Squads 101: DAOs & SubDAOs

In the first two installments of our “Squads 101” series, we broke down the significance of multisig wallets and the two types of Squads that can be created in Squads Protocol. After reading these introductory pieces, one should understand how Squads’ multisig and beyond solution can serve a wide range of web3 teams. Today we are going to talk about a new type of web3 team: “subDAOs.” In short, subDAOs are small autonomous working groups within a DAO that in many ways operate like their own miniDAO. We’ll be exploring what a DAO is, what subDAOs are, how they help DAOs scale, and inspect some real-world examples. Enjoy!

What’s a DAO?

As with almost everything in the web3 space, definitions are hard to nail down. New concepts are built daily, so the terms to define them are loose and constantly evolving. Before we explore subDAOs, let’s first identify a few key characteristics of DAOs. DAOs are often referred to as a new type of organization where users all across the world can democratically organize, make decisions, and manage cryptoassets together without the need for a centralized entity. DAOs are commonly dubbed as “internet native communities with a specific mission and shared bank account.” Naturally, instead of a bank account, funds are held on chain. Utilizing blockchain in this way facilitates transparency, decentralization, censorship resistance, and international cooperation through programmable governance in smart contracts. DAOs are usually “token gated,” which means you need to own a specific NFT or a minimum amount of its native token to be recognized as an official member. While this jargon may make DAOs sound complicated, they don’t have to be! A DAO could be an investment group with a few friends who use Discord emojis to vote on investment decisions and a multisig to deploy capital. A DAO could be a protocol with $1B in its treasury, 12 autonomous working groups, and a governance structure more complex than esteemed nation states. A DAO can be thousands of people that come together to purchase and collectively own an asset, like the constitution. The point is, DAOs come in all shapes and sizes. They use different tools, have different missions, and distinct governance processes. The characteristics DAOs most commonly share are a decentralized group of internet native members, collective treasury management, token gated, and some sort of governance structure specific to the team’s needs.

DAOs vs. Traditional Orgs

In comparison to traditional orgs, DAOs are usually more open, merit based, democratic, and agile. Let’s breakdown each of these categories.

Open & Merit Based

DAOs are inherently more transparent than traditional orgs. Most major DAO decisions are usually done in a public forum where the entire community witnesses and plays a role in the process. Unlike a corporation’s balance sheet which is subject to audits a few times a year and usually hidden from everyday employees, DAO treasuries are stored on chain where it is visible for anyone to view.

The barrier to entry for DAOs is significantly lower than traditional orgs. Traditionally, one needs to go through a rigid hiring process just to have the opportunity to display their value. Unlike companies, DAOs are permissionless, meaning they are open for anyone to join given they meet the minimum membership requirements. Since DAOs are more flat than traditional hierarchical structures, there is often “emergent behavior.” This is where community members organize on their own and come forth with ideas and action plans that they think are best for the DAO, without being directed to do so. DAOs also often have bounty systems that encourage people in our outside the DAO to complete tasks in exchange for crypto. One can simply join the Discord or governance forum of a particular DAO and begin providing value. For example, someone who isn’t yet a member of the DAO, but is very familiar with it, can prove their merit by submitting a coherent governance prosposal. This is called “permissionless work.” You do not need to wait to be told what to do from a higher-up; you can simply provide what you think the DAO needs. If the DAO agrees that you’re adding value, your permissionless contributions may turn into a part-time or full-time job offer. Traditional corporations value legacy systems of merit such as college degrees from prestigious universities and take into account irrelevant characteristics like race, gender, and age. DAOs are more equitable because they do not require such personal information from contributors; they simply judge based off “proof of work.” The permissionless nature of DAOs is one of the biggest opportunities for those in the web3 space. People can now jobs they love just by showing up and proving they’re worth it.

Agile

Creating a DAO requires fewer formalities than forming an LLC because there’s little to no paperwork involved. Some DAOs choose to incorporate as LLCs, while others stay completely in the cloud. Instead of legal contracts displaying the rules and regulations, smart contracts set forth the rules. These smart contracts can define processes such as treasury management, how users should participate & join the DAO, and the DAOs voting mechanism. Changing code is much quicker than changing legal agreements, so DAOs can iterate on their processes efficiently (given the community approves the changes). DAOs also provide agility to its members by allowing them to participate in multiple DAOs. There are many instances in which DAO contributors act without a contract binding them to one DAO. While this isn’t always the case, it’s an interesting culture shift from dedicating your time to only one company.

