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Top 9 Challenges of DAO Unit Success

Written by
RnDAO
Published on
August 6, 2022

‍Creating and running a DAO Unit is a challenging task. Our research, in partnership with Sobol, identified 9 key challenges of operating DAO Units (DAO Teams, Guilds, and Pods). We researched the problems in adding Units to DAOs. We spoke with multiple DAO builders to ensure representativeness and validation of the problems that arose.

TERMINOLOGY

Throughout this work, we use “DAO Units” in a broad sense - any time a DAO forms a smaller group of contributors within the DAO, with a distinct purpose and independence to act.  We did this because we heard many different terms and definitions from our participants and felt that “SubDAO” implied something specific but their definitions varied significantly. So think of DAO units as a large and diverse family, with a few distinct variations (common patterns).

Context

Our research (see Why and How to subDAO) uncovered that DAOs typically formed sub-units because they wanted to:
  • Drive action. DAOs form smaller units to act independently (rather than involving the entire DAO in every decision and action)
  • Be decisive. Voting and governance processes take a minimum of 3 days from proposal to execution. Involving the entire DAO in every decision slows decision-making and creates information overload, thereby diluting governance.
Sometimes DAOs were motivated to:
  • Introduce checks and balances. DAO units may flag or pass decisions taken by the main DAO for security purposes. For example, Decentraland DAO has a Security Advisory Board of solidity experts with a 3 / 5 multi-sig. This board can pause, cancel or resume any action taken by the DAO.
  • Support broader contribution and decentralization by letting more people take ownership and adopt roles in an important area.

And finally, a few DAOs created Units for risk management to shield the main DAO from uncertain activities.

The objectives above tend to be fairly common, but everyone has a different definition of what DAO Units look like. Our research identified four key types, each serving a slightly different purpose and with different characteristics.

4 key types of DAO Units:
As these Units work to achieve their objectives, they encounter a series of challenges. The Top 9 in terms of incidence (i.e., mentioned by more DAO builders) were:
  • Leadership (more under the surface; read on)
  • Lack of engaged contributors
  • Dependencies with Parent DAO or other units
  • Alignment with Parent DAO
  • Lack of trust amongst DAO unit members
  • Decision-making and autonomy
  • Lack of visibility around productivity and impact
  • Decentralization of work
  • Compensation

Now we’ll dive into the challenges of creating DAO units, the risk they pose for DAOs, and the potential solutions or mitigating factors.

Leadership

The challenges of leadership within DAO Units include getting things done, dependency on a few individuals, governance structure and mechanism, and general lack of clarity.

We encapsulate each challenge using a 3-factor framework, which shows how the challenge manifests, how it’s defined, and its primary causes.

The leadership challenge is most frequently quoted when it comes to effective DAO Units. When pressed to describe causes for problems, the easiest answer was usually “leadership is hard'' or “it would have worked with a better leader”.

We could be tempted to take this explanation at face value, framing the problem simply as the need for better leaders. As J.R. Hackman, organizational science professor at Harvard said, “the leader is the most visible part of a team and success or failure gets disproportionately attributed to them.”

Below the surface of 'the leadership problem' in DAO Units, we find multiple interlocking problems, including confusion about decentralization and what it means, general difficulty of teamwork, and the ability to get things done. Gaps in skills, processes, tooling, and shared mental models are recurring issues.

Lack of engaged contributors

Contributors are the lifeblood of any DAO, and consequently any DAO Unit. Strengthening and maintaining contributor engagement is an evolving aspect for DAO Units. Here is the structure behind this challenge:

Lack of engaged contributors can also be attributed to a lack of effective leadership. Engagement can be created by building a passion for the mission of the Unit. This, in turn, can drive motivation beyond differing levels of compensation, and encourage contributors to suggest initiatives and improvements (not blindly churn out what they are told).

