Image Credits: MACINTOSHMINUS
The DAO Landscape is vast and complex. The number of DAOs alone has dramatically increased in the last few years. According to DeepDAO, in 2018 there were roughly only 10 DAOs. By 2020, there were 200, and as we enter 2022, that number will continue to rise exponentially.
In crypto space where DAOs are prevalent, there’s a whole new set of specialized skills needed to build a project. Critical skillsets are needed in areas such as tokenomics, treasury management, community management, onboarding, governance, smart contract development, data science, protocol security, OpSec, etc. Because there aren’t many experts in these areas yet, we’re already seeing crypto-native agencies (i.e., “service DAOs”) surface to provide the workforce to build and evolve DAOs.
Service DAOs combine the flexibility of freelancing with the upside of startups. Most individuals working for service DAOs get paid in a combination of ETH and ERC20-tokens so there’s skin-in-the-game and aligned incentives.
As these service DAOs build out their processes, hire more talent, and build software to automate their services, it’ll be much easier for Community DAOs to solve some of their toughest problems and scale with the help of Service DAOs.
Aside from Service DAOs, there are many types of DAOs that all play key roles in the ecosystem. While not exhaustive, the main types are:
- Creators DAOs: There are no major examples of creator-led DAOs today, but I suspect some of the people minting NFTs today will launch DAOs tomorrow that let fans join instead of subscribing.
- Protocol DAOs: Protocol DAOs (also called AMM or Automated Market Makers) transition power from a core team into the hands of the community, spawning a new way for projects to issue fungible tokens into the market. These DAOs offer users decentralized finance (DeFi) services via smart contracts. DeFi Protocols like interest rate protocol Aave, Compound, and Synthetix are all good examples. They let crypto owners earn billions of dollars' worth of assets and share financial rewards and governance with their communities.
- Tokenized Communities: The earliest DAOs were Tokenized communities such as the DAO. We have seen some of these tokenized communities being hacked this year but malicious incidents have ironically made these communities stronger.
- Grants DAOs: Grants were the first use cases for DAOs. Communities donate funds and use a DAO to vote on how that capital is allocated to various contributors in the form of governance proposals. Governance of Grants DAOs had an original main goal: participation was largely motivated by social capital over financial returns.
- Investor DAOs: After a long period of non-profit DAOs, investment clubs flipped the switch for members to focus on generating a return. While these DAOs come with a lot more legal restrictions than a Grant DAO, they showed that any group of individuals could come together to invest larger amounts of capital with low barriers to entry. The LAO is a great example for an investment DAO. In the case of The LAO, members have contributed 14k ETH so far to invest in blockchain-based projects, including other DAOs, like Flamingo, Red, Neón which itself invests in NFTs.
- Collectors DAOs: Curator groups act as the underlying glue behind a specific artist, platform or series to help establish longevity. Collector DAOs acquire cultural collectibles for the community and distribute ownership of the high-ticket digital assets equally among all community members. Unlike creator DAOs, these are driven by the supporters of collection instead of the creator. The most popular examples of Collector DAOs are NFT, Flamingo, Fingerprints, RAW, Red.
- Social DAOs: Social DAOs are particularly compelling as their focus is on social capital over financial capital. Social DAOs are the natural evolution of group chats, where friends become co-workers. They challenge what it means to be a part of a community and offer ways to lean into becoming a part of a digitally native tribe. FWB is a good example, and one of the earliest Social DAOs, but my take is that it became too big to manage. I was part of it and still hold my tokens but even though they are closed for new members, the experience today is nothing like it was before. For FWB when it started you needed 50 $FWB worth about $25 - now the price is crazy for the tokens ($4k). There is this flywheel where the earlier you join, the easier it is to join but as the token rises, the financial barrier to entry gets higher and higher. I have seen Pleasr DAO as another alternative.
- Service DAOs: Covered above. A great example of a service DAO is Raid Guild.
Going more into Investment DAO:
The investment process of a venture DAO (a subtype of an investment DAO) is different from a typical venture fund since each member of the DAO can act as a lead investor and bring investment proposals to the DAO.
The decision to invest is also based on the DAO voting results rather than via an investment committee. Depending on the specific DAO smart contracts, members of the DAO may have the right to “ragequit” or end their participation in the DAO at any point in time. Typical venture investments require that investors remain in the fund for a set period of time.
The LAO was established as a venture DAO by OpenLaw. It is structured as a Delaware LLC and uses Moloch v2 for its on-chain smart contracts. The LAO has over 15,119 ETH contributed by its members. New members must contribute a minimum of 310 ETH for a 1% share of the LAO membership units.
Flamingo DAO is an NFT-focused investment DAO and the first collective set up by The LAO in September 2020. Organized as a Delaware LLC, Flamingo DAO uses OpenLaw as its service provider for DAO administration. The DAO uses Moloch v2 smart contracts and Members must be accredited investors as defined by US law.
The selection of a DAO’s legal entity’s jurisdiction is an important decision and is subject the DAO to regulation. DAO’s typically have to select between a US or non-US entity, with the decision often based on the nationality of their members. Non-US members can invest in either US and non-US entities but investments in US entities are tax-inefficient as they would be subject to US tax regulations.
There are several jurisdiction options for non-US-based venture DAOs. Switzerland, Cayman, Malta and Singapore are the current most crypto-friendly regulatory jurisdictions for many blockchain projects. BVI has risen to be a great alternative to Cayman, as Cayman could change its regulations slightly.
The cool thing about a Venture DAO or an Investment DAO is that they have shifted the logistics of operating an investment fund onto the blockchain, bringing transparency to an otherwise less transparent one. One of the great missions we have in TheVentureCity is to bring that transparency we've seen for ages into the ecosystem. Regulations are still behind in recognizing DAOs as legal entities which has forced the current set of venture DAOs to adopt a hybrid model in the form of traditional legal entities combined with on-chain DAO governance. Despite the regulatory hurdle, the success of so many DAOs has shown that venture DAOs have a place in the crypto ecosystem.
Nevertheless, there are still benefits and negatives to DAOs:
Venture DAO Benefits:
- Allow more people to participate in early-stage investing
- Provide strategic funding of new projects
- Treasury diversification
- Solidify network effects within blockchain protocols
- Democratize investment decisions and expand deal sourcing
Venture DAO negatives
- Regulations - legal, security, and tax, are major consideration
- Smart contract limitations and risk
- Limited participation for retail investors depending on jurisdiction
- Requires lots of tooling
- KYC is still not as advanced as we have in venture capital today
We are still in the early innings and there will be more new DAOs coming into town as the space evolves. Join me in discovering and making sense of this fascinating space!
Contributor: Molly Rowe