Forbes: DAOs are not a fad, but the future

In ten years, the investment scale of DAO will reach 2 trillion US dollars.

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Tribute Labs CEO Aaron Wright and COO Priyanka Desai in Williamsburg, Brooklyn, where background paint is a popular NFT.

Tribute Labs created the Flamingo DAO and became its service provider.

Flamingo DAO turns a $10M investment into a $1B NFT collection.

“It’s an extremely risky move. I don’t know if I agree with that.” Erick Calderon, founder of Art Blocks , a company that works on non-fungible tokens (NFTs), is more or less worried. areas of risk. In February 2021, Calderon joined 58 other investors in a plan to buy 150 rare NFTs, known as CryptoPunks , directly from manufacturer Larva Labs .

The decentralized autonomous organization (DAO) group, called Flamingo, has raised $10 million and meets weekly via Zoom online meeting software (audio-only to protect members who wish to remain anonymous) to discuss how to use the funds. Buying the CryptoPunks for 4 ETH (worth $7,200 at the time) each would use up 10% of the total funds raised, which is part of Calderon’s concerns in the DAO’s Discord channel reason.

Tensions became even more acute when the members discovered that a member under the pseudonym “Pranksy” was trying to get a head start on the deal and wanted to buy 150 CryptoPunks from Larva Labs through private channels. Ultimately, Flamingo members voted to buy. Today, the cypherpunks are valued at $30 million. As for Pransky, who left the Flamingo DAO by “consensus,” he told Forbes that “he didn’t know much about the DAO process.”

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Part of the cypherpunks owned by the Flamingo DAO

This is the case in much of the United States. Of course, you’re probably familiar with this concept: leaderless collective organizations that make investment decisions democratically. For example, last year a DAO with 17,000 members attempted to purchase one of the 13 original copies of the US Constitution in existence in the world. Aaron Wright, CEO and co-founder of Tribute Labs, which built the Flamingo DAO, calls the DAO “a sub-reddit with a bank account.” But while headlines tend to be eye-catching or silly, a new model is emerging with real advantages as an alternative investment vehicle.

Twenty-five years ago, an “investment club” in Illinois called Beardstown Ladies was born in a church basement and has published many best-selling books on investing. The club had a large following because of the proliferation of stock-picking groups at the time. DAOs have modernized and digitized this concept, incorporating many of the features that make blockchains very powerful.

By using tokens, DAOs can vote efficiently, share profits, and, crucially, provide liquidity because tokens can be bought and sold — although at the moment token trading is not something the SEC is prepared to support.

Some DAOs can also bypass SEC rules by limiting membership to less than 100, as this would qualify as an 82-year-old exemption for an ancient “investment club” — as long as the club members All participate in the management of funds and do not publicly offer their securities.

While this leadershipless model could be called anarchy by another definition, it also allows those interested in alternative assets to invest without worrying about hedge funds, venture capital firms and private equity The manager takes a 20% profit share, even though these guys are just average performance. Syndicate, which developed DAO-in-a-box software in partnership with another startup, can help you with all the legal and tax paperwork for as little as $2,000 a year, while Tribute charges 2% of the original investment per year , do all this paperwork and include some things like coordinating group meetings (not coincidentally, fund houses charge a similar upfront fee). The difference is that in this way, the profit is all yours.

Combine all of this and you have something that can’t be judged by stupid headlines. Instead, think of a DAO as a legitimate platform, like the same kind of company formation, flexible limited liability companies (LLCs) that emerged decades ago, easier than C Corp.s that require a lot of lawyers established. Early adopters of DAOs may seem silly. But the second wave of DAOs will make it mainstream.

Example A: Kinjal Shah is a partner in a San Francisco-based venture capital firm called Blockchain Capital, which manages $1.8 billion using a traditional fee structure. Nonetheless, Shah co-founded a DAO group called Komorebi Collective with 35 female investors and $400,000 in funding to invest in crypto startups founded by women and non-binary founders . Shah said DAOs can “have a lot more experimentation and flexibility” when it comes to creating an investment vehicle (using Syndicate’s services) that isn’t bogged down by institutional investors or high fees, two words that tend to herald an index. level growth.

The early stages of DAOs were not smooth. In 2016, early adopters of ethereum formed “The DAO” to support the crypto project, which quickly attracted $150 million — before hackers stole a third of it before making any investments. While the developers have recovered most of the hacker’s loot by controversially “forking” (re-issuing) Ethereum, here’s the point: The DAO is disbanded, and all DAOs exude something similar to the early darknet marketplace Silk Road. (Silk Road) stench.

