Prior to entering into the weeds of the policies and procedures a subDAO ought to follow when procuring services, goods or general work for its operations, it’s pivotal that we delineate what we mean by Procurement, specifically in the context of SubDAOs (present, and future) within the dYdX Ecosystem.
In general, Procurement refers to the process of acquiring goods, services, or works from external sources. It encompasses all stages of a procurement process from the identification of needs, the acquisition process, to the final delivery and contract management. In traditional government procurement, the process would consist of a tendering process however, albeit this methodology being potentially utilised for some of the subDAO’s activities, this methodology is not one that’s normally used within the context of dYdX subDAO procurement due to the needs that need to be satisfied.
In the context of subDAOs, procurement involves selecting service providers and partners who can deliver services or products that support the subDAO's objectives and add value to the underlying dYdX community who would have entrusted the corresponding SubDAO with responsible management of fund expenditure.
Now that we’ve defined Procurement at a conceptual level, hereunder, we will delineate some high-level principles one ought to keep in mind when either running a Procurement Framework (with an ancillary tendering process) or even administering/facilitating an in-house Procurement process for good, services or work in general. These guidelines and standards are designed to ensure that procurement activities are conducted in a transparent, efficient, and ethical manner with the end goal being that of achieving a cost-effective and risk-mitigated result.
Transparency and Accountability: By following a clear set of rules and guidelines, subDAOs can ensure that all procurement activities are open to scrutiny and that decisions are made objectively. This builds trust within the community and ensures that community funds are used responsibly.
Efficiency and Effectiveness: A well-defined procurement framework (even one to be used for internal purposes) helps streamline the process of acquiring goods and services, reducing the time and resources required to effectively meet the need as identified by the subDAO. This ensures that the subDAO can quickly and effectively meet its needs while obtaining the best possible value.
Adequate Due Diligence: Careful selection and vetting of service providers minimises the risk of selecting an unreliable or incapable partner.
A detailed Scope of Work should be the starting point for any procurement process, strategy or framework. It defines the need to be satisfied as delineated in the needs assessment, provides context, identifies responsible individuals within the subDAO to facilitate the process, and offers a rough budget estimate that would ideally be in full alignment with the subDAOs financial plans and any applicable segregated budgets allocated for the respective needs identified. This document is crucial for engaging potential service providers.
Potential service providers can be identified through various channels, including:
No avenue should be overlooked, and thorough research is necessary to ensure service providers can deliver on their promises. Ideally, when running a non-tender-based procurement framework, the subDAO personnel responsible for satisfying the need identified should correspond with the identified service providers/partners so as to assess their viability and track record in relation to the need to be satisfied. For the sake of a thorough process and for one to reach an objective conclusion on the service provider/partner to be selected, a scoring mechanism could be implemented.
Due diligence is essential to ensure the subDAO is comfortable with a chosen service provider. The extent of this process depends on the project's importance and potential risks. Key due diligence activities include:
In most cases, the subDAO would have short-listed multiple service providers that are capable of meeting its needs. Hence, the additional hurdle in this regard is adopting a methodology that aims at reaching the decision on the most optimal service provider to solicit the need from.
Where the subDAO finds that there are multiple service providers that are capable of meeting its needs in light of the methodology adopted throughout the procurement process, the Three-Quote System could be employed to ensure competitive pricing and value for money. The Three-Quote System ensures that you have a minimum of three comparable proposals from these shortlisted service providers to enable the subDAO to compare and contrast the value-proposition of each.
This procedure involves soliciting quotes from the corresponding multiple service providers, comparing their offerings, and selecting the most suitable provider based on a range of criteria including cost, quality, and capability. The steps involved in this procedure are outlined below:
dYdX subDAOs may be underpinned by a legal structure as delineated in the ‘Legal’ section of the DAO Playbook. In this regard, there are certain legal parameters one must abide to when choosing a service provider they have affiliations and/or pre-existing contractual agreements with.
