When to use a DAO

Like the early internet, blockchain is a coordination technology that shifts what is fundamentally possible. Not unlike the dot-com boom, a DAO fever raged in 2021 as DAOs aspired to do everything from buying a basketball team to starting a TV show. People were throwing DAOs at everything and seeing what stuck. Through trial and error, we learned DAOs are great at some things and struggle at other things. Much like how a surgeon chooses the right instrument for the operation, we will discover when a DAO is the right tool for the job. When it comes to fundraising, harnessing collective intelligence, building engaged communities, and preventing tyranny, they give us a shiny new toolkit. We'll also investigate when not to use a DAO, for example when they can't compete against more agile startups.

Collective ownership

Between 2007 to 2013, the rap collective Wu-Tang Clan recorded an album in secret that would become the most expensive work of music ever sold. The catch? Only one copy of the album, Once Upon a Time in Shaolin, was ever fabricated, and it was locked away in a vault at the Royal Mansour Hotel in Morocco. The group auctioned it off and infamous pharmaceuticals executive Martin Shkrelli won the auction, only to be forced to part with it after he was charged with fraud. The album was auctioned off a second time, and this time was purchased for $4 million by the art collectors at PleasrDAO. Today, PleasrDAO members are the only people in the world who can listen to the album. PleasrDAO is just one example of a DAO that pools money to collectively own assets like art and rare collectibles. Today, DAOs are buying all kinds of assets together. CityDAO (which was founded by your author) owns 40 acres of land in Wyoming, and DAO members decide what gets built on the land by voting. Krause Hause is aspiring to buy an NBA basketball team, and they already got started by purchasing a smaller team that plays in the BIG3 league. LinksDAO brought together golf-enthusiasts with a mission to buy a golf course that will be owned and governed by its members.

Collective ownership is one of the most promising uses for DAOs. Like hundreds of tiny Lilliputians assembling to reach the height of a giant, DAOs can empower everyday people to pool capital and buy things that previously only a wealthy person could afford. In the chapters that follow, we will discover why DAOs may prove to be the best way to collectively buy and own assess, and explore why they are uniquely able to inspire large communities towards audacious goals, coordinate large sums of money, and redistribute power from the top out to the edges.

Funding Projects

Each day, NounsDAO auctions off a digital pixel-art character called a Noun to the highest bidder. Owning a Noun has become a status symbol of sorts, conferring admission into the exclusive Nouns DAO. Through these auctions, the DAO has amassed one of the largest treasuries of any decentralized organization - over $200m in cryptocurrency as of this writing. The Nounders (Nouns founders, get it?) seeded the project with a simple, yet effective mission: "This treasury exists for Nouns DAO participants to allocate resources for the long-term growth and prosperity of the Nouns project." The DAO gets a steady stream of proposals that suggest how to allocate the DAO's treasury, and anyone who has a Noun gets a vote. When two anonymous entrepreneurs wanted to bring Nouns-themed sunglasses to market, they asked the DAO for a small grant to create a prototype by writing a proposal outlining the budget, timeline, and scope of work. After creating a successful prototype, they made a bigger ask, around $200k, to bring the shades to market. The proposal passed, and the project was a win-win for the DAO and the entrepreneurs, amassing over $500k in sales and creating a viral trend on Twitter that brought attention to the DAO.

Giving grants and making investments can be a great use case for DAOs. SeedClub and MetaCartel fund emerging crypto projects, VitaDAO gives grants to longevity research projects, and UkraineDAO has raised over $8m to support the Ukrainian defense effort. DAOs can also bring accountability to the grant-giving and funding process, since the collaborative nature of DAOs and the transparency of blockchains means that DAOs can be a more trustworthy way to allocate capital. Lastly, they give donors a chance to be involved with how their money is used, since they can vote in what projects get funded instead of blindly contributing to a charity and trusting administrators to allocate funding wisely. In this way, DAOs are a decentralized substrate that harness collective intelligence to decide which projects and grants rise to the top and get funded.

Preventing tyranny

After the 2008 financial crisis, Danish entrepreneur Rune Christensen was furious that the very authorities tasked with protecting consumers from financial exploitation were using taxpayer dollars to bail out big banks, letting their executives walk away unscathed (in some cases, even enriched from lavish exit packages) from the financial collapse they caused. He turned to Bitcoin, the cryptocurrency released by Satoshi Nakamoto shortly after the crisis. Christensen saw the potential for cryptocurrency to prevent the next crisis, but thought there was one problem preventing Bitcoin from reaching mass adoption: volatility. Wild price fluctuations made most tokens unreliable as a means of exchange or store of value. Put a dollar in Bitcoin today, you might have $10 tomorrow, or you might also have $0. In a Reddit post, he proposed his solution with the creation of DAI, a stablecoin that mirrored the value of the US Dollar. It was a bold bet, an algorithmic Federal Reserve that would bring legitimacy to crypto and democratize the stability of the dollar across the world to places like Argentina where inflation ran rampant.