However, the DAO concept gradually spread. By 2018, about 10 DAOs had been established. According to DeepDAO, by 2020, there are already as many as 200 DAOs of various types. Yes, embarrassing things are still happening, including many “runaways” – scammers raise funds for DAO’s crypto products, then runaways, literally a Crypto version of “Music of Joy” (“The Music Man”). The 24,000-member BadgerDAO, an organization that lets people earn interest on their bitcoin holdings , lost $120 million in a cyberattack in January.

But sheriffs are pouring into the “Wild West”. According to OpenZeppelin, more than 50 companies today offer blockchain security auditing services. And the number of DAOs is soaring, there are currently more than 4,000, and they have more than $8 billion in their vaults.

Yes, populist teams and populist themes grab the headlines. PleasrDAO, which has about $100 million in assets, according to its “Chief Pleasing Officer” Jamis Johnson, PleasrDAO’s mission is to go hand in hand between doing “cool things” and building “a portfolio that represents Internet culture.” Circumstances change. They paid $4 million for the Wu-Tang Clan’s one-of-a-kind album “Once Upon a Time in Shaolin” (purchased from the FBI, previously from the jailed “pharmaceutical guy” Martin seized from Shkreli). They also spent $5.5 million on a “Stay Free” NFT minted by fugitive NSA whistleblower Edward Snowden, and $4 million on the original “Doge” picture NFT – which Elon Musk tweeted The mascot of the cryptocurrency advertised by Te Zhong. But if you look closely, you will find that this is not a group of “dumbs” – the investors include the top venture capital firm Andreessen Horowitz (companies or individuals can invest).

THE DAO NETWORK | At its headquarters near Vancouver, British Columbia, Jess Sloss, the “sponsor” of the Seed Club, organizes training camps for aspiring DAO creators. They give 3% of their DAO tokens to the Seed Club as tuition.

While fans may have fantasized about uniting to buy their home team for decades, the Krause House DAO offers a legitimate group a more formal avenue to achieve this unlikely goal, combining former players and Superfans come together to launch a campaign to buy an NBA team.

This growing legitimacy is largely due to Wright, the 41-year-old founder of Tribute Labs and a law professor, who has been obsessed with DAOs since the beginning. After graduating from Cardozo Law School in 2005, he traveled back and forth between entrepreneurship, co-founding sports forum site Armchair GM (which was sold to Wikipedia’s for-profit arm in 2006 for $2 million) and New York corporate law. Go, and even represented Jay-Z in an intellectual property dispute.

In 2014, seeking more intellectual freedom and more time, Wright began teaching law at his alma mater, combining his two careers, building a legal clinic for tech companies, and elaborating on cryptocurrencies and blockchain chain. In 2015, he advised the co-founders of ethereum on their first “crowdfunding” — they sold ether for 30 cents, which is now trading at around $2,500. – Later he came up with the idea of ​​The DAO. Wright said he did not invest in The DAO because “it’s not 100% sure what you’re buying, what the structure is going to be like, and whether it’s feasible.” The tokens were securities that were supposed to be registered, confirming his previous concerns.

In 2017, Wright co-founded Tribute Labs with Swiss software engineer David Roon to advise companies on how to embed legal contracts in blockchains, and hired Priyanka Desai, a recent graduate of Cardozo Law School, as COO. Essentially, he’s the guy who sells the pans during the gold rush, but he can’t help but get involved – he’s one of the key people behind the Flamingo DAO.

While the DAO for the Tribute service accepts Ethereum as a fundraiser and runs on the blockchain, with certain key safeguards written into its code, they are organized as a Delaware LLC that invests in Investors hold the company through equity rather than crypto tokens . To further avoid SEC regulatory and reporting requirements, they are only open to accredited investors – investment funds and individuals with income greater than $200,000 or net investable assets greater than $1 million. No investor can own more than 9% of the shares, and Wright limits his stake in each DAO to 1%.

The Tribute DAO’s charter requires only the consent of a majority of those voting on any transaction (rather than a majority of all members) to approve a purchase, and provides a mechanism for disgruntled members to take their money and exit – Or it’s called “rage out” in the DAO world. Despite the various interactions within the organization, members may choose to remain anonymous to each other . Tribute Labs has 12 attorneys, engineers and financial staff working remotely, vetting all participants to meet federal know-your-client requirements and filing annual K-1 tax reports required by the IRS. The Flamingo DAO has participants from New York, California, Puerto Rico (a tax haven for cryptocurrency investors) and Australia.

