One of the more interesting aspects to crypto (or Web3 if you like to call it that instead) is the concept of organizational models and how decentralized networks have the ability to enable new kinds of coordination and collaboration across individuals and teams (some doxxed, some anon or pseudonymous).
As I have researched various grants and incentives programs since late last year I have started to understand some of these models better and thought it would be interesting to dive in a bit to some of what I have learned as it applies to a few different kinds of organizational models.
As I started to brainstorm on writing this article I thought back to The Sovereign Individual. I know the book is really overplayed, especially in our space, but bear with me here. In Chapter 5: The Life and Wealth of the Nation State, the authors discuss the work of Frederic Lane who developed a mental model for understanding where the control of government lies. Lane believed there were three basic alternatives in the control of government, each with different sets of incentives: proprietors, employees, and customers
Proprietors: run for the benefit of their masters. The Sultan of Brunei is mentioned in the book. I think a good example for our space would be some of the cults of personality we see in crypto or highly centralized NFT projects where one or two founders hold all decision making authority (and keys to the treasury.)
Employees: USG is the example mentioned in the book, for our purposes I think the corollary would be project teams and holders of the native governance token (assuming they are actively participating in the functions of governance.)
Customers: Merchant era Venice is used as an example in the book. In our example this could be users of the protocol or project or a specific L1/L2 network or project that the DAO helps to support. A bit more on this concept a little later.
Like many of the concepts in the book this model holds true today decades after it was authored. As I review the different approaches to organizational models prevalent in our space today I find that all of the different examples I have come across fall into one of these three camps. In this article I will review a few of the more prevalent models including Foundations, Ecosystem DAOs, and Protocol DAOs.
I’ll attempt to contrast each of these structures against the different examples from the Sovereign Individual mentioned above and look at how these organizations decide on their goals, solicit and review proposals, allocate funding and ultimately make decisions on who to fund and how they will measure success.
Let’s start with Foundations.
One of the reasons I originally became interested in grants and incentives programs was my background as a board president for a regional food bank. The food bank is a registered 501c3 non profit in the US and, since the beginning of the pandemic, we have seen critical funding come in through grants from both government (federal, state, and local) along with different foundations.
Many times these “traditional” foundations are created through an endowment or initial seed fund and they have specific goals and objectives defined for how their funds should be used. These goals and objectives are usually defined by the creators of the foundation and stewarded over time by a board of directors or fund managers who have a fiduciary responsibility.
The makeup and structure of these organizations in crypto is not much different from traditional foundations with some key differences:
Initial funding for their treasury usually comes from a native token creation event that underlies the network or protocol they steward and support.
They are focused on the development and sustainability of their ecosystem versus a public good like feeding people or building roads (though, sometimes these things can intersect across the metaverse/meatspace)
In looking at what kind of organization these foundations would most closely resemble from my Sovereign Individual example I think it would probably be an organization that runs for the benefit of its employees (namely the largest token holders, of which the Foundation and their stakeholders are usually part of.) These organizations typically decide on their goals in alignment with what they believe will bring the best ROI for the token holders and drive activity on their network or protocol, specifically incentivizing developers and builders to create systems and applications that will drive up overall network value (a la the Fat Protocol Thesis by Joel Monegro.)
In terms of how these foundations solicit proposals it can vary. Many of them have opted to use various kinds of submission methods and management platforms including Notion, Google Suite, Salesforce or crypto native apps like Questbook (yay!). Overall, there is a lack of standards in this realm today and that is why at Questbook we believe there is an opportunity to learn what is working and not for many of these groups and see how we can purposely build our product to better fit the needs of the wider Web3 Community.
Funding allocations can vary as well and, at Questbook, we have definitely seen a decline in allocated funding amounts since onset of the bear market. On a very positive note we have also seen many of our partners step up due diligence in review and overall allocation of funds. Due to the centralized nature of many foundations, it is a relatively small group of stakeholders within the Foundation that makes that decision and is ultimately responsible for the results. This can make the job of allocations fairly easy in terms of making a decision but those that have to live with the decision after the fact can feel that weight over time if things don’t go the way they had hoped.