In this regard, when a conflict of interest arises in relation to a service provider to be chosen, this should always be disclosed to the subDAO’s respective personnel namely, the Supervisor or Enforcer of the corresponding subDAO. The existence of a conflict of interest should not disqualify the service provider from providing services that satisfy the needs of the subDAO if, following the disclosure of a conflict of interest by a subDAO member, the corresponding service provider is still deemed to be the best solution in light of the methodology delineated in this Procurement section.
In this regard, aside from the pre-existing legal obligation to disclose conflicts of interest as per the applicable law regulating the legal structure, it is always advisable for each respective subDAO to adopt their personnel-level conflict of interest policies and procedures so as to streamline the disclosure process.
Hereunder, we shall now delve into a non-exhaustive list of considerations one ought to take into account when, following the choice of service provider as per the process delineated throughout this section, the subDAO reaches the contract execution stage.
1. Exit Strategy and Transition Assistance
This was substantially altered from the previous version, which was very bureaucratic and in our experience not feasible for a small team, such as ours (Ops subDAO) and we are of the opinion that subDAOs are smaller teams by default. Which is why we wanted to create guidelines that if followed achieve the same goals as the original Procurement Policy
subDAOs are mandate-oriented collectives which are wholly and entirely created and facilitated through the dYdX Governance Framework. As can be assessed from the Legal section, several entity-types are able to create a bridge between on-chain governance, and the legal enforceability of the respective proposals passed by the community through on-chain governance. In this section, we’ll be delving into the details of the dYdX Governance Framework.
In the dYdX ecosystem, DYDX token holders, through the dYdX Chain Governance Framework and its ancillary mechanics, hold the ultimate decision-making authority in relation to the establishment of subDAOs, their termination, and any modification during their term of establishment. To balance the need for efficient execution with the necessity of retaining decision-making power among token holders, the two existing subDAOs have established a governance structure that aims to create a bridge between on-chain governance decision-making and the legal enforcement of these decisions.
dYdX Chain Governance is recognized as the highest authority in the legal documents governing the two subDAOs, specifically through:
This legal structure ensures that decisions made through on-chain proposals are legally binding for the subDAO entities and their representatives, extending the reach of dYdX Chain Governance beyond the blockchain. More specifically, the governing documentation specifically creates a bridge between on-chain governance and the corresponding entity by virtue of specifying the rights that DYDX tokenholders have in relation to the subDAO. These could include the appointment and removal of personnel, amendments to the governing documentation and/or mandate, and termination or further injection of funding to the subDAO. For more detailed information, refer to the Legal section.
[Trustees & Enforcer / Directors & Supervisor]DYDX token holders, through on-chain governance, appoint Trustees and an Enforcer for the Grants subDAO (and the first iterations of the Ops subDAO), as well as Directors and a Supervisor for the Operations subDAO in its current iteration. These representatives are responsible for pursuing, or overseeing the pursuit of, the subDAOs' mandated goals within the provided budget. Their roles may involve direct action or the assembly and supervision of a team of core contributors tasked with achieving the subDAOs' objectives.
In both legal entities (Trust and Foundation Company), DYDX token holders, through dYdX Chain Governance, retain some critical rights and responsibilities in relation to their formulation:
These powers ensure that DYDX token holders, through dYdX Chain Governance, maintain ultimate control over the subDAOs and their strategic priorities, while delegating necessary execution authority to the Community Representatives and any core contributors that are onboarded for the purposes of satisfying and / or facilitate the subDAO’s mandate. This governance structure facilitates lean and agile operations within the subDAOs while providing mechanisms to hold both the subDAOs and their representatives accountable.
Given the significant authority and funds entrusted to subDAOs by DYDX token holders, a robust set of internal controls are essential to ensure that both are applied as intended. These controls, heavily inspired by best practices in corporate governance and internal controls from traditional corporations, are tailored to the specific needs of the dYdX ecosystem, considering the subDAOs' size and operational nature.
