DeFi protocols have introduced radical transformation in the financial services sector with credible advantages. Amidst the rising popularity of DeFi services, DAOs have also established a formidable mark for decentralization. However, questions such as “what is SubDAO” have created doubts in the minds of many blockchain and web3 enthusiasts. 

How is SubDAO relevant for the expanding base of DAOs? What are the primary objectives of SubDAOs? How will they evolve in the future? Just like every new concept in the domain of blockchain and web3, SubDAOs have also invited many similar queries and assumptions. The following post helps you find the answers to these questions with a detailed introductory guide on SubDAOs.

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Definition of SubDAO

The obvious thing you need to know before reflecting on the details of a SubDAO token would refer to the definition of SubDAO. Some of the most popular DeFi solutions, such as dYdX and MakerDAO, have been at the front of this new development. Traditionally, blockchain protocols could rely on Decentralized Autonomous Organizations or DAOs for governance. DAOs included a group of people responsible for managing the treasury of the protocol or organization. At the same time, DAOs also focus on ensuring decentralization in the decision-making process. 

However, it is important to note that DAOs also grow like any other organization, thereby leading to more money at stake. Therefore, DAOs have to incorporate some form of bureaucracy to safeguard the funds of the organization. Bureaucracy could spell a red signal for people in the DAO, thereby encouraging them to leave the organization. You can try out DAOs for governance with low-stake experimentation. 

Any SubDAO example would show how it offers a new approach to resolving the challenges associated with the delegation of DAO responsibilities while preserving decentralization. You can think of a SubDAO as a system similar to a startup dividing its workforce into different divisions. SubDAOs rely on an independent foundation as well as an ownership structure, albeit sharing the mission with their parent DAO. Experts have suggested that the primary objective of SubDAO focuses on driving progressive decentralization throughout a DAO protocol. 

The basic structure of SubDAO focuses on multiple independent groups with ownership and responsibilities for various functional aspects within the ecosystem. As a result, it could provide effective results in the alignment of community members with different functional areas. At the same time, community members could also come up with unique ways to contribute to DAO governance and the community.

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Working of SubDAO

The next important highlight in the introduction to SubDAOs would also draw questions like ‘how SubDAO works‘ to the table. As a matter of fact, you can identify the details about the working of SubDAO through the overview of an example. Have you heard of dYdX, the DeFi protocol? Apparently, the protocol is not a stranger to SubDAOs. 

The DeFi protocol introduced its first SubDAO with the dYdX grants program, also known as DPG. The DPG was created in March through a Guernsey non-charitable purpose trust model, in which a multi-signature committee with eight members received dYdX tokens worth $752,000. Members of the community could use the funds from the DAO treasury to monitor the processes of grant distribution. 

How is the Guernsey model relevant for the dYdX SubDAO? The significance of the Guernsey model in the SubDAO crypto landscape reflects profoundly on reducing DAO liabilities. At the same time, the model also helps in reducing the liability for the eight-person committee in the DPG SubDAO. Furthermore, the model helps in allowing the committee to participate in off-chain transactions while ensuring compliance with payments tax and reporting stipulations. 

The members of the SubDAO hold accountability to token holders who vote for the allocation of a share of the community treasury for funding grant programs. Community members could make desired changes in the structure of the SubDAO, such as changing trustees or enforcers. The Guernsey trust model will serve as the benchmark for the design of many other SubDAOs in the future. One of the significant highlights of the model refers to the facility of legal compliance while safeguarding essential DAO principles. 

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Value of SubDAO

The working of SubDAOs offers a brief explanation for “are SubDAOs the future of DAO governance” with the resolution of delegation issues within DAOs. Companies grow, and so do DAOs, thereby adding new departments, products, teams, projects, and business verticals. SubDAOs are more similar to the new organizational structures designed with the continuous growth of an organization. However, SubDAOs do not follow the conventional hierarchy-based management model. On the contrary, they follow an autonomous approach that maintains alignment with their parent DAO. You could explore the following value advantages with SubDAOs.

1. Independent Operations

How can DAOs remove the concerns of bureaucracy in their governance? You can refer to the identity of SubDAOs and their on-chain components for verifying the autonomy of operations. In most cases, DAOs are present on a broader spectrum. A SubDAO token would have a strong connection to the spectrum of DAOs, which includes certain entries with limited on-chain capacity. Such DAOs also feature better and more large-scale coordination on the social layer. 

