Analysis

What's a SubDAO?

An explanation on the most exciting scaling model for DAOs
Bankless Bankless Jan 20, 20226 min read
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What's a SubDAO?

Dear Bankless Nation,

Decentralized Autonomous Organizations (DAOs) have exploded in popularity in the past year.

They’ve grown from niche projects with a handful of contributors to behemoths with billions of capital and thousands of dedicated community members all working toward achieving their mission.

We’re starting to see these new forms of social structures fulfill their potential as the future of work. Anyone, anywhere can join a DAO and start getting paid.

More recently, we’ve seen the rise of SubDAOs—smaller, autonomous working groups and projects within a broader DAO. We believe these are how DAOs scale without burdening the community with bureaucracy.

DAOs are already a grand experiment within crypto, but this is a very new area within the DAO sector.

Fortunately, we have a front-row seat to subDAOs through BanklessDAO.

Our resident anon and core contributor to BanklessDAO, Frogmonkee, dissects what we’ve learned so far.

This is 401 level content for those down the DAO rabbit hole.

Let’s explore.

- RSA


2021 was a big year for crypto.

Across the board, we saw adoption soar—NFTs, DeFi, Alt-L1s, L2s, and DAOs.

According to DeepDAO, an analytics platform focused on DAOs, DAO treasuries went up 40x from $400M to $16B while participation ballooned 130x from 13K to 1.6M members.

With this level of attention, DAOs achieved an inflection point in their evolution. In adapting to the growing pressures of new ideas, new contributors, and new money, DAOs need to scale their ability to coordinate and best leverage newfound interest.

First, consider that the switching cost for DAOs is next to nothing.

In traditional companies, you go through extensive hiring processes before receiving a salaried position with benefits. In DAOs, that only sometimes happens. In many cases, you can simply join a Discord server, start providing value and get paid.

In this way, DAOs are great for low-stakes experimentation. People join, propose ideas, gather squads, get funded, and execute with relative autonomy. But as soon as bureaucratic red tape appears, people will leave and take their ideas elsewhere, and you lose talent.

In an attempt to capture the value of new ideas, DAOs have been experimenting with the concept of subDAOs—a way for a superDAO (also known as a parentDAO) to localize an experiment with sufficient autonomy while keeping them economically and relationally aligned with the superDAO.

As superDAOs experiment with subDAOs, we need to learn how to:

  • Support experimentation of new ideas with a way to measure ROI.
  • Keep subDAOs economically aligned with the superDAO as to both create new value, but also capture that value.
  • Templatize various subDAO models and define their ownership structure and relationship to the superDAO, as not all subDAOs are the same.

So what exactly is a subDAO?

⚠️ The definition, classification, and conceptualization of subDAOs is an evolving field of discussion. What follows are just my opinions and the mental models I’ve formed. They will likely change.

When companies grow, they add new departments, products, business verticals, teams, and initiatives to their organization. SubDAOs are like these new organizational structures, except instead of following a hierarchical management model, subDAOs operate with complete autonomy while remaining aligned with the superDAO. They’re more along the lines of subsidiaries.

Let’s double click on that statement and explore further: subDAOs operate with complete autonomy while remaining aligned with the superDAO.

Autonomy

Let’s first explore the on-chain component of a subDAO.

Generally, DAOs exist on a spectrum. Some “DAOs” are quite juvenile, consisting of minimal on-chain capacity, and are largely coordinated at the social layer.

In a prior post, Lucas refers to these structures as a Minimum Viable DAO:

  1. Establish a mission (this part is open!)
  2. Build a community on Discord or Telegram paired with Collab Land
  3. Create a shared treasury with a Gnosis Multisig
  4. Construct a governance framework with Snapshot
  5. Distribute ownership with Mirror or Coinvise

On the other end, protocols DAOs like Uniswap and Compound have quite sophisticated on-chain governance frameworks, like Governor Bravo.

Compound Finance’s Governance Framework - Note how voting decisions are automatically queued as transactions, unlike human-operated multi-sigs that require manual execution.

As with DAOs, subDAOs exist on this spectrum as well.