The internal controls aim to ensure that subDAOs operate according to the dYdX Chain Community's intentions. It also prevents any individual from making unilateral decisions such as spending decisions, vendor selection, or invoice payment, without consulting other subDAO members. This significantly reduces the risk of malicious activity within the organisation.The recommended internal controls aim to regulate key strategic decisions, spending decisions, vendor selection, accounting, and invoicing. However, given the importance of lean and efficient operations, these controls would primarily apply to high-stakes decisions or transactions. The Community Representatives of the subDAO are responsible for defining the thresholds for these controls and holding subDAO members accountable.
Although not directly tied to specific expenses, the strategy defined for a subDAO will dictate many needs and necessary expenditures. Therefore, it is essential that the overarching strategy of the subDAO be sanctioned by its Community Representatives.
Deciding to allocate funds for specific purposes and selecting third-party service providers are critical organisational decisions. It is vital that no single person is granted full authority over such decisions. For larger financial commitments, more than one individual should support the decision. For more detail, refer to the Procurement section.
Best practices in international accounting and internal controls suggest that three different individuals should handle the following tasks:
While implementing this within a small team can be challenging, involving at least two individuals should suffice. By way of an example, the person using the service (e.g., an engineer for an AWS invoice, or legal counsel for external legal fees) can check the invoice. Additionally, subDAO accounting should be as publicly available as much possible, enabling the dYdX Chain Community to hold the subDAO accountable and track financial activities in near real-time. For more detail, refer to the Operations section.
Decisions going beyond the original mandate or for structural changes require DYDX token holder approval through the dYdX Chain governance framework.
The detailed governance process is explained here. But in short the process for seeking dYdX Chain Community consent for a subDAO is made up of the following steps:
Informing the community about the subDAO’s plans and detailing reasoning and objective of the upcoming proposal.
The community feedback is considered and if applicable incorporated in the proposal.
After the discussion phase the proposal is published on the dYdX Chain, and voting commences.
After completion of the voting phase the outcome of the vote is implemented.
The timeline of the Ops subDAO website provides several examples of when and how dYdX Chain Community consent was sought:
The primary objective of the operational infrastructure underpinning a subDAO should be that of efficiently and transparently delivering on the mandate granted to it by the community and as ratified by the community through on-chain voting. Achieving this goal requires a robust operational setup that enables subject matter experts to realize their full potential and deliver optimal value for the dYdX Chain Community.
While mandated priorities and key activities will vary significantly among different subDAOs, each organization needs a strong operational core to pursue its corresponding mandate effectively. This section outlines key aspects of subDAO operations essential for creating an effective working environment for the subDAO team of core contributors.
The regulatory landscape underpinning the dYdX Chain’s operation is characterised by significant legal and regulatory ambiguity. This creates a complex environment for subDAO operations, necessitating a proactive and strategic approach to manage legal and regulatory risks effectively. The legal team within a subDAO must adopt a multifaceted operational approach to ensure compliance and mitigate risks. In this regard, one can also refer to the Procurement section of this Playbook so as to assess the ideal manner in procuring the necessary personnel to target this area.
subDAOs within the dYdX Ecosystem are funded through the dYdX Chain Community Treasury. The decision to fund a dYdX subDAO is naturally taken by ecosystem participants in a collective manner and thus, ensuring the responsible management of these funds is a paramount element to the subDAOs operations. The finance team is tasked with meticulously tracking the funds entrusted to the subDAO, creating a financial roadmap, maintaining precise records, and preparing regular public reports to be delivered to the dYdX Community at large. At every step, these actions aim to facilitate and achieve the principles of accountability and transparency. Aside from offering the Ecosystem the necessary information on the subDAOs expenditure and planning, these details also aid in providing the Supervisor/Enforcer of the corresponding subDAO the necessary information so as to ensure that funds are not only being safeguarded, but are being utilised in line with the purposes of the subDAO as ratified through governance.