What does a DAO need, at the least?

  • An objective or mission statement.
  • Development of a community on Telegram or Discord.
  • Creation of a shared treasury.
  • Development of a governance framework.
  • Distribution of ownership.

You could also find sophisticated protocol DAOs, such as Compound and Uniswap, with effective on-chain governance frameworks, such as Governor Bravo. Simultaneously, you could also consider a SubDAO example along the same spectrum as protocol DAOs. How? SubDAOs also feature sophisticated governance frameworks, depending on the necessity of decentralization and maturity of the project. Interestingly, SubDAOs could start off as centralized entities and make their way towards decentralization as time passes. In the most basic sense, SubDAOs could be a multi-sig with the support for social governance. 

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2. Alignment with Parent DAO

The need for alignment between a SubDAO and its parent DAO is one of the basic tenets in SubDAO design. It defines the way in which SubDAOs interface and relate to the parent DAO or SuperDAO. The outline of ‘how SubDAO works‘ would also focus profoundly on how SubDAOs are related to their parent DAOs. When you look closer, you can figure out two distinct aspects of the relationship between a SubDAO and a SuperDAO. The two distinct anchors holding the SubDAO to the parent DAO are economic alignment and relational alignment. 

  • Economic alignment focuses on the alignment between economic incentives associated with SubDAO and its parent DAO. Some of the notable factors accounted for in economic alignment would refer to token swaps, buybacks, and revenue sharing. 
  • The implications of ‘what is SubDAO’ and its relationship to the parent DAO also consider relational alignment. Relational alignment emphasizes the intangible benefits for the parent DAO due to the SubDAO and vice versa. The important factors for evaluating relational alignment would include goals for branding, recruitment of fresh talent, and promotion. 

The variations in an economic and relational alignment of SubDAOs with parent DAOs show that all SubDAOs are not equal. Here are some of the scenarios for showcasing multiple types of SubDAOs according to their economic and relational alignments. 

  • Bankless Consulting obtains direct access to specialized labor in Bankless DAO guilds in return for a 10% tax on all revenue to the parent DAO.
  • The Bankless DAO Writers Guild accesses labor through payments in BANK tokens from the DAO treasury. The funding can be cut off or diverted in event of any misalignment between the Bankless DAO and the Writers Guild.
  • DAO Dash explicitly agrees to issue their native token alongside sending 33% of the supply to the treasury of Bankless DAO. In return, DAO Dash could receive initial funding alongside the opportunity to include itself in the Bankless DAO product suite. 

Each SubDAO example in different scenarios showcases how the interface between SubDAO and its parent DAO would vary according to the desired purpose. For instance, internal-facing SubDAOs such as guilds could have better relations with the parent DAO. On the contrary, outward-facing SubDAOs, such as revenue-generating initiatives, are more likely to have looser ties with the parent DAO. Most important of all, the alignment between SubDAOs and parent DAOs is a critical highlight to emphasize before the SubDAO scales beyond control. Without the aspect of alignment, DAOs would practically spin up multiple groups, which create value without any scope for capturing the value. 

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3. Accountability

The final highlight in discussions about the value advantages of SubDAOs would refer to accountability. It is one of the crucial factors which can help in investigating concerns such as “are SubDAOs the future of DAO governance?” and how they would remain connected to parent DAOs. The value exchanged between SubDAOs and the parent DAOs is completely contextual in nature. However, in some cases, the relationship between the SubDAOs and parent DAOs could become one-sided. What are the possible cases where you can experience such scenarios?

The one-sided relationship between SubDAOs and parent DAOs is evident when SubDAOs keep feeding off the DAO treasury without any viable returns. In such cases, the parent DAO needs a mechanism to compensate for its losses. On the other hand, DAOs could not put down a SubDAO completely as it could be messy alongside setting a bad example. How will parent DAOs deal with SubDAOs? The overview of ‘how SubDAO works‘ could help in understanding how SubDAOs must be held accountable for their actions. Parent DAOs could find a viable solution in the form of allocating funds and support through clearly-defined metrics such as KPIs. 

The SubDAO must have a clear indication of tangible progress to achieve value that can sustain the relationship between SubDAOs and parent DAOs. It offers a viable model for accountability of SubDAOs for their commitments to the parent DAO. As a result, the parent DAO could come up with informed decisions about continuing their support for SubDAOs.

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How to Create a SubDAO?