Democratic

DAOs are democratic because the rules and decisions of the DAO are governed by its members rather than a central authority. DAOs are community-oriented, which means there are more open discussions than closed-off board member meetings. Most things are usually voted on by the entire community instead of decided by a single CEO. While decentralization is the core ethos of web3, DAOs can decentralize to a fault by bringing every little decision to a DAO-wide vote. As DAOs grow larger, it becomes increasingly inefficient for every DAO member to vote on every decision. It makes much more sense to have dedicated teams for particular domains. That’s where subDAOs come in.

What’s a SubDAO?

Similar to DAOs, subDAOs don’t have a clear cut definition, and no subDAO is one and the same. Even the word “subDAO” is still up for debate, some prefer to call them squads, pods, teams, departments, working groups, guilds, circles, and so on. Despite the fluidity of the concept, subDAOs do have a few defining characteristics.

  1. Separate Treasury

SubDAOs should have their own treasury separate from the DAO’s main treasury. This treasury is usually held in a multisig to avoid any one entity from having full control over funds. By operating with its own treasury, subDAOs can move faster than if they needed to submit a proposal to receive funding from the parentDAO every time they needed cash. Instead, they can be funded quarterly by the parentDAO, and create spending reports and additional proposals as needed.

2. Unique Governing Process

SubDAOs usually have their own governing process, while still operating within the governing principles of the parentDAO. A marketing subDAO may elect a team leader, whereas the main DAO has no CEO like figure. By giving the subDAO freedom to operate as it pleases instead of forcing a governance structure onto it, teams can organize naturally how they see fit, facilitating better results. This doesn’t mean subDAOs can go against parentDAO rules. For example, if the parentDAO requires all members to hold x amount of tokens to be a member of the DAO, that rule will likely carry over to the subDAO. It’d be quite odd to have a subDAO working on sensitive information for the parentDAO without being members themselves. That would be an error in the incentive structure.

SubDAOs are working groups within a DAO that have their own particular mission and duties aligned with the overall purpose of the DAO. Similar to departments within a company, delegating specific domains to small teams with expertise in that field localizes action, streamlines decision making, and reflects the different expertises of community members. If you have 50 people in your DAO, it doesn’t make sense for everyone to vote on the website’s new landing page. Instead, it makes sense to delegate these decisions to a small working group focused on design. Then perhaps if you want to decentralize even more, the design subDAO can create a few options for the entire community to vote on. When making investment decisions for the DAO treasury, those that have no investing experience shouldn’t have the same power as the experienced investors in the group. Those that are passionate and knowledgeable about certain subjects should lead those teams, and don’t necessarily need to participate in others. Although, there can be members that participate in multiple subDAOs. Let’s explore some examples of different subDAO parentDAO relationships, so we can get a better idea of how they fit together in the organizational puzzle.

SubDAO-ParentDAO Relationships

DAOs need subDAOs for one simple reason: decentralization is messy. As DAOs grow in scope, it becomes increasingly difficult for DAO members to coordinate. To facilitate efficiency and organization, it’s necessary for members to be grouped based on who can best work together and what they offer to the DAO. An agile network of autonomous working groups creates a distributed organization that decentralizes without sacrificing efficiency.

Let’s say there’s an investment collective called InvestDAO that plans to scale its operations. They spin off a number of subDAOs — ResearchDAO, focusing on investment research; MarketingDAO, which builds up public-facing media properties, and OutreachDAO which is responsible for liaising with portfolio companies. InvestDAO exists as the parentDAO, populated by senior partners, funding and overseeing the operations of the three subDAOs. ResearchDAO, MarketingDAO, and OutreachDAO should each have their own treasuries operating as independent multisigs, with addresses separate from the parentDAO. Within each of these subDAOs, there could exist a core group whose jobs would be to interface with the parentDAO and the other subDAOs. Different subDAOs will have different proximities to the parentDAO. For instance, ResearchDAO could be much closer to InvestDAO compared to OutreachDAO, whose operations are largely external.