Dependencies with Parent DAO / other DAO Units

DAO Units do not operate in isolation or as watertight entities. Their Parent (or Root) DAOs support and constrain them, often in unexpected ways.  Additionally, these Units work collaboratively with others, leading to different types of dependencies. Effectively managing these dependencies is challenging. The challenges can be encapsulated as follows:

The challenge of managing dependencies between the Parent DAO and DAO Units also has a funding element. This includes funding battles with the Parent DAO, starting a community with no funds, and a  lack of funds to improve processes and outcomes (which manifests as a slow pace of work and minimal innovation).

Alignment with Parent DAO

Although alignment sounds similar to dependencies with the Parent DAO, alignment challenges more frequently manifest through fear and also have different causes. This challenge can be driven by a loss of decision autonomy, stifling of mature DAO Units, a lack of clarity, and a fear of loss of control. The complexity of the alignment challenge can be described as follows:

The alignment challenge is typically caused by lack of clarity around why a DAO Unit exists and how closely it’s linked to the Parent DAO. This, in turn, causes difficulties in engaging with the mission and vision of the Parent DAO. In short, it is a challenge to find a balance between DAO Unit independence and strength of linkage with the Parent DAO.

Lack of trust in DAO Unit members

Lack of trust in DAO Unit members is a consequence of misunderstanding a DAO Unit’s intent, operations, and direction. Limited or insignificant interactions between a Parent DAO and DAO Unit teams leads to a lack of familiarity, and poor accountability and governance.

Invariably, a lack of trust in DAO Unit members results in a reciprocal feeling for Parent DAO members. The Parent DAO members don't trust the DAO Unit team as faithful stewards, and the DAO Unit team doesn't trust the community to get things done.

DAO Unit decision-making and autonomy

This challenge revolves around DAO Units having the autonomy to make decisions. The moment their autonomy is stifled, decision-making becomes a challenge. The reasons for stifling autonomy are multiple, and are a combination of both Parent and DAO Unit team dynamics.

Challenges around decision making are also driven by misperceptions between DAO Unit and Parent DAO such as how the Parent DAO perceives DAO Unit decision making, DAO Units being too centralized in their thinking and approach, and sometimes simply not liking a DAO Unit decision.

Lack of visibility around productivity and impact

Lack of visibility around productivity and impact starts becoming a DAO Unit challenge when it starts hampering operations.

Lack of visibility around productivity and impact invariably leads to a lack of trust. This raises uncomfortable questions like, “Is the work promised getting done?”, “When a swarm requests funds, how does the full DAO voting membership know that they are making good use of the money?” and “Do they know that talking about the work is not doing the work?”

Decentralizing of work

For a DAO Unit, challenges of decentralization of work stem from the sheer volume of work, how many people are involved, and the final output of work. Our research uncovered some interesting dynamics:

Decentralization of work challenges stop DAO Units from scaling. Difficulties in scaling makes the realization of a DAO Unit vision challenging. It also creates a chicken-and-egg situation - the inability to deliver work effectively inhibits scaling, and the inability to scale prohibits taking on high-impact work requiring more resources.

Compensation

Compensation is a wider DAO ecosystem challenge, but has some specific ramifications for DAO Units. Because of the narrower and specific focus of DAO Units, compensation forms and levels need to be closely tied to the ethos, shared ownership and shared success of the DAO Unit.

Compensation challenges in DAO Units can stem from poorly designed payment systems and processes. Simplifying these systems is a solution.

Closing remarks

As shown, there are numerous challenges for DAO Units to operate smoothly, and the numerous challenges have non-apparent root causes. Also, the different challenges tend to form a web - a system of challenges reinforcing each other. This leads us to conclude that the solutions to DAO Unit challenges will be complex, combining multiple products and services that will enable better ways of organizing.

At RnDAO we believe that high-quality research, before building, can save countless hours that would've been lost solving the wrong problem. If you have a challenge you'd like to address, or are actively working towards, we can save you time, money and headaches by partnering with your team, carrying out expert research, facilitating strategy workshops, and serving as a sounding board and devil's advocate. Message us on twitter to learn more.

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