The value advantages of SubDAOs prove that the SubDAO crypto relationship would strive in the long run. DAOs have been touted as the next big thing for replacing conventional businesses with massively centralized operations. How will you achieve the scalability required for encompassing everything offered by centralized organizations in a DAO? Most DAOs rely on four important components such as its treasury, the voting mechanism, community discussions, and the blog. The future of DAOs seems bright, with the crypto-native organizations set to revolutionize conventional business models. Irrespective of the nature of the DAOs, they all would share the following important goals. 

  • Bringing in new members. 
  • Enhancing value for community treasury.
  • Emphasizing the role of governance in decision-making.
  • Development of a market for native tokens to ensure the valuation of ownership.

The foremost highlight in any outline of ‘what is SubDAO‘ would focus on resolving the problems of scalability for DAOs. SubDAOs could help DAOs in achieving the desired levels of scalability. How will DAOs evolve into SubDAOs? The easiest way for DAOs would be to exercise ownership of a percentage in all the related SubDAOs. DAOs must store and govern their stake in the SubDAOs through their Community Treasury. When you want to create a SubDAO, you should focus on revising the goals of a DAO as follows,

  • SubDAOs could help in attracting new members through the creation of multiple teams and sub-missions to enable better scalability.
  • The use of the SubDAO tokens could also help in increasing the Net Asset Value of the Community Treasury.
  • SubDAO tokens can also support better prospects for DAO governance
  • Most important of all, SubDAO tokens could also help in creating a market for native DAO tokens that would drive exposure to different SubDAOs. 

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Best Practices for Creating SubDAOs

The fundamentals behind the evolution of DAOs into SubDAOs for achieving better scalability offer the foundation you need to create SubDAOs. First of all, you should remember that all SubDAOs are not equal. Why? All the working departments within a DAO would not qualify as the best candidates for becoming SubDAOs. Therefore, you should start the process of creating SubDAOs by evaluating the feasibility of creating them. Here are the general principles for the assessment of working units in an organization for creating SubDAOs. 

  • Does the working group in the concerned DAO have full-time contributors?
  • Is the working group capable of generating revenue consistently?
  • How is the working group different from the parent DAO?
  • Will the working group be able to sustain its operations independently?

If a specific working group fulfills all these conditions, then you can proceed to the next steps of creating your SubDAO. At the same time, you must also pay attention to the fact that all working groups could not serve as SubDAOs. For example, back-office functions are crucial for the DAO, albeit without any profits. On top of it, time-constrained projects such as NFT drops or one-time bounties such as IRL events are better as the core components in the broader DAO. 

Here are the important steps you must follow to move beyond ‘how SubDAO works‘ and create your first SubDAO.

  • Create the specifications for the SubDAO, such as the allocation of Team Lead alongside drafting a proposal for creating the working group.
  • Work in collaboration with the Team Leads to request funding in the native DAO tokens and USDC tokens from the DAO. Generally, the ratio between the USDC and native tokens is 1:1 for funding SubDAOs.
  • Offer an onboarding function to the Team Lead for staffing the SubDAO. 
  • Enable permissions for the working group to prove its potential through generating revenue for the parent DAO. 
  • After the SubDAO working group generates more revenue than the initial funding, you have to work on SubDAO crypto tokenization. In this step, you have to assign a member of the DAO to work directly with the Team Lead for the creation of the new SubDAO. 
  • In the final stage, you have to work on distribution. First of all, you would have to pay attention to the minting process for the new SubDAO token you would use. Ensure that you transfer a share of the total supply directly to the DAO associated with a cliff as well as the vesting period. Subsequently, you can distribute the rest of the tokens of the SubDAO to the new community treasury of the SubDAO and to the contributors. 

Once the new token has been distributed, revenue has to be divided between the new treasury of the SubDAO and the DAO treasury. 

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Bottom Line

The gradual rise in the adoption of DAOs has come up with many interesting benefits as well as formidable setbacks. DAOs could win in the long run only if they are capable of scalability. However, DAOs could not accumulate thousands of members within a few days when the need arises. 

In such cases, the answers to ‘what is SubDAO‘ would serve as a vital solution for the DAO scalability problems. The detailed introduction to SubDAOs emphasizes how the parent DAOs could scale higher with SubDAOs. The basic principles of SubDAOs, such as autonomy, alignment, and accountability, ensure that they can work in line with DAOs. Learn more about DAOs and their role in the future of decentralization.

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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!