The financial records of the subDAO should ideally be publicly accessible. For instance, the ledgers of the Ops subDAO can be found here: DOT, DOS. Regular reports combined with these ledgers provide the necessary information and context for the broader DAO to oversee the subDAO’s finances effectively. These reports also serve as a historical track record of the subDAOs finances, and aid in planning for future mandates and terms. They also provide the DAO at large great insight on the costs associated with a subDAO’s particular mandate.
In addition to thorough accounting, the finance team must implement robust internal controls. These controls are designed to prevent any single individual from concentrating decision-making and spending power, thus mitigating the risk of fraud. Spending decisions, for example, must be approved by more than one person.
It is advisable to engage an expert accounting firm to maintain financial records in line with industry standards. This ensures the broader DAO receives an expert and independent opinion on the SubDAO’s financial situation and records. There are multiple accounting firms operating within the industry that offer digital asset accounting and bookkeeping. In most cases, the underlying legal infrastructure of a subDAO has annual bookkeeping and accounting obligations; ensuring adequate procurement of professional service providers in this regard is a pivotal piece of the subDAO’s accounting infrastructure.
Engaging an audit firm to conduct a comprehensive audit of financial records, statements, and internal controls can subject the SubDAO’s financials to scrutiny comparable to that faced by publicly traded companies.
A strong documentation culture is essential for enabling the SubDAO to share and transfer knowledge across verticals and personnel. Detailed documentation of all activities, processes, and resources is crucial, particularly for remote teams. Fostering this culture and providing the necessary tools for effective documentation and information retrieval is a core responsibility of SubDAO operations.
Careful evaluation of tools is advised to avoid oversubscription. The operational process that a tool aims to improve should be thoroughly examined and optimized beforehand. Simply porting an inefficient process to a slightly faster tool is counterproductive. Optimizing the underlying process can unlock more potential and reveal additional requirements for tools, further enhancing the optimized process.
The following is a list of tools the currently operating subDAOs find useful:
Notion is an all-in-one workspace for note-taking, task management, and documentation, allowing teams to centralize and organize information. It enables real-time collaboration, making it ideal for maintaining a shared knowledge base and project management.
Slack is a communication platform that facilitates organized team collaboration through channels and direct messaging. It integrates with other tools, ensuring seamless communication and coordination across the SubDAO.
Google Workspace provides essential productivity tools like Gmail, Docs, Sheets, and Drive, enabling efficient document creation, sharing, and collaboration. It’s widely used for managing email, file storage, and real-time collaboration on documents.
Trello is a visual project management tool that uses boards, lists, and cards to organize tasks and workflows. It’s particularly useful for managing projects in software development and tracking progress across teams.
Safe is an industry-standard multisignature wallet solution for securely managing digital assets on-chain. It ensures that multiple approvals are required for any transaction, enhancing security and transparency in fund management.
Tres.finance is an on-chain accounting tool that provides real-time financial tracking and reporting for DAOs. It allows for transparent and automated accounting processes, making financial management more efficient and accountable.
Xero is an accounting software that helps manage invoicing, expenses, and financial reporting. It’s user-friendly and integrates well with other financial tools, making it suitable for maintaining accurate financial records and reports.
Relevant roles for the subDAOs vary naturally with their mandate and need to be defined on a case by case basis. But supporting roles covering administrative and legal topics are necessary regardless of the mandate. The following are two roles that in our experience are key for any new subDAO:
Role: The Legal Counsel is responsible for overseeing all legal matters within the SubDAO. This includes contract drafting and review, compliance policy development, regulatory engagement, and legal risk management. The Legal Counsel is also responsible for liaising with third-party jurisdiction-specific legal firms to facilitate the subDAOs strategies.