“Everyone has a plan until they get punched in the mouth”
– Mike Tyson
Another aspect to foundations and more centralized grants programs is sometimes they can be stepping stones to more traditional VC opportunities. There are many foundations today that maintain strong relationships with a network of VC’s and use this network to help broker introductions to these VC’s in addition to their own ecosystem funds that back early stage projects.
At Questbook, we have seen success with teams that set funding goals month to month or quarterly and work to align those funding goals to specific outcomes where there is also buy-in from the wider community. Even if the decision making process for foundations is centralized that doesn’t mean getting feedback and learning from your community through engagement in forums, social, or events is off limits, quite the contrary.
We have found that foundations may vary in their desired levels of transparency (especially if they are more of the stepping stones to traditional VC as mentioned before) and, because of this, we have implemented privacy controls into our platform that allow for grants and bounty programs to mask application data in a way that is encrypted where even our teams are unable to see applicant and disbursement data.
Now that we have taken a high level look at foundations let’s dive in a bit to a more varied type of organization: Ecosystem DAOs.
Ecosystem DAOs are interesting organizations that have started to pop up more and more since the last bull market. If you are wondering what exactly an Ecosystem DAO is, it is a DAO that was created to help bolster support for a specific community or purpose. Some examples of Ecosystem DAOs today would be MetaCartel and MolochDAO for Ethereum, Polygon DAO for Polygon (a Questbook Partner) Aave Grants DAO (also a Questbook Partner) for Aave, Climate Collective (also a Questbook Partner) for Celo, or Uniswap Grants Program (UGP) for Uniswap.
Usually these organizations were founded (and initially funded) directly from a grant or initial disbursement from the organization or community they were intended to support and their purpose can vary from functions like specifically managing grants and bounties for the community (like with Aave Grants DAO) and other times grants and bounties might just be one of the functions they help to provide.
As I compare these organizations to my Sovereign Individual example I think these mostly align with an organization that is run for the benefit of their customers (ultimately the project/protocol and their wider community). Because of this their ethos is very much community first and many of them start with heavy community discussions and involvement to form their goals and areas of focus as they form and start to build their structure. You can see examples of this in the initial forum post defining Polygon DAO or in the initial forum post defining UGP.
Ecosystem DAOs are similar in many ways to foundations in how they solicit and review proposals in their use of tools like Notion, Google Suite, Airtable and Questbook (yay again!) but we have seen them be more innovative in how they build systems and workflows around these toolsets that support collaboration and community involvement when compared to other types of organizations.
Examples of this innovation I could point to would be how Polygon DAO created Polygon Village as a one stop shop where builders can come to engage the community and find all the ways that Polygon DAO can support them. Climate Collective and Polygon DAO have also seen success in adopting our platform to improve management of their grants workflows while driving down SLA’s in terms of response, review and approvals of their grants.
For funding allocations usually these groups have set budgets for some period of time like with Aave Grants that is approved and allocated from Aave Treasury or Polygon DAO was formed with an initial amount of funding from the previous DefiForAll Fund. It is ultimately up to the DAO Lead or Grants Manager (if the Ecosystem DAO is specifically for management of grants) to decide on budgets and work within those constraints across the budget term.
In terms of the decision making process these groups usually operate by having analysts and reviewers that are responsible for ensuring the applications coming in meet the qualifying criteria set forth by the DAO and may have a process of peer review for larger or more complex applications. An aspect of our product we have built thanks to feedback from Ecosystem DAOs like Polygon is features like evaluation rubric (used to help define evaluation criteria) or customizable reporting dashboards that can help to show trending metrics like disbursements, application flow, submission queue and more.
We have found that most of the teams we would group as Ecosystem DAOs want to be transparent and open in their approvals process including exposing the names and approval status of their applicants. Whether it be full transparency or some level of privacy as mentioned before with Foundations our platform can help to provide the level of transparency desired.
Now that we have reviewed Ecosystem DAOs let’s take a look at Protocol DAOs and compare them using some of the criteria we have applied for the previous two types of organizations.
