DAOs: An Institutional View

DAOs: An Institutional View
Dance II by Henri Matisse 1910

I was recently a speaker at Miami Web3 Summit and assigned the topic “DAOs: An Institutional View.” The session’s description was:

Decentralized Autonomous Organizations (DAOs) are a new form of structuring social groups, bringing people together for a shared cause while rewarding those who contribute. Institutions have started to recognize their value, with venture capitalists investing heavily. Join us to find out what the future holds for DAOs and what role institutional investors play. Panelists will discuss the current state of DAOs and how decentralized decision-making impacts projects, companies & investors.”

Generally uncomfortable with how broad the description was, I prepared some notes in order to streamline my thoughts. While they’re unstructured and unpolished, I wanted to make this public as a marker of my Q4 2022 thinking 👇

Intro/DAO Landscape

What traction and impact have DAOs had?

  • As of mid-2022, there are 4,000+ active DAOs with a $20B+ market capitalization. 40% of these are DeFi-focused, but DAOs also exist across art & culture (6%), gaming (5%), politics (4%), physical assets (4%), and media (2%)
  • Due to the growth in the space and the malleable way in which DAOs can form and focus on different goals, institutional investors have become increasingly interested in the DAO opportunity – with VC investment into the DAO space reaching a $160M local peak in Q1 2022

What do we mean by DAO?

  • The term "DAO" is pretty useless. Depending on who you talk to, it’s either an overly broad term (like “company,” “business,” or “network state”) or any one of a number of very specific definitions
  • IMO, DAOs can be thought of as “internet-native” or “web3-native” organizations, where ownership, governance, and revenues are all on-chain

What are the different types of DAOs?

Why are people so excited about DAOs?

Decentralized Ownership and Governance

  • Incentive alignment, equitable distribution of value, equality of opportunity
  • Malleability with which DAOs can form and focus on different causes

Future of Work

  • Global, Remote, Async, Freelance 2.0, Ownership Economy, Pseudo/Anon
  • Transparent + Non-Hierarchical Organizations, Seamless On/Off-boarding

Scalable Human Coordination

  • Effective coordination is represented by: a) the effective delegation of authority (empowering specific individuals with their roles and power), b) values alignment (recruiting the right people in terms of skills), and c) meme alignment (where people are most passionate)
  • With this in mind, everything from universities and charities to hedge funds and start-ups could become DAOs; distributed resources and collective intelligence with the context that authority is correctly and effectively delegated and values are aligned is incredibly powerful!

What challenges are DAOs facing?

Tragedy of the Commons

  • DAO leaders either: i) don’t share context for DAO members and contributors and/or for those that come after them, or ii) they do, and their time is eaten up in doing so and getting involved with more trivial rather than more important matters
  • Do all DAO members and contributors really want to govern/have a say in governance?

Free-rider Problem

  • Often problematic in Investment DAOs – DAO participants receive pro-rata financial returns based on their capital contributions, thereby disincentivizing and de-motivating active participation in the DAO (which for investment DAOs is deal sourcing, due diligencing, portfolio support, etc.)

Coordination without Structure

  • A DAO’s dynamism, transparency, and lack of hierarchy are also its pitfalls. Contributors find DAOs “messy”, encounter information overload, and lack clear leadership

Consensus-driven Product Design Results In Worse Outcomes

  • Steve Jobs – “people don’t know what they want until you show it to them” – contrarian product building can be more effective
  • Vitalik Buterin – Some decisions should not involve compromise and are best made when centralized

Legal/Regulatory Uncertainty

  • Investment instruments are in the early stages of being figured out, especially to protect investors and appropriately dilute them at the point of equity -> token conversion
  • Options include SAFE with pro-rata token conversion, SAFT, SAFE + Token Warrant, SAFE + Token Side Letter
  • Legal frameworks are in the early stages of being figured out, especially to protect contributors from unlimited liability. KaliDAO is working to solve this

Revenue/Value Accrual

  • Why and how value accrues to a DAO’s tokens and/or NFTs (“tokenomics”) is still in the early stages of being figured out
  • Token value accrual and its relationship to building sustainable on-chain revenues and a business model is still up in the air
  • Specifically for protocols and products, there uncertainty around whether to charge fees (which in an open-source environment creates vulnerabilities to be forked) or follow a more experimental hyperstructure model

What are DAOs getting right?