Usual Responsibilities:
The Operations Manager in a SubDAO plays a critical role in ensuring that the organisation runs smoothly and efficiently. As voiced by existing dYdX subDAO, the Operations role is the backbone of the subDAOs endeavours. As can be seen from the below, most of the details mentioned throughout this section are facilitated by the subDAO’s operations manager.
Usual responsibilities:
The Operations Manager designs, implements, and continuously improves the processes and workflows that enable the SubDAO to meet its mandate effectively. This includes optimizing project management, communication, and operational workflows to enhance productivity and efficiency.
They are responsible for selecting, implementing, and managing the tools and technologies that support SubDAO operations. This involves evaluating and integrating software for communication, project management, accounting, and documentation to ensure all tools align with the team's needs and operational goals.
The Operations Manager is tasked with compiling and delivering regular reports on the SubDAO’s activities, finances, and performance to the broader DAO community. They ensure that reporting is transparent, accurate, and timely, balancing the need for operational effectiveness with the requirement for community oversight.
They play a crucial role in supporting the core contributors by providing the necessary tools, processes, and environment to enable them to perform their tasks effectively. This includes fostering a collaborative work culture, ensuring effective communication, and addressing any operational issues that arise.
This section was authored by Axis Advisory
DISCLAIMER: The information in this guide should not be construed as legal or tax advice for any particular facts or circumstances and is not meant to replace competent counsel. None of the opinions or positions provided below are intended to be treated as legal advice or to create an attorney-client relationship. This analysis might not reflect all current updates to applicable laws or interpretive guidance. It is strongly advised for the reader to contact a competent attorney in their jurisdiction for any questions or concerns.
The Cayman Islands Foundation Companies Law, 2017 provides a flexible and robust legal structure that combines features of both traditional companies and trusts. This legal framework is particularly suited to decentralized autonomous organizations (DAOs), such as those in the dYdX ecosystem, where a formal organizational structure is essential for managing complex operations and ensuring legal enforceability.
A Foundation Company in the Cayman Islands is a corporate entity with distinct legal personality, but it does not have shareholders. Instead, it can be established to pursue specific objectives, which may or may not be for the benefit of persons or entities, and these objectives are set out in its constitutional documents. For dYdX subDAOs, this vehicle provides an optimal bridge between proposal that are ratified by DYDX token holders through the dYdX Chain governance framework, and the legal enforceability, facilitation and execution of that proposal through an underlying legal structure established for its purposes.
Constitutional Documents: The Foundation Company is governed by a memorandum and articles of association, which collectively form its constitution. These documents must outline the subDAO’s objects, governance structure, and provisions for the disposal of assets upon winding up. The constitution can also provide for the appointment of directors, and supervisors, and set out their respective duties and powers. As per the Governance section, the purposes of the Foundation Company, its directors and supervisors, are all elements that can be inserted in the corresponding governance proposal and adopted in the Foundation Company’s governing documentation.
Legal Personality: A Foundation Company is a legal entity separate from its founders, members, and other participants. It can enter into contracts, hold assets, and sue or be sued in its own name.
Foundation Company Requirements:
Supervisors and Directors:
Both of the aforementioned personnel can be voted on by DYDX token holders and subsequently appointed to these roles upon the passing of a governance proposal by DYDX token holders.
Bylaws: The Foundation Company may adopt bylaws to regulate its internal management and governance. These bylaws do not form part of the constitution but are binding on the directors, supervisors, officers, and other persons with duties under the constitution.
Regulatory Compliance: The Foundation Company must comply with relevant Cayman Islands laws, including the Proceeds of Crime Law, the Terrorism Law, and the Money Laundering Regulations. The secretary plays a crucial role in ensuring this compliance.
The dYdX DAO can utilize Cayman Islands Foundation Companies to establish and govern subDAOs, such as the dYdX Operations subDAO. This structure allows the DAO to delegate specific responsibilities to subDAOs while maintaining overall control through the on-chain dYdX Chain governance framework.
