Since the early 2000’s, the internet has brought billions of us together. Platforms that we all know and use daily have enabled people with common goals and interests to collaborate in ways that disregard geographical distance and financial barriers. With a cellphone and an internet connection, almost anyone is accessible.
Looking ahead, blockchains will foster the next wave of collaboration by giving communities the ability to easily pool and deploy capital. As a result, more online groups will begin to organize themselves around shared treasuries – eventually leading to a point where many social circles are also financial. By enabling quick and trustless collaboration between community members, DAOs will play a significant part in this trend.
In an earlier post, I described DAOs as an organization centered around a mission where members coordinated through a shared set of rules that live on the blockchain. I understood that when communities function via DAOs, members can come together and pool resources in a quick and trustless manner since governance tends to be widely distributed and all transactions are verifiable on-chain.
Going forward, I would describe DAOs as an attractive foundation for internet communities that enable trustless financial coordination. By thinking of it this way, it is easier to understand that DAOs are not a new type of org structure in themselves. Instead, they are a technology that lays the groundwork for many new ways of organizing people. Through trial and error over time, DAOs will serve as the base layer for a handful of new org structures that make good use of on-chain coordination.
Just like most new innovations at the beginning of their lifecycle, many DAOs are being treated as toys. Yet whether or not they succeed, ambitious projects like LinksDAO, ConstitutionDAO, and Krause House are enabling communities to rethink conventions surrounding ownership. And it is through this process of eccentric experimentation that DAO utility will continue to develop.
While there are likely many use cases for DAOs that have not yet been discovered, DAOs have already proven to be useful in several ways. Since DAOs enable large groups to collaborate and make decisions in a trustless manner, they are improving the way we manage decentralized protocols, investment clubs, and tokenized communities. The remaining paragraphs will explore each use case in detail.
To no surprise, most web3 protocols are built by small, centralized teams of core developers. Eventually, once most of the work has been completed, protocols reach a phase in their development when they are ready to fulfill their initial promise of becoming a user-owned network. At this stage, governance rights tend to be partially handed over to users, who are then able to vote on the day-to-day running and development of the platform.
As protocols mature and reach this stage, DAOs can be a useful tool in decentralizing ownership and responsibility. By enabling members to draft and vote on proposals on-chain, DAO structures facilitate safe, widespread collaboration using governance tokens.
For example, in an effort to further decentralize their token exchange, Uniswap Labs airdropped governance tokens to liquidity providers and other contributors. Through the Uniswap DAO, token holders can vote on proposals, put forward their own, and effectively have a say in the future of the protocol.
In his most recent piece for Forefront, Jihad Esmail describes tokenized communities as groups with seven distinct characteristics. These characteristics come together to define them as self-managed, collectively-governed groups who collaborate to advance a common “meme” - using tokens as the primary means of coordination.
In other words, tokenized communities are decentralized, self-governing group chats that can be accessed by holding a specific token in your crypto wallet. Each community has their own unique perspective of the world, and pools capital together by issuing tokens in order to finance their objectives.
As tokenized communities continue to define new categories of social networking, DAOs are being used by these groups to enable widespread governance and coordination over a community’s shared treasury. For example, Friends With Benefits token holders initially exchagned ETH for the community’s token, which effectively funded a treasury that the community governs over. By holding sufficient FWB tokens in their wallets, members gain exclusive access to content, events, and the broader community that makes up the social network.
Without DAOs, governance could not be both widespread and trustless, giving everyone a say in what happens within the community. In this way, DAOs are making it possible for new internet-native groups to collaborate financially and advance whatever their missions are.
As a means to invest in crypto-native assets alongside a community, investment DAOs are emerging as the easiest and safest alternative. In this way, communities are able to fund shared treasuries that are governed in a trustless way by all members - since transactions must be voted upon and are verifiable on the blockchain. As such, DAOs enable communities from all corners of the world to collaborate financially, which will democratize access to investing over time.
For example, right after identifying a promising investment opportunity, an online community whose members are from a handful of different countries could form an investment DAO using Syndicate and wrap it in the legal entity of their choice using Doola - all in a matter of minutes. Since all transactions would need to be voted upon and will ultimately be verifiable on-chain, members wouldn’t have to worry as much about theft or misappropriation of funds.
At the center of an investment DAO and the value it brings to decentralized communities, lies the DAO’s native token. These tokens are used as a voting mechanism within the community, and are allocated to members based on their contribution to the fund. A member’s tokens represent their ownership stake in the DAO, and will be used to exert influence over investment proposals and decisions regarding the shared treasury.
While both investment DAO and token gated communities revolve around their native tokens, each is inherently different in the way that it attributes value back to its members. It can be said that all investment DAOs are token gated communities, while the converse isn't always true. This is because investment DAO tokens enable profits to be redistributed back to community members, whereas community tokens like $FWB hold economic value for other reasons.
Compared to communities like Friends With Benefits, investment DAO tokens are valued based on the total value of the community treasury. If the community treasury is worth $10,000 and there are 10,000 outstanding tokens, then each is currently worth $1. The unit value of each token will fluctuate along with that of the treasury, since there is an expectation that the fund will eventually be liquidated - redistributing profits and losses to members. In this way, investment DAO tokens are closer to “security” tokens rather than “utility tokens”, which has significant impact on the legal frameworks that apply to such a community.
On the other hand, the value of a $FWB token is more subjective, as it is effectively based on the utility that members derive from the community. Given that there is a limited supply of $FWB tokens, their value would increase along with demand to join the community.
Even if the Friends With Benefits DAO holds NFTs and other assets in its treasury, from a legal standpoint they cannot be sold with an expectation of profit so that proceeds can be redistributed to token holders. As a result, the treasuries held by large tokenized communities like FWB should be thought of as a means to achieve social value, rather than as a means to earn profit.
DAOs are the most effective way to organize large groups in a crypto-native setting while enabling financial collaboration at speed. For now, if you want broadly distributed governance over a treasury, as well as the ability to move quickly, you probably want to DAO it.
Over time, it is becoming more clear that web3 will do to traditional finance what web2 did to publishing and media. Just as DeFi democratizes access to many layers of the financial system, DAOs will do the same to startup fundraising and venture capital.
The next post will be focused on exploring how investment DAOs will displace traditional VC over time. Thanks for reading!