gm and welcome to State of the DAOs!

We are still in the early days of understanding DAOs as a business model and need to keep experimenting to determine the best way to organize and govern ourselves.

One of the biggest challenges has been finding a business model that works. DAOs have had to grow up from their early days as a chat group with a shared bank account. This model might have worked during the bull market, but we have witnessed how poor treasury management and a lack of a coherent business model can bring a DAO to its knees during the bear.

This week, Azeem explores one possible model that might allow DAOs to thrive: a fusion of a startup and a hedge fund. Like startups, DAOs are well equipped to act on a specific mission or product and they need capital to get started. Hedge funds understand how to raise capital and generate returns for holders for the long term. By effectively managing the DAO treasury, they would allow the DAO to do what it does best: collectively act towards a shared goal.

A hybrid model that combines smart capital with the build-fast culture of startups might just be the solution we need.

Contributors: BanklessDAO Writers Guild (Azeem Khan, Warrior, kenichi, Teafeh, BOBOtoTHEmoon, HiroKennelly, siddhearta)

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DAOs As Self-funded Startups

Author: Azeem Khan

After spending the last year working in DAOs, I’ve come to a conclusion I’ve yet to see anyone publicly discuss, despite many agreeing in private: most successful DAOs combine the smart capital deployment and management associated with hedge funds with the build-fast culture of startups.

It’s not that people are afraid to say it; it’s that they are just starting to see that it’s true. Traditionally, hedge funds and startups have been two very separate entities — hedge funds may even capitalize startups. But in the world of DAOs, where capital and creation are largely intertwined, it’s as if they’re two important divisions of the same organization. The problem is that few, if any, DAOs have been successfully run that way. Looking to the future, I believe the most successful DAOs will be run using this model. Bull markets don’t last and diversifying assets under management in a way such that it creates more runway for projects will be an integral step to allowing DAOs to mature in a crypto native way.

DAOs As Chat Groups With Shared Bank Accounts

The early iterations of many DAOs were built around this idea of having a group chat with a shared bank account. Communities cohered in Discord servers and then started spinning up ways to monetize their work to create a treasury. Some of these communities decided they would launch a native token. Maybe those tokens were airdropped to original community members, or perhaps they were put on the open market for people to purchase. Other communities did an NFT sale, and the token was then used to gate a Discord server. Token gating wasn’t always a requirement to join the community, but was one method used by many groups to create a sense of status — or community, depending on who you talk to — that drove the price up, making people want it even more. While different in a sense, both native tokens and NFTs enabled the DAO to accumulate a certain amount of shared funds that could be used by the community.

Whether native tokens or NFTs, the tokenization of the community enabled some DAOs to have treasuries valued at over a billion dollars, which is a shocking amount of money for a group chat, no matter how you want to spin it.

The Rise of NFT Communities

The early iterations of these internet-native organizations as chat groups led to DAOs that were formed to sell NFTs, often a 10,000 PFP collection. Besides keeping some of the NFTs in the community treasury, many of these DAOs also set up their smart contracts so that they would receive royalties each time an NFT was bought or sold, whether the price was going up or down. Royalties accumulated quite quickly for some of these DAOs, leading to well capitalized organizations with sustained revenue. Moonbirds is a great example of this new kind of project that combines fundraising with community building.

Why is this important? Unless the intent of the DAO was to collect and grow a large treasury and manage it appropriately, most of these successful DAOs were in a very interesting position. In a matter of no time, they were sitting on eight- and nine-digit treasuries, but there was often not a single person with decision-making power who knew what to  do with all that money.

DAOs Need a Business Model

Traditionally, if you’re a group or organization that decides they want to raise a very large sum of capital, you’ll likely have extensive plans for what you’ll do with the capital. This is fundraising 101. That wasn’t the case with these DAOs though. They sold the idea of a startup, community, or animal jpegs to people, and often made small fortunes in the process.

You might be wondering why is that a bad thing? Well, it’s not bad when you’re in the middle of a bull run and everyone thinks the price of your NFTs or native tokens will continue soaring forever. But that’s not how reality works. The euphoria always ends.

In the last couple of years, people were living in the middle of that euphoric period. A lot of these organizations weren’t set up in a way to maximize on the windfall, nor did they have any business model to guide financial decisions. If they had a coherent business model, then a bear market, like the one we are in now, wouldn’t matter as much - they could survive the drop in euphoria. These DAOs would be so well funded and capitalized they would be able to execute their mission knowing money was in the bank. Instead, many DAOs have had their treasuries decimated. This isn’t to say all DAOs are failing. DeFi DAOs like Uniswap, ENS, Gnosis, Lido, Frax, Aave, and some others are sitting on treasuries worth as much as or even many times more than Jay Z’s net worth.