Wright pointed out that the US legal system is more suitable for DAOs than the European legal system , because in the US you can create a member-managed company that does not appoint a single manager or CEO. He helped create new laws in Wyoming that would allow LLCs to form DAOs, but said Delaware’s laws are just as flexible.

Other DAOs powered by the Tribute developed almost naturally. Last October, the Neon DAO raised $20 million in just 45 minutes to invest in the metaverse and has already purchased undeveloped virtual land. Two months later, Noise DAO, which focuses on music NFTs, raised $7 million internally in just 30 minutes. Red DAO raised $12 million in September to focus on Crypto fashion (an NFT that represents ownership of a piece of clothing both in the physical world and in the metaverse). One member is already advising fashion brands on NFT strategy — not uncommon, as DAO members typically see themselves as participants rather than just passive investors. For example, Flamingo commissioned NFTs from unknown artists who gained some degree of Crypto fame through the credibility Flamingo delivered.

How big can an investment DAO be? The global money management industry currently has more than $100 trillion in assets, and Ian Lee, co-founder of Syndicate, predicts that within 10 years DAOs will hold 2% of this $100 trillion , and increasingly enter assets like stocks and A large pool of funds such as real estate. A former venture capitalist and head of cryptocurrency at Citigroup, Lee’s Syndicate has a number of high-profile backers, including venture capital firm Andreessen Horowitz (a16z), cryptocurrency exchange Coinbase Ventures, rapper Snoop Dogg, actor Ashton Kutcher and Reddit co-founder Alexis Ohanian.

This ecosystem is maturing rapidly. Located in a house 90 minutes from Vancouver, British Columbia, 39-year-old Jess Sloss is the leader (or “initiator” as he calls it) of Seed Club, whose goal is to become a DAO Y Combinator in the field, held an 8-week startup bootcamp for the 15 entrepreneurs who won admission. Advise them on topics such as marketing and how to issue tokens.

Sloss first moved into Crypto marketing and then worked for crypto startups. In the process, he joined those frustrated with the power of the big dot-coms. “The value we create for these networks is enormous, and we have minimal, if not zero, voice or ownership in these networks, so should we just put up with these feudal overlords and work for them,” Sloss said. Are you alive?”

Feudal overlord? Sloss isn’t as deviant as he says it is. Last year, he raised $2 million from dozens of angel investors, including Tribute DAO; Union Square Ventures partner Nick Grossman is also a backer. Furthermore, Seed Club is just one of many DAOs determined to ensure that creators and those who come up with ideas – and investors – maintain a fair share of wealth. Frank Rotman, a 50-year-old managing partner of fintech venture capital firm QED who recently started working on DAOs, says DAOs “help to shape a ethos and zeitgeist that will influence the next generation.”

In Silicon Valley, Syndicate hopes to quickly scale the DAO model, offering a service that allows up to 99 investors to instantly turn an Ethereum wallet into a DAO — a platform that votes and tracks their holdings on the blockchain “Web 3 Investment Club.” The basic setup plan is no more than $300; ​​the service launched in late January, and in less than a week, 200 DAOs had signed up.

Traps abound. The crooks continue their plague-like tactics. If assets do balloon into the trillions, it will be hard to see the SEC comply with the rules designed for the financial sector. Since the tokens can be bought and sold, not just used to vote, and then burned (burned) when investors exit, regulators already consider them securities. And a decentralized exchange Uniswap already exists. “This is really massive civil disobedience,” Rotman muses.

Finally, actual performance matters . If the wisdom of the crowd were more imitating mem-stock-buying fools than enlightened Aristotle, DAOs would have a short shelf life. After their best-selling book drew scrutiny, those Beardstown ladies turned out to be underperforming investments and hardly the Buffett of the basement. Having said that, the faceless guys at Flamingo DAO are doing far better than CryptoPunk NFTs – their forward-looking investment behavior has helped them turn $10 million into nearly $1 billion in 15 months. A 1% stake in Flamingo DAO, which initially cost only $23,000, is now worth 3,000 ETH, or about $8 million. They consider what their knowledge and impact can contribute to the organization when screening new members — similar to how a blue-chip VC firm or a hedge fund finds a partner, except that there is no crazy fee structure.

 

By Jeff Kauflin and Isabel Contreras, authors of Forbes

Compilation: Dave Lin

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