As previously stated, the main reason for creating subDAOs is to provide competent talent with increased autonomy. The parentDAO will oversee the operations of each subDAO, and provide funding given certain goals are met. SubDAOs should have full responsibility for delegating tasks and governing internally within their working group, while the parentDAO monitors predetermined Key Performance Indicators (KPI) to understand how well each group is performing. The main job of the parentDAO is to allow as much operational autonomy as possible while maintaining an incentive structure that makes sure the subDAO is aligned with and acting towards the goals of the parentDAO. As argued in this piece, that burden could fall mostly on the subDAO, which must convince the parentDAO at frequent intervals to fund its operations and support it.

Now, that we’ve analyzed theoretical subDAO-parentDAO relationships, let’s acknowledge a few real-world examples.

Yield Guild Games (YGG)

YGG is a players guild that rose in tandem with the surge of Play-2-Earn games. Games like Axie Infinity had significant barriers to entry, users needed to buy expensive NFTs in order to play the game. This restricted entry to a large of the population, particularly in developing countries. In response, YGG implemented ‘scholarships’, wherein NFT owners rented out their in-game assets to aspiring gamers in return for a share of the player’s earnings. YGG has devolved into several subDAOs, each grouped based on certain characteristics. There are specific P2E game subDAOs such as Axie and Sandbox. There are geographic subDAOs, such as YGG Southeast Asia and YGG India, which help players in the region band together and maximise yields. As reported here, each subDAO consists of a community lead, it’s own wallet and a subDAO token. They can manage their respective activities and assets under their own set of rules and conditions, but they have to contribute earnings to the parent YGG DAO.

Grape Protocol

Grape is a social networking protocol built on Solana which helps set up token-gated communities. It has spun off at least six subDAOs that operate within the larger Grape ecosystem. Each subDAO is free to establish its own governance system, and can refer to the parent DAO for arbitration in case of internal disputes. Two to five members from each subDAO constitute a board, and they liaison with the parentDAO and other subDAOs. Grape subDAOs create weekly recaps on their actions and goals for the parentDAO to review. We’ll be diving deeper into the Grape ecosystem in a future article. 🍇

Bankless

Bankless’ numerous subDAOs are a blueprint for the proximity index we discussed earlier in the InvestDAO example. As this edition of their newsletter explains, Bankless’ subDAOs (native token $BANK) are aligned with the parentDAO based on their economic and relational agreements. A couple of examples:

  • Most proximal: Bankless DAO’s Writers Guild receives funding in $BANK from the parent treasury and pays contributors from this funding.
  • Middle path: Bankless Brazil does not receive funding from BanklessDAO, but uses $BANK tokens in exchange for brand licensing.
  • Least proximal: DAO Dash has its own token, and deposited 33% of its initial supply to BanklessDAO’s treasury in return for initial funding and inclusion in its product suite.

No org structure is the same. There is a wide range of complex relationships that can exist between a parentDAO and its subDAOs. The important thing to remember is that all subDAOs must be incentivized to act in accordance with the parentDAOs mission. Every “sub-mission” the subDAO takes on should bring the group as a whole closer to its desired destination.

Squads: Infrastructure For SubDAOs

Squads Protocol is ideal for subDAOS because it allows them to operate with their own treasury as well as create their own unique governance parameters. In the “multisig” option, subDAOs can store funds, send them to contributors, and invest. In the “teams” option, a Squad can put forth proposal discussions and flexibly allocate governance power to different members based on their expertise. Self-sovereignty over its own governance processes and finances are the two main components necessary for subDAOs to operate. To learn more about how Squads can help your DAO, please refer to our previous article explaining Squads’ core features.

Conclusion

DAOs are a new way for people around the globe to coordinate effectively around the prospect of achieving a collective mission. SubDAOs are a proposed solution to the issues that come along when trying to efficiently decentralize. It’s key to remember DAOs are the most human-centered sector of crypto. Even if you utilize subDAOs properly and create a democratic and decentralized structure, it’s not going to matter if you don’t have strong leadership, comradery, and competent talent throughout your DAO. After reading this article you should understand what a subDAO is and why they are necessary for any decentralized autonomous organization to succeed. Be on the lookout for the next Squads 101, where we’ll continue to dive deep into the DAO space.

Thanks for reading!

This is a collaboration piece written by Mister Maven and “DAOcter,” a prominent member of the Squads community.

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