DAOs As Startups

This is where DAOs tie back to being like a startup. A group of people get together around a shared mission, think of an idea, create something to sell, go out and sell it, receive money in the process, and then have a treasury.

The key differentiator is startups are holding a stable currency, like dollars. Maybe they went out and raised $30 million, but once that money was in the bank, it’s going to more or less have the same value a year from now, minus expenses. Where they need to focus is on making sure their burn rate works out in a way that makes sense. When startups are sitting on cash, they don’t ever have to worry that their pile of ETH or tokens may go down in price by 40% in a week, or that their stablecoins will collapse to zero, as we saw with UST last year. How can you run a company over the course of years if you don’t know how much money you will have next week? Imagine when Truepill raised $142 million in 2021, they woke up a month later to see that value had shot down to $60 million. In most instances that would lead to the failure of a company. Why would it be different for a DAO?

That’s the situation so many DAOs found themselves in this past year. They had treasuries that would have lasted forever, it seemed, but are now making cuts across the board. Could this have been prevented? Maybe not entirely, though I do believe had these DAOs onboarded more traditionally finance-minded people who understood web3, things could have played out very differently.

DAOs As Hedge Funds

If the treasury and the product/community of these DAOs were broken up into two separate divisions, run by entirely different people with different, relevant skills, the outcome might have been very different.

In hedge funds, the strategy is to raise large amounts of capital, and then work to increase that money over time. Essentially, they actively manage pools of capital with a variety of strategies. Sometimes those things are risk averse but often it’s more creative. They do things like buying assets with borrowed money or trading derivatives in an attempt to beat the market average. With the finance side in place, the product team could have continued executing the roadmap laid out for their communities. It would have been the best of both worlds, capital and community.

There were so many amazing opportunities DAOs missed out on in this last bull run. Massive treasuries have dwindled to almost nothing, with prices down across the board for all native DAO tokens. Liquidity is running low too, so trying to sell large amounts of those tokens wouldn’t even work, meaning those treasury numbers are misleading because any large sale would crash the token price. Then there are the NFT projects whose sales are down, their floor prices are lower, the price of ETH is a fraction of its all-time high, and on top of that, there’s a global recession that may drive things down even more. Wow.

Imagine if there had been people at these DAOs with a clear strategy rather than just staring at the numbers, wondering what to do with all that ETH. What if they worked on doing things like treasury diversification to make sure they were holding assets other than their native token or ether. Maybe they would have transferred some of those holdings into stablecoins to have a runway based on their burn rates. And treasury management doesn’t have to involve token swaps - managing buy and sell pressure on a token would have been possible with enough planning.

I know that there were companies out there trying to do this. It’s just that most of them were extremely unsuccessful, as they were too caught up in the euphoria themselves. Other times the organizations didn’t even think to manage their treasury at all, which leads us to where we are now.

One of the more exciting ideas could have been going down the mergers and acquisitions route. What if major voting rights to DAOs started to get bought in strategic ways? Even the notion that tokens and NFTs aren’t tied to equity, but you’re not precluded from raising strategic capital later on, is an amazing concept. Waiting until you’ve found product market fit would enable you to later sell equity in your company to strategic partners — like a gaming company deciding later on to only take money from Epic Games and Sony. It’s a fascinating thought experiment to say the least. The possibilities were endless, and that’s why in the future the smartest and most well-run DAOs will all be building on these business models.

Professionalizing Capital to Help Community

In hindsight, this all makes sense, but it was hard not to be caught in the moment during the bull run. The fervor caused a mania I suspect won’t happen again though.

In the future, the divisions of the DAOs will be separated as they are now in any other industry. Finance professionals from the traditional world interested in web3 will emerge with ideas on how to confidently maintain or grow treasuries to allow DAOs more runway. The tech teams building products to ship to the masses will be working on their own, removed from treasury worries. But all these teams will be working synchronously towards the same end, which will result in a never-before-seen fusion of startups and hedge funds happening within the same organization.

This future will truly shake things up.

Actions steps

📖 Read Why Decentralization Matters | Chris Dixon

⛏️ Dig into Crypto’s Business Model is Familiar. What Isn’t is Who Benefits | Jesse Walden

🧭 Explore The Best DeFi Business Models | Ben Giove

Ecosystem Takes

🔥 and 🧊 insights from across the DAO ecosystem

DAOs are not corporations: where decentralization in autonomous organizations matters

Author: Vitalik Buterin

🔑 Insights: DAOs have often been criticized for being inefficient and that they won’t compete with traditional corporations until they can optimize decision making. In this article, Vitalik argues against the ideal by posing three significant areas where the impact of decentralization is essential.

• Decentralization for making better decisions in concave environments: When making convex judgements, decentralizing the process can quickly result in confusion and poor compromises while relying on the wisdom of the crowds can produce greater results when judgements are concave. DAO-like systems with a lot of different input contributing to decision-making can be very sensible. In fact, those who perceive the world as being more concave in general are more inclined to see the necessity for decentralization in a wider range of situations.