Cayman Islands Foundation Companies offer a robust and adaptable legal structure that can be effectively utilized by dYdX subDAOs. By incorporating subDAOs as Foundation Companies, the dYdX DAO can ensure that its decentralized governance model is supported by a formal legal framework, enabling efficient operations, legal enforceability, and long-term sustainability.
Guernsey's legal framework, particularly under the Trusts (Guernsey) Law, 2007, allows for the creation of non-charitable special purpose trusts (SPTs). These trusts are specifically designed to hold and manage assets for purposes other than charitable aims, providing a flexible and secure structure that is particularly well-suited for decentralized autonomous organizations (DAOs) like the dYdX Ecosystem.
SPTs do not have beneficiaries in the traditional sense but are instead established for specific non-charitable purposes, which can include the management of decentralized protocols or other specific objectives critical to a DAO's operations.
The dYdX DAO can effectively utilize Guernsey non-charitable special purpose trusts to manage its subDAOs, ensuring that decentralized operations are legally structured and enforceable.
Guernsey non-charitable special purpose trusts offer a robust and adaptable legal structure for the dYdX DAO to manage its subDAOs. By utilizing SPTs, the DAO can ensure that its decentralized governance model is supported by a strong legal framework, enabling effective and secure management of its operations. This approach not only enhances the DAO’s operational capabilities but also provides the legal enforceability and accountability necessary for long-term success in the decentralized finance space.
The complexity of operating a decentralised exchange like the dYdX Chain presents significant challenges. Transitioning control of the dYdX Chain to DYDX token holders without any formal organisational structure could lead to stagnated development and mismanagement of the protocol. Traditionally, decentralised communities rely heavily on the DAO and community members to drive protocol development. However, at this stage, it is unrealistic to expect the broader community to possess the specialised knowledge required to manage all the intricate parameters and functions necessary to operate an exchange as sophisticated as the dYdX Chain.To address this challenge, the dYdX DAO has decentralised protocol development by delegating specific responsibilities to subDAOs. These subDAOs are tasked with overseeing key functions of the protocol, allowing subject matter experts to play a more significant role in decision-making on behalf of the community. Meanwhile, the DAO retains ultimate authority over the execution of changes to the underlying protocol. In essence, the DAO delegates decision-making to contributors with specialised expertise while maintaining overall control.
At present, there are two active subDAOs within the dYdX ecosystem:
The dYdX community is also exploring the possibility of establishing a third subDAO to manage the treasury. The long-term vision of the dYdX DAO is to deploy multiple subDAOs, each dedicated to specific activities that contribute to the protocol's development and growth. This section outlines how the dYdX Chain community can establish subDAOs to fulfill these roles.
A dYdX subDAO is a team of core contributors, funded and mandated by DYDX token holders, through the dYdX Chain governance framework to achieve specific goals as determined through the corresponding governance proposal. These subDAOs are incorporated as independent legal entities, enabling them to employ team members, interact with traditional financial systems, and enter into legal agreements with service providers (capabilities that are essential for effective operation within the industry).
The DAO should consider forming and funding a subDAO for long-term projects or initiatives that are deemed core or key competencies of the protocol. SubDAOs empower the dYdX Chain community to build, employ, and retain high-quality teams capable of driving the protocol's development and growth. These teams are crucial for maintaining the protocol's competitive edge and ensuring its continued evolution.
Establishing a new subDAO involves a significant financial commitment and comes with an administrative burden. It is crucial to carefully evaluate the necessity of creating a new, standalone subDAO and to justify its formation. The decision to spin up a subDAO should be driven by a clear and pressing need, ensuring that the resources allocated to it are used effectively and efficiently.
The entire dYdX Chain community is encouraged to contribute to the success of dYdX subDAOs. This participation begins with active involvement in the governance process, including engaging in initial forum discussions, providing feedback on proposals, voting on key decisions, and overseeing the ongoing activities of the subDAOs.
