DAOs Are The New Political Process
Opinions are the author’s own and are for discussion purposes only. This does not represent the views of Decentral Park Capital or its affiliates. Furthermore, this does not constitute legal, accounting, or tax advice of any kind and should not be relied upon as such.
Decentralized Autonomous Organizations (DAOs) are the new political process. They get a whole lot of people riled up in real time ready and willing to contribute and deploy capital in a way social issues and causes have not had access to until now. As of this writing, DAO treasuries hold $9.5B on the collective balance sheet. In concept, the DAO construct is predicated on delivering trust in an organization by automating organizational processes via smart contract, allowing communities and groups with a common goal to spin up coordination and capital and deploy for a common good in a rapid manner. Presidential candidate and New York City mayoral candidate Andrew Yang gets it:
“But now I’ve realized that the most profound opportunity to fight poverty lies in Web3 technologies,” he said in the Twitter video. “Unfortunately our leaders in DC don’t really get these technologies — they’re a little bit nervous about them, so that’s what we have to change.” - Blockworks referencing Twitter, 2/17/22
DAOs focused on social causes are the next iteration in decentralized autonomous organizations, the organizational paradigm and force for good taking web 3.0 protocols in force since 2016. They have been accelerating in adoption and sophistication these last 18 months in particular, and are now ready for prime time. The model is simple, for example, you purchase an NFT via a minting process, the DAO supports social causes and the NFT provides access, participation rights, and certain privileges. The DAO mobilizes, deploys capital, incentivizes contributions and participation, andevolves always at the most efficient frontier of the overriding consensys strategic direction of the common enterprise. There are several machinations of this, investment DAOs, HR guilds and bounty platforms, decentralized finance protocols, and of course social causes, to name a few.
Recent headlines however are less than optimistic – in practice coordination without the human element, good faith leadership, can be disastrous:
Without robots, DAOs will never progress beyond their current level - CoinDesk, 3/18/22
Reality intrudes on a utopian crypto vision - New York Times, 3/8/22
DAOs as the future? Hard pass, thanks - Tech Cruch, 3/1/21
Dunbar’s number tells us groups do not efficiently coordinate over 150 members. I can tell you, as a former military officer, that coordinating individuals in real time reaches diminished marginal utility after you cross 100 soldiers and approach 150. This is perhaps the reason Company size elements are staffed this way under military doctrine is based on sociology.
Let’s explore the arguments for and against DAOs:
DAOs theory does not translate in practice.
Difficult to coordinate the gig economy at scale, without long term employee commitment, quarterbacking massive grant programs drives exponential leakage of domain knowledge and brain drain.
Actual low stakeholder participation, with VCs owning a significant portion of the active voter base.
Certain sectors of the crypto market and cap table dynamics can result in DAOs suffering from pump and dump tokenomics over value capture and coordination.
General liability for members of the DAO, as the DAO concept does not fit cleanly into traditional legal entity types.
DAOs automate bureaucracy and execution (inverse of the above).
Rapid ability to coordinate disparate subject matter experts and pay efficiently for actual performance.
Inherent stakeholder equity as passionate DAO members can mobilize in a matter of days to bring product and platform to market.
Fair launches have all but removed bad actors from capital formation and keep stakeholder transparent and accountable via democratic systems on chain.
DAOs are maturing in real time as wrapped DAO structures come to market that leverage existing (LLCs, non-profits) and new legal entity (foundations, trusts) constructs.
DAO personalities can be good and evil.
Build Finance single wallet holder executes hostile governance takeover and drains the treasury, albeit less than $500k.
UNI majority controlled by 8 wallet addresses and the September 2021 announcement that UNI was under investigation by the SEC for marketing issues will likely turn out to be an attack on decentralization.
Juno Network DAO votes to revoke tokens from a whale DAO member, setting a polarizing precedent.
0.0008% voter participation across the space with 310k+ members with 255 votes per proposal on average
Bearish View - Let’s embrace reality, DAOs only exist because founders facing the prospect of enforcement and the advice of savvy attorneys developed the DAO concept as a legal defense to the ‘efforts of others’ prong of the Howey Test. DAOs are merely a securities defense strategy dressed up as a philosophical worldview come Web 3.0 concept. If you have ever built anything, you realize how incredibly difficult it can be to coordinate resources, garner consensus, and execute with speed. These pieces are in contention with each other and the primary reasons founders and CEOs often choose for their companies to remain private (vs. going public). DAOs are no different.
Bullish View - NOW that all of the bearish sentiment is out on the table. Let’s get down to BULLISH business. DAOs are the purest extension of the gig economy and an evolution of…no, an amalgamation of… the best and most efficient versions of all corporate and bureaucratic versions that came before. DAOs can crowdsource and meme a brand or business into existence in a matter of hours. This LIQUID NETWORK EFFECT is THE NEW FINANCIAL METRIC, more so than revenue, it is pure equity value with cash flow and governance rights vested in the DAO token holder’s active relationship with the DAO (not the passive speculation of a shareholder in a 2.0 corporation). DAOs are zealous in their philosophy, and stimulating and romantic in how they challenge our grasp of the republican concept and democracy in general. The catalyzing drivers of the great republic in the years to come will be DAO tooling, coordination, identity, and participation products. If you are building one, we are interested. Generations are disenchanted with the political process and polarized to build and participate in this year of the DAO. This is the new political process with no contribution limits. Vote with your wallet. Pun intended.
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