• Create memes or some shared "sacred" documents/artworks that contain all the collective principles the community can rally around (like Loot).

4. Streamlining operations

• Hire project managers.
• Allocate talent/capital for communication, coordination improvements, process improvements, full-time member experience, documentation, quality assurance for forum posts, sales processes, etc.
• Maintain structure and quality of work/client experience differences by adopting existing processes (like design sprints)—do things that have already been tested and proven effective.

Design Sprint (a basic process outlined by Google on how to lead teams to quickly innovate and validate designs)

Tech Stack

• Custom CRM and invoicing https://smartinvoice.xyz/
• Utopia / Gilded Finance
• Discord, Gnosis, Lettucemeet, Airtable, Notion, Snapshot

External Solutions

• Deploy a few people to manage the bridge between working groups, personnel, and the public.

• Transparency is an important element.

• If you are an open-source, community-driven project, you should be completely transparent.

• If you are building a product, then there will be less focus on transparency.

• Balance transparency and operational focus based on the project you are building.

• Create a meme for the DAO. This also helps with talent retention and recruitment.

Conclusion

We hope this helps all DAO operators and DAO tool builders design better solutions for decentralized coordination.

If you want to join the above list or become part of the service DAO operator community, we have created a community to share solutions and advance this field. If you are building in this space, we would love for you to join.