Their sophistication depends on their maturity and the need for decentralization. It’s okay for subDAOs to start out as centralized and progressively decentralize as time goes on.

At the very least, subDAOs are a multi-sig with social governance. But they can be much more.

Alignment

Alignment refers to how the subDAO relates and interfaces with its superDAO. What is the mutually beneficial relationship between the subDAO and superDAO that catalyzes the creation of a new subDAO?

This breaks down into two important levers: Economic Alignment and Relational Alignment.

  • Economic Alignment: How closely aligned are the economic incentives between the superDAO and subDAO? (eg. Token swaps, revenue share, buybacks)
  • Relational Alignment: What intangible benefits does the subDAO gain from the superDAO and vice versa? (eg. Branding, promotion, access to fresh talent)

Earlier, I mentioned that not all subDAOs are the same. What I meant by this is that subDAOs will vary in their alignment to the superDAO depending on what their economic and relational agreements look like.

Take the following scenarios:

  • BanklessDAO Writers Guild pays for labor in BANK and receives all of their funding from the BanklessDAO treasury, which can be cut off or diverted if the Writers Guild misaligns with BanklessDAO. (Most aligned with BanklessDAO)
  • Bankless Brazil is not funded by the BanklessDAO but still uses BANK tokens in exchange for formal recognition and brand licensing.
  • Bankless Consulting pays a 10% tax on all revenue back to BanklessDAO in exchange for having direct access to the specialized labor contained within each BanklessDAO guild.
  • DAO Dash agrees to issue their own token and sends 33% of their supply to BanklessDAO’s treasury in return for initial funding and inclusion in their product suite. (Least aligned with BanklessDAO)

The point here is that depending on its intended purpose, the way a subDAO interfaces with its superDAO will differ. For example, subDAOs that are internal-facing (like a guild) may have stronger ties with the superDAO whereas outward-facing subDAOs (revenue-generating initiatives) may have looser ties.

As a word of caution: It’s important that these relationships are defined before the number of subDAOs has ballooned beyond control. Without some form of standardization, superDAOs will risk spinning off groups that are creating tons of value without a way to capture that value back.

Accountability

The final leg of this subDAO mental model proposed is accountability. As highlighted in the alignment section above, the value that subDAOs and superDAOs provide to one another is highly contextual. At times, these relationships are going to become one-sided where one party derives more value than the other.

More often than not, this will happen when the subDAO becomes a burden on the superDAO’s treasury without a clear indication of ROI—after all, many subDAOs will start off funded by the superDAO. When this happens, the superDAO must have a clear way of cutting its losses. Without a defined process, winding down a subDAO will inevitably be messy and set a poor precedent.

Pet3rpan and James Young wrote an excellent blogpost on this topic:

In it, he emphasizes the need for funding and support to be tied to KPIs and OKRs. In other words, there should be tangible progress towards value created in order to maintain the subDAO and superDAO relationship.

This is an excellent model to hold subDAOs accountable for delivering on their promises to the superDAO, while also allowing the superDAO to make informed judgments on the continued support of any subDAO.

The Future of subDAOs

As I wrote this piece, I realized how early we are on subDAOs. DAOs themselves are still an evolving discussion, let alone this sub-classification that introduces relational complexity.

In our Bankless 2022 predictions post, I wrote:

DAOs are the easiest way for people to engage in crypto with low risk (cost is only time). With tooling, onboarding, and compensation continuing to evolve, DAOs will take off in 2022. That doesn't necessarily mean their tokens will.

I want to adjust this prediction: I think 2022 will be the year of subDAOs.

DAOs are only able to scale so much before they’re forced to introduce bureaucracy. All the new talent and ideas will need an outlet to flow towards.

That outlet will be to a subDAO.

Special thank you to James Montgomery for inspiring much of this blog post with his detailed musings on subDAOs: Classification and Templatization.


Action steps


Author Bio

Frogmonkee is a core contributor at BanklessDAO where he’s actively involved in governance, operations, and macro-level strategy. He also works at BanklessHQ as a newsletter editor.

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