Members of dYdX subDAO teams should be top-tier talents in their respective fields, with a deep passion for the industry, DAO governance, DeFi, and perpetual trading at the protocol level. These individuals will play a critical role in advancing the dYdX protocol and ensuring its long-term success.
By leveraging the expertise of subDAOs, the dYdX DAO can effectively manage the complexities of protocol development while maintaining decentralised governance and community involvement. This structured approach ensures that the dYdX Chain continues to evolve and thrive in a rapidly changing industry.
Decentralized organizations are not new. There exists a wide selection of research literature to help us understand the principle of organizational decentralization. The concept is most commonly used to describe organizations that distribute decision-making to individuals across different levels of authority, in contrast to centralized organizations where decisions center at a single point (Mintzberg, 1989). Decentralized organizations carry out a process of devolution, where the power of making decisions is transferred from senior managers to members lower down the organizational hierarchy (Hales, 1999).
Decentralization is used to improve decision-making given the increasingly complex nature of businesses and their needs to respond quickly (Mintzberg, 1989). Centralized organizations benefit from the efficiency of a single authority. However, it’s unreasonable to expect one individual to have the answer to every business problem. By promoting responsibility and authority to individuals with higher subject matter expertise, the quality and responsiveness of decisions are improved.
The process for decentralization, however, is not as straightforward. Degrees of decentralization exist, with different stages of decision-making and authority distributed across each step. Mintzberg defines these stages as: information, advice, choice, authorization, and execution. A fully centralized organization keeps every stage within a single authority, while decentralizing organizations distribute these stages across levels of hierarchy to find the optimal degree of delegated authority. The choice of what decisions to devolve, and the extent to which authority is granted, can vary significantly (Hales, 1999). Ultimately, this becomes a decision unique to each organization.
Decentralization is also thought of in terms of reducing hierarchical controls to create a completely flat organization with no barriers. But research shows decentralized organizations may actually have a higher need for internal controls to manage individual autonomy at scale (O’Grady, 2019). Coordinating individuals is among the biggest challenges to efficient decentralization. A lack of controls can lead to uncoordinated decisions with no clear direction for individual efforts. Controls should exist to coordinate efforts productively, albeit without dampening the efficiency of autonomy gained from decentralization.
In the end, research shows us that decentralization is to be defined at an organizational level. While Mintzberg and others explore structures that help guide future models, organizations working through this process need to do so in a personalized approach to meet their needs and match their optimal structure.
Meanwhile, internet organizations built their own version of decentralization using networks. Early research identified the power of networks in allowing internet organizations to coordinate autonomously within an online network (Kreutler, 2021). Eventually, this was adopted by crypto researchers to create decentralized autonomous organizations (“DAOs”). Vitalik Buterin introduced the term in 2014, defining a DAO as an autonomous internet-based entity with internal capital that is managed through automation while also employing individuals to run it.
DAOs introduced something not found in previous research: an automated protocol that enforces rules on the organization. Instead of relying on a centralized authority such as senior management, DAOs use smart contracts to manage the organization in a permissionless manner. The single point of decision-making is replaced by a set of smart contracts. This is what allows a DAO to be decentralized. All members of the organization hold authority on the smart contracts, removing the need for a senior member to execute decisions.
dYdX, like most other blockchain-based protocols, uses a token (“DYDX”) to govern on-chain smart contracts and off-chain DAO or protocol related matters. The Community governs the protocol by holding DYDX, and participating in decision-making by voting on governance proposals. Voting power is determined by the amount of DYDX held - 1 token equals 1 vote. Governance proposals in this setting can be thought of as decision-making in traditional organizations. Instead of distributing decisions across the organization’s hierarchy, all members of the DAO participate in each decision.
To account for obvious attendance problems, most DAOs include a minimum quorum requirement in the decision-making process, needing only a percentage of the total voting power (e.g., total token supply) to participate in a proposal for it to be validated as a decision. In dYdX, for example, the minimum quorum for an on-chain vote is 2% (20M DYDX). dYdX has different requirements for different types of proposals. Most DAOs also include voting delegation, which allows holders of DYDX to delegate their voting power to other, more active participants.