• Decentralization and censorship resistance: A DAO or protocol must be able to function and defend itself despite external attack, including from huge corporate entities, as censorship resistance is the most commonly stated rationale for decentralization in crypto.

• Decentralization as credible fairness: DAOs have more to learn from the design of sovereigns (political science), not the design of corporate governance, because they do not have a sovereign above them and frequently explicitly engage in the business of providing services that are typically reserved for sovereigns. Predictability, robustness, and neutrality are valued over efficiency in scenarios where DAOs are performing nation-state-like tasks like providing fundamental infrastructure.

DAOs could revolutionize how startups are run

Author: Josh Drake

🔑 Insights: This article walks us through how crucial decentralized decision-making is in the web3 ecosystems. DAOs can revolutionize how startups run as their structures and values complement that of startups.

• Sole decision-makers can slow down critical decisions or cause a deviation from the company’s goal. There should be an encouragement of decentralized decision making as people get to participate irrespective of financial status, beliefs or ethnicity.

• DAO members are empowered to express concerns about how the DAO should run in terms of treasuries, governance, and operations.

• Individuals can access previously reserved opportunities and get incentivized to work together when they utilize decentralized networks as a part of a DAO structure.

More than semantics: “crypto” vs. “web3” is about what will be decentralized

Author: Jesse Walden

🔑 Insights: People often use crypto and web3 interchangeably, but the words we use matter.

• Web3 is a more inclusive and expansive term that expands on the foundations of crypto.

• Crypto is typically used to refer to distributed assets and protocols.

• Web3 focuses on advocating for the decentralization of consumer products.

• The future imagined by web3 is one of progressive decentralization, but this doesn't mean that all platforms supporting access to new ownership experiences will be owned like co-ops by their users.

Future of Venture Capital: Understanding the Rise of DAOs and their Implications

Author: Shubham Pandey

🔑 Insights: The article discusses the impact of the emergence of DAOs on traditional Venture Capital (VCs). DAOs could improve the current VC model by increasing diversity of funded ideas, decentralize decision making, and improve access to public capital.

• With the annual returns of VCs steadily growing, there has been an increase in numbers, especially in Asia. Also, in 2021, there was a 108% increase from the year before, with the growth of dollar volume invested around the world has risen to 92% YoY in the last ten years.

• In contrast to the VC centralized economy decision-making process, DAO VCs are based on communal decision-making and governance. It functions as a self-sufficient venture network for both startups and end customers. They are an innovative platform that enables retail investors to access the cryptocurrency market and gives start-ups access to a vast pool of investors.

• In recent years, the use of DAOs and the adoption of hybrid financing models is bridging the gap between VCs and DAOs, bringing more funding and participants into the crypto space. Despite DAOs' potential to replace VCs, they present a new way to diversify the crypto space and allow more significant participation by retail investors.

DAO Spotlight: PoolTogether

Author: Warrior

PoolTogether DAO is a protocol grant funded by MakerDAO. Since its launch in July 2019, PoolTogether DAO has been promoting financial health by encouraging prize savings. With over 12,000 members, each member can earn prizes by simply depositing funds in the protocol.

PoolTogether is built on the concept of “prize-linked savings account” and “no loss lottery” where you have the chance to earn prizes for depositing funds. It is a no loss lottery because if you don’t win a prize, you still have your deposit.

The prizes earned are funded by the accumulated interest from the funds deposited in each pool. Your chances of winning are directly proportional to the amount you deposit, so the higher the amount you deposit, the higher your chance of winning. As long as your funds stay in the pool, you can win. Members can withdraw deposited funds anytime.

There is an emphasis on maintaining security, simplicity, and speed of execution. Maker funded the first ever professional third-party security audit and there have been at least two more security audits since then.

PoolTogether DAO uses a token named POOL. It is solely used in governance of the protocol. The POOL token holders can make and vote on proposals regarding changes in the protocol. The total token supply is 10,000,000 POOL with the token being freely distributed to members.

PoolTogether DAO aims to help millions of people achieve financial security using the decentralized and open-source protocol. However, there are risks associated with its usage. The users are solely responsible for their deposit’s safety while interacting with the protocol.

The PoolTogether protocol was upgraded from V2 to V3. The new release comes with additional features such as:

• Larger prizes

• Deposit rewards for everyone in the pool

• Referral rewards for helping the pool grow

• New asset types, yield sources, and prize distributions for pools

• Instant eligibility for prizes

• Provable randomness with ChainLink VRF

• No admin keys for prize pools

The V2 pool is no longer accepting new funds, only withdrawals can be made.

To learn more about PoolTogether DAO, visit their website and follow them on Twitter.