Capital Formation

  • Everything from one-off/ephemeral use-cases like Constitution DAO (raised $47M to bid on the US Constitution), activist use-cases like Ukraine DAO (raised $10M for the war in Ukraine) or more ongoing ecosystem development and investments like BitDAO ($1.3B treasury)

Revenue Generation

  • ENS and NounsDAO have demonstrated novel models to consistently generate revenue and sustainably grow their treasuries

Financialized Meme

  • Bitcoin (digital gold), Ethereum (digital oil), FWB (culture-makers), and Seed Club (fuck YC) successfully accrued billions in market cap by successfully proliferating their respective memes as efficiently and effectively as possible and creating FOMO

Technology Upside

  • DAOs with products and/or communities (revenue generative or not) have successfully rewarded early participants in their networks. I’ve received $100K+ in airdrops from projects including ENS, Uniswap, BAYC, Seed Club, LooksRare, and Poolsuite

Community Building

  • Krause Hause, PROOF Collective, FWB have leveraged on- and off-line methods (content, media, events, conferences, education, resources) to build hyper-engaged communities

How might you approach investing in this space?

  • NFTs as early-stage DAO tokens
  • Private, early-stage investments: a) into corporations with a mandate to launch a token /  “exit to community”, or b) directly into illiquid DAO tokens
  • Liquid tokens (capitalize on mispricing due to dynamics of early liquidity)

How are VCs investing in the DAO space? Investment approach: picks & shovels vs DAO direct?

  • Two ways VCs are getting involved: 1) Investing in DAOs/DAO infrastructure, 2) DAOs as the VCs themselves (Venture DAOs / Investment DAOs)
  • For the former (investing in DAOs and DAO infra), VCs are often approaching the space as they would enterprise SaaS (backing products, not DAOs). This is cool – it’s what we do at Seed Club Ventures – but it’s also important to recognize that: a) in web3, since so much of the tech stack is open-source, the network effect is often the community (not the platform), as evidenced by OpenSea getting attacked by LooksRare (& 20+ others), and b) some of the most interesting and valuable products have been built by and spun out of DAOs solving their own problems, e.g., Coordinape (which came out of Yearn) and Gnosis Safe (which came out of Gnosis DAO)

Can DAOs compete with the largest and most impactful VCs and investors?

  • Investment DAOs started with “The DAO” and gained steam with friends collecting NFTs together, then participating in on-chain investments together, and then gradually forming InvestmentDAOs and VentureDAOs together, participating in Pre-Seed rounds, Seed Rounds, and now Series A rounds. It’s all an experiment!
  • Speaking for Seed Club Ventures, for start-ups raising and that we’re investing in, DAOs represent a non-traditional source of capital that have less strings attached than VC backing, but don’t sacrifice the network of companies and individuals that come with a VC. We also bring our community and deep expertise
  • I think the trend here is community investing – DAOs can gather information from different parts of the world perhaps better and faster than traditional systems, which may learn of trends or changes in a given industry later than the members of a DAO. This can give DAOs an advantage. However, a potential downside is the proposal and allocation of funds process in order to capitalize on that information

Which institutions will have the biggest impact on the DAO space?

  • The “institutions are coming” meme has expired – institutional investors are already here – CFA’s 2022 investor survey revealed that 94% of state/government pension plan sponsors are currently investing in crypto
  • On the flipside, in 2021 and 2022, we saw a surge in web3 activity from major brands across NFTs, Metaverse, Community, Memberships, Loyalty Schemes: Time released 3 NFTs of its red-bordered magazine covers, selling for $446,000. Tiffany unveiled 250 digital necklaces for 30 ETH each ($50,000 at the time) – available exclusively to CryptoPunk NFT holders. Budweiser released its first set of NFTs and partnered with 22 emerging artists for an 11,000 NFT collection. Nike acquired NFT sneaker studio RTFKT Studios, launched a metaverse sneaker line, and announced its SWOOSH platform for community members to create and trade digital collectibles

How do you define the success of a DAO?

  • Web2 KPIs – organizational complexity, impact, and scale (Amazon, Starbucks, etc.)
  • Web3 KPIs – active members, votes, proposals, treasury value, token holders, market cap, trading volume

Final thoughts

  • If you made it this far through my ramblings, there's either clearly something wrong with you or, like me, you're quite obsessed with DAOs. In any case, please don't hesitate to hit me up on Twitter – I'd love to chat! 🙏