Christensen realized if one person or company controlled DAI, it would just be a recreation of the same fragile system, susceptible to the whims of an authoritarian hand, no matter how benevolent. That's why he turned to DAOs, decentralizing control of DAI into MakerDAO, a decentralized guardian for the new stablecoin that prevented top-down tampering like money printing. A diverse coalition of parties would have a say in how DAI works, protecting it from a unilateral decisions that could threaten the stability of the system.

MakerDAO exhibits one of the best use cases of DAOs: safeguarding valuable systems by ensuring a wide group of people has a seat at the table. Instead of relying on a benevolent dictator to not tamper with something, a DAO can make sure many voices have a say in how something works and prevent big changes from being made without community consent. One reason for the success of projects like MakerDAO, along with blockchains like Bitcoin and Ethereum, is that the lack of centralized decision makers creates a high degree of trust in the system. Knowing that it's mathematically impossible to create more Bitcoin from thin air or change how much DAI is in circulation without a large majority vote means that the system is free from tyranny and in the hands of the people.

Exit to Community

If you used the Uniswap protocol to swap tokens before September 1st, 2020, you woke up to thousands of dollars in free money when the protocol airdropped millions of tokens to its users. It sounds too good to be true...why would the protocol hand out money? In 2020, a wave of financial protocols like Uniswap aspired to decentralize the valuable pieces of internet infrastructure they had built and started airdropping its users governance tokens. The airdrop helped shift the balance of power from the founders and institutional investors towards its users. Decentralizing the protocol gave users a voice in key decisions like which assets to list on the platform and what projects and improvements to fund. It also made the protocol more resilient and censorship resistant since decisions could be made by people other than just the founding team.

The approach of building a protocol and decentralizing it to a community rewards users and gives them a say in the services they use everyday. It turns users into owners. There are also financial motivations at play since these airdrops coincide with IPO-like exit events where the protocol's founders, early developers, and investors finally have a market to trade their once-illiquid tokens. There are regulatory risks to this approach, since there's a chance these tokens are considered securities by the SEC. With significant decentralization, however, protocols reduce the need for a core team and transition from being a product to being self-executing infrastructure. Popular protocols that have exited to community include Uniswap, Compound, Ethereum Name Service, Gitcoin, Optimism, dydx, and countless more. Importantly, these airdrops don't necessarily made these protocols DAOs overnight, but they bring users into fold and make these protocols closer to being community owned.

Collective Intelligence

Uber's arrival in Taiwan in 2013 was fraught with the tension. On one side, consumer enjoyed cheaper, easy-to-hail rides. On the other, taxi drivers and activists saw Uber taking jobs while skirting regulations, avoiding registration fees by claiming to be a technology company, not a transportation service. Government officials embraced a bold idea to give both sides a voice: they would use a platform called Polis to crowdsource ideas, get input, and identify areas of agreement. Popular with DAOs, Polis asks voters if they Agree or Disagree with short, snappy phrases and lets anyone add their own ideas to the mix. In a demonstration of how collective intelligence can create healthy outcomes, controversial statements like "Uber should be banned" were unpopular while more nuanced statements like "the government should set up a fair regulatory regime on transport instead of protecting certain groups with vested interests" saw widespread agreement. Both sides were asked to make some concessions, and the common-sense recommendations that received near unanimous approval informed the regulations that Taiwanese government ultimately implemented. Like how collective intelligence brought out the best ideas in Taipei, DAOs allow us to harness the wisdom of the crowd and source ideas from diverse viewpoints.

Many DAOs use Polis and similar methods to align on values, goals, and projects. Instead of a top-down agenda, ambitious contributors are empowered to run with an idea and take it to the voters for funding. But just because good ideas surface does not mean they will get implemented. A common challenge is activating and engaging DAO contributors towards a goal, especially since DAOs don't have bosses holding people accountable for outcomes. DAOs are institutions brimming with knowledgeable contributors, many of whom contribute because they are aligned with the mission and could not even afford to be paid at their billable rate. Finding the right way to engage these contributors is key, and while it often starts in low commitment settings like Discord or Polis brainstorms, an effective core team can help nurture ideas towards outcomes. This could take many forms, for example helping new members understand the proposal process, creating clear documentation and knowledge bases, and introducing likeminded contributors who could form a team and co-author a proposal together. Ultimately it's not enough to just crowdsource good ideas, as someone needs to have clear ownership for bringing the idea to light.

In many cases, entire DAOs serve as pools of collective intelligence. For example, Service DAOs provide consulting, advice, or development work to clients. They are shaking up the agency model, replacing top-down management with a more fluid and transparent system where talented people can choose which projects to work on and get more of the upside. For example, LexDAO is a DAO for legal professionals working at the bleeding edge of regulatory regimes for DAOs, crypto, and real world assets. DeveloperDAO is a place for developers to meet each other, work on projects, and fund projects. VectorDAO offers design services to clients in exchange for equity in the projects they work on. These DAOs attract top talent in their respective industries and create a density of expertise, all without the strings of a traditional employer.

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