What Are DAOs? And More Importantly, Should You Join One? What Crypto Investors Need to Know
You don’t have to spend a lot of time in the world of cryptocurrency before you run into something called a DAO.
Formed for everything from raising venture capital to buying a copy of the U.S. Constitution (although its bid lost at auction), DAOs have become a promising, albeit experimental, way to “invest” in crypto.
They’re not exactly new – the first DAO was built on Ethereum (ETH) back in 2016 – but they’ve exploded in popularity over the past few years. In 2019, only about 10 existed. But by the end of 2021, that number was up to 180. One recently formed DAO is even raising money in an attempt to buy the NFL’s Denver Broncos. (I mean, how cool would it be to own a piece of your favorite NFL team?)
No doubt you’ll keep hearing more and more about DAOs in 2022. But there are some things you need to know first…
DAO stands for “Decentralized Autonomous Organization.” They’re organizations formed for a particular purpose but are governed democratically. Participants join by purchasing a crypto token created for that purpose; those purchases also provide the initial funding for the DAO. In most DAOs, the more tokens you own, the more votes you get.
The “decentralized” part means there is no CEO. A group of developers will create a DAO, but all the decisions are made collectively by the group.
DAOs rely on two crypto-based technologies: blockchain and smart contracts. Smart contracts are sets of code that can carry out instructions. The blockchain is the digital ledger that stores data on the location and movement of crypto tokens and any data linked to those tokens. These technologies allow DAO participants to use their tokens to vote on any proposals before the group.
The other steps in the process of creating a DAO are pretty simple. The founders just need to write up a mission statement, create a Discord server where the community can discuss issues, and create an ERC-20 token (also a basic skill in the crypto universe).
Whether you know it yet or not, these DAOs are already having a big impact on the crypto market.
But before you run out and get involved in one yourself, let me show you how DAOs really work, what some of the most notable DAOs are doing, and whether or not you should join one…
The Advantages and Disadvantages of DAOs
DAOs offer a different approach to how a purpose-built organization can be funded and governed. Here are some of the advantages to keep in mind…
The Advantages of DAOs
- Because all decisions are made collectively on the blockchain, they are public and transparent.
- The global nature of cryptocurrencies means DAOs can draw from a worldwide pool of investors, allowing them to raise large amounts of money quickly.
- Since most DAOs are built using the same tools, it’s relatively easy and cheap to build one compared to creating a similar organization in a conventional way.
- Democratic nature creates a more collaborative environment since all participants have a voice – not just through voting but by having the ability to submit their own proposals to the group.
It’s also important to note that the structure of DAOs can have disadvantages…
The Disadvantages of DAOs
- With no clear authority figure, DAOs can get mired in debates, and decisions can take more time.
- If participants can’t agree on a controversial issue, it may cause the DAO to split in two.
- If a small number of participants control most of the tokens, the voting power gets concentrated (more centralized), negating a key reason for having a DAO in the first place.
- The sale of tokens can get into murky legal territory. If the U.S. Securities and Exchange Commission (SEC) determines that the tokens sold are illegal securities, it could take action against the DAO.
What Are People Doing with DAOs?
DAOs are being used for an extraordinary range of purposes. I’ve already mentioned the DAO trying to buy the Denver Broncos. To give you a better idea of the diversity of DAO projects, here are a few more for you to check out…
UkraineDAO is raising money to donate to civilian organizations in Ukraine to help those affected by the Russian invasion.
FriesDAO wants to buy fast-food restaurants (a Subway is first on the list) so the DAO community can vote on how they operate.
PubDAO is a media project in which writers, reporters, and editors brainstorm ideas on the DAO’s Discord channel. The content produced is shared with a network of publishers.
Perfume DAO was created by U.K. scent-maker Rook Perfumes to allow participants to collaborate on the creation of a new perfume.
Decentralized Pictures DAO aims to bypass the insular Hollywood culture by creating a community of film industry creators who can give feedback on each other’s projects. Top-rated projects will be eligible for awards and an option for financing, with DAO earning a share of the profits.
Neptune DAO‘s goal is to generate venture capital for decentralized finance (DeFi) projects. Members vote on which projects to fund from their collective pool of capital. The idea is to fund projects that will produce a return.
LinksDAO was formed by crypto venture capitalist Mike Dudas and looks to buy a top-100 golf course. Participants will receive membership perks and be able to vote on the organization’s rules.
The potential for DAOs is almost unlimited. But they’re so new that some have run into trouble. Here are some recent examples of DAOs gone wrong…
DAOs Gone Wrong
ConstitutionDAO lost its bid to buy a rare copy of the U.S. Constitution at a Sotheby‘s auction, and when it did, it no longer had a reason to exist. After some deliberation, the DAO’s leaders decided to refund everyone’s money, which had been paid in Ethereum. But for the smaller donors (the average contribution was $206.26,) most or all of their money was gobbled up by high Ethereum gas fees. This sort of thing is a risk to any DAO formed to buy a specific thing but then fails to pull off the purchase.
The lesson: A DAO should have a Plan B if it can’t fulfill its original mission.
Build Finance DAO was another DAO designed to work as a sort of community venture capital fund for new crypto projects. But a bad actor figured out how to manipulate the voting system and give themselves the power to mint and sell more than 1 million BUILD tokens. Plus, they pillaged other tokens associated with the DAO directly from the treasury. All told, the attacker extracted about $470,000 worth of value from the Build DAO. The organizers of the DAO may try to use the code to create a new one, but the original has been utterly devastated.
The lesson: DAOs are still very experimental and very risky.
Spice DAO actually succeeded in its goal of purchasing an original 1975 copy of a legendary “script bible” for a film based on the classic science fiction novel “Dune.” Many participants believed this meant they were helping to finance a film based on the script book. Unfortunately, the DAO paid $3 million for the book – 100 times the asking price – and it never intended to make a “Dune” film. Their plan, poorly communicated, was to make an animated film inspired by the old “Dune” script. In any case, the DAO could not make a “Dune” film since the purchase of the script bible did not include the rights to make a film. The DAO plans to publish the script book online and produce an animated series not based on the actual “Dune” story.
The lesson: Be clear about the DAO’s true goals.
Should YOU Participate in a DAO?
Now that you know all about DAOs – warts and all – the question remains…
Should YOU get involved with one?
Participating in a DAO isn’t for everyone. But if you find a DAO that really resonates with you, you may want to take the leap. For instance, if I were a Denver Broncos fan, I’d seriously consider participating in the Broncos DAO.
There’s definitely an appeal to being part of a like-minded community and having a voice in that community through the voting process.
But also be mindful of the risk. In many respects, DAOs are experimental. If you put money into one, don’t risk any more than you’re comfortable losing.
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Advisory Board Member, Alternative Wealth Daily
Follow me on Twitter @DavidGZeiler.