Looking back at the distribution of decision-making authority found in more traditional decentralization (e.g. Mintzberg), protocols take a radical step in the process. Instead of optimizing for the appropriate degree of devolved authority, DAOs attribute all voting members of the protocol with identical levels of decision-making power. There is no clear delineation for Mintzberg’s decision-making stages across members. The protocol provides the opportunity for any member to participate in all stages of decision-making, and expects a minimum quorum of members to participate in voting on the decision to make it valid.
While the ethos of crypto encourages maximal decentralization, DAOs are at the risk of erasing the benefits of distributed authority from their radical implementation. Much like a centralized authority couldn’t manage a complex organization without distributing decision-making authority down to lower levels, it’s difficult to imagine an efficient organization that depends on each member weighing in on every decision. DAOs should instead look to optimize for decentralization in the same way traditional researchers argue for thoughtful devolution of authority.
There is overwhelming agreement among researchers that decentralization includes the transfer of responsibility from ‘those with accountability for the organization as a whole to those with accountability for smaller subunits of the organization’ (Hales, 1999). It only makes sense that DAOs should mirror this structure as a means of combating issues with radical decentralization.
This is where subDAOs come in. A “subDAO”, also known as a working group, manages specific functions of a protocol and/or DAO through delegated decision-making authority to individual contributors and/or service providers. In subDAOs, a subset of contributors are appointed to manage functions based on their skill sets. In doing so, the DAO is reconfiguring its distribution of decision-making authority to a more productive subunit of the protocol. The necessity for all Community members to participate in every stage of decision-making is removed.
Mintzberg introduces the concept of horizontal decentralization, which is defined as the standardization of skills among members working in parallel within an organization. Although only ‘relatively decentralized’, this structure benefits from improved productivity by delegating some stages of decision making to subject matter experts. We expect subDAO contributors to decide on information, advice, and choice on behalf of the DAO, leaving the community with the responsibility of authorization. In other words, subDAOs submit thoughtful recommendations and the DAO votes on their decisions.
Just as traditional decentralization requires additional controls to manage increased autonomy, DAOs must be intentional in maintaining controls when establishing subDAOs. subDAOs should not undermine governance contracts to the extent that core protocol decisions can be executed without DAO approval. Instead, they should feed into the overarching governance structure to improve organizational decision-making. By limiting delegated decision-making authority a DAO maintains controls on decisions. Instead, subDAOs are now held accountable for the decisions put forth through their work largely done across the information gathering and recommendation stages.
In the end, DAOs maintain decentralization in authorizing and executing protocol-wide decisions, but devolve information gathering and recommendations to individual contributors with subject matter expertise. The result is a horizontally structured community, with contributors working across protocol functions on behalf of the DAO while still reporting to it for execution of their decisions.
This document is meant to serve as a possible framework for establishing subDAOs. The first section of the document provides a background on decentralized organizations and the logic behind subDAOs. The second section is a reference guide for how the Community can establish subDAOs, with information on legal entities, operational procedures, governance, maintenance, accountability, and community assessment.
Although we recommend reading the first section for a contextual understanding of the problems with decentralization and benefits of subDAOs, readers seeking practical guidance on forming a dYdX subDAO can jump to the second section.
This document will not provide guidance on which subDAOs the community should launch, nor will it make recommendations for future subDAO proposals. The community will be responsible for determining which subDAOs are needed to help manage the current and future iterations of the dYdX protocol. Similarly, this document will not provide legal guidance for establishing an entity, but rather, suggestions for how to go about it.
Community members should use this document to better understand the process for launching, managing and operating subDAOs. Ultimately, the goal is to guide the community towards a thoughtful and scalable growth of the DAO and protocol.