Protocol DAOs are a more classic representation of the original “DAO” model (minus the mega hack and rollback that brought us $ETC). These organizations tout decentralization and make every effort to drive engagement and governance from their communities using mechanisms like forums for discussion (Commonwealth and Discourse being the most popular) and governance token voting (using tools like Snapshot).
While these DAOs look to fulfill crypto’s ultimate promise of decentralization and further our efforts in the battle against Moloch they are incredibly hard to govern at scale and face unique challenges with driving balanced community engagement and fair consensus across all holders of the native governance token. Some of the more prominent examples of these kinds of organizations would be Compound, Balancer, and MakerDAO.
First, let’s compare one last time against my Sovereign Individual example. For these organizations I think that they would fall most into the camp of an organization that operates for the benefit of its employees (i.e. the native token holders participating in governance). This can create challenges in balancing governance with the largest token holders teaming to ensure their interests are met while minority holders that may have less weighted equity per wallet address (but may outnumber in quantity) are at a disadvantage in being able to have their voices heard or interests recognized without the ability to coordinate. I think because of this and a certain percentage of these minority token holders being pure speculators we don’t see a balanced form of governance across many of the Protocol DAOs that are operating today.
In looking at how these kinds of organizations define their goals it is usually started in much the same way Ecosystem DAOs approach, through forums. With these protocol DAOs many times there are respected community stakeholders (usually founders and/or core developers) that start these conversations and ask for other respected members of the community to weigh in and share their thoughts and opinions. These discussions can move to Discord and other collaboration tools until proposals are formed and eventually voted on using systems like Snapshot.
These proposals can range from things like changes to the protocol, funding decisions, human resource decisions and a variety of other topics. Whereas Foundations and Ecosystem DAOs many times have a more centralized form of decision making (more akin to traditional organizations) Protocol DAOs look to drive these decisions all from the community and its stakeholders.
Sometimes these proposals are focused on development activities, marketing or other community objectives that bleed into grants and bounties and that’s where our platform can come into play. At Questbook we have created integrations with both Discourse and Commonwealth that allow for on-chain updates to be pushed between platforms allowing for tighter integration between platforms that Protocol DAOs use for governance and grants managements.
A major innovation we have helped to build at Questbook is the concept of Delegated Domain Allocators (DDA). We developed this governance model as we witnessed some of the challenges (and opportunities!) present in the Protocol DAO model. At a high level the DDA model allows the community to select a grants manager (this can be outsourced to Questbook or one of our partners) or can be done “in house”, that is the choice of the DAO. The Grants Manager would be a highly visible community stakeholder that is responsible for oversight and management of the overall grants and bounties budget. Under the Grants Manager we have Domain Allocators, these are other highly visible and respected community stakeholders that have a specific area of expertise (security, SDK, etc.)
Each of the domain allocators are given a specific budget that they have discretion to approve and disburse but all of their actions would be done in a way that is visible and open to feedback from the wider community. We believe that this model cuts down on the amount of overhead and time wasted by the community delegating on items that could be quick approvals but still forces oversight and community awareness on the decisions being made by the domain allocators.
We recently started to work with Compound on CGP 2.0 on this approach and have received positive feedback and are in active conversations with many other protocol DAOs that are evaluating this model for their purposes. While this model is not required for Protocol DAOs to use the Questbook platform we believe it offers a great option for those that are looking to either revamp their existing grants program or look at developing one anew if they have not yet created one formally as of yet. We also believe that DDA could offer opportunities for Ecosystem DAOs and Foundations that are looking to launch parallel community funds to their more centralized grants programs as an option versus building a new structure from scratch and going through the pains of deciding on how to manage and steward them over time.
I hope you found this article informative. We are still very early (yes, I said it ... we’re still early) in the development and growth of these organizational models and it’s an exciting time to be paying attention as things develop. I have been told bear markets are for building and there is no better way to get exposure to building than working with these grants programs and seeing how they are contributing to the decentralized future that all of us know is possible.
Until next time, frens.