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If you were asked to define what a company is, where would you start?
A classic dictionary definition doesn't deliver much utility beyond the obvious: "an association of persons for carrying on a commercial or industrial enterprise."
In layman's terms, you might just say a group of people with a shared bank account operating toward a shared goal. And in a way, DAOs, or decentralized autonomous organizations, are exactly that as crypto's new go-to corporate structure.
DAOs (pronounced "dow" as in Dow Jones) can be set up for almost any purpose. Perhaps my favorite DAO to date — ConstitutionDAO — was set up in November last year with the sole purpose of raising money to bid on one of the last privately held copies of the U.S. Constitution. What started as a joke amongst friends quickly grew to raise a war chest of $47 million in a mere matter of days. When the group was outbid at the Sotheby's auction, contributors (such as myself) were able to get their contributions back or convert into the project's native governance token.
In fact, many DAOs operate as just that — basically a tokenized, shared bank account where contributors are entitled to a split of the pot. What a DAO does with its pot is usually up to what members vote to do with it. That can be as simple as "Hey, let's buy the Constitution" to "Let's solve global warming."
Another popular DAO, RED DAO, has been scooping up digitally wearable fashion items (think digitally imposed clothes you might see on Instagram or Snap filters.) RED DAO even famously bought a digital Dolce & Gabbana crown for nearly $1.3 million last year. RED DAO member Megan Kaspar was recently featured on the cover of Haute Living magazine wearing only digitally imposed dresses and has tried to convince me multiple times that digital fashion will eventually become the norm (Our interview together on Yahoo Finance was the first to display wearable NFTs on live TV.)
The upside for DAO members is three-fold. On one hand, DAOs are buzzy. Simply bidding on an item can make it appear worth even more. Noteworthy DAOs can legitimize unproven artists or pieces. Second, DAOs unlock access for expensive things. For example, I, myself, would never be able to pay $45 million for a copy of the Constitution, but tokenizing ownership over it suddenly enables even jabronis like me to chip in $250 to say they participated in buying it. And lastly, when a DAO elects to sell something it purchased, theoretically those funds would go back to the communal account, enriching every contributor.
Now, you could be saying this sounds cool — but are DAOs regulated at all? And the answer is basically not really. The SEC is admittedly overwhelmed and only appears to be targeting certain projects they deem worthy of pursuing. However, that doesn't mean there isn't a good chance many DAOs are actively violating U.S. securities law.
To be fair, I am not a lawyer. However, I've been speaking with lawyers who specialize in securities laws and DAOs as I work on my own DAO project and it's safe to say the law is pretty clear that any time you attach an expected return or a share of upside profits to anything someone is paying you for, it's probably a security. That said, there are a few loopholes (crypto does love a good loophole.)
Why most DAOs seem to be escaping securities backlash (for now) appears to be because most are, by definition, decentralized. By which I mean there isn't a centralized management team that you're expecting to put in the effort that would make the price of your share go up in value. In many cases, it's just a group of people who vote on decisions and there isn't really any central effort. In other cases, buying into the DAO enables you to participate in decisions, but doesn't entitle you to any future profits (a la ConstitutionDAO.)
Each DAO can make up its own rules, which kind of makes policing them a bit of a game of whack-a-mole for regulators.
There are a lot of obvious upsides to DAOs. To be able to quickly raise millions of dollars is a dream for any common goal. As people continue to realize that, more and more DAO creators are also putting an emphasis on being legally compliant as well. Two states, Wyoming and Colorado, have been at the forefront of helping DAOs legally come into the fold. That's probably a good thing for both sides — no DAO member wants to be held legally liable in a case of catastrophe, and states could be bringing in hella tax dollars.
So, if DAOs could eventually boast the speed they have now with the legal protections of tomorrow, what might that unlock? Well, why not owning a major sports franchise like the Denver Broncos?
The team is currently up for sale and will likely fetch something close to $4 billion. When I saw the team would be put up for sale last year, I jokingly asked which DAO might step up to make a bid. Now, a DAO called BuyTheBroncos is putting together the pieces to make it happen.
But to attract anything close to the $4 billion the BuyTheBroncos team might need, it's clear they can't just structure things as loosely as any other DAO. There's got to be some legal understanding and structure to it if you want to attract the big bucks. To do that, the team is looking to structure its DAO akin to a cooperative — a structure that has existed for centuries (think sporting goods store REI) which allows for legal community ownership.
If they can check some of those boxes, it's plausible they could get to $4 billion. BitDAO, which includes the likes of billionaire Peter Thiel, boasts more than $2 billion in its treasury. It'll be difficult, but speaking as someone who is also currently trying to crack the legal DAO code, it would be exciting to see it pulled off on such a massive scale.
The more pressing question I get asked is "should I join a DAO?" My answer is: probably. Mostly because they are fun, a great way to feel like you are a part of something, and could potentially be profitable.
For example, when I threw $250 into ConstitutionDAO last winter there were no illusions of grandeur. The DAO didn't even really promise a literal share of ownership in the Constitution. All the group promised was a say in where it might get put on display along with other similar governance votes.
When the auction came about, I tuned into the Sotheby's livestream. Outside of maybe an eBay auction for a moped as a kid or a charity date auction back in college, I've never felt so alive watching one. With basically nothing at stake, me and thousands of other strangers in a chat room waited to see if we won.
When we lost, the group behind ConstitutionDAO let contributors choose if they wanted to get their money back (minus fees) or if they wanted to redeem their contributions for their share of governance tokens (like digital ballots in the case of this DAO.) Well, lo and behold those digital ballots had surged 10X in price because by that point so many people were talking about ConstitutionDAO and how they were able to raise $45 million in a matter of days. What might they do next?
Was that pure speculation? Absolutely. Did it let me turn my $250 into $2,500? Also, absolutely.
My point is, there is currently a lot of speculation in the DAO space. Some projects might raise funds and then never do anything. Others might underpromise and overdeliver big time. Just be smart with what you're expecting to get out of any bets and maybe make those bets in an area of actual interest. For example, one of my golf buddies (and Crypto Uncomplicated reader! Hello, James!) bought into LinksDao. The DAO wants to buy a golf course. Members of the DAO will get to become golf members at the physical golf course if the team running the DAO make good on their goal of buying an actual golf course somewhere.
Personally, I've become more interested in DAOs that offer real yield. For example, there are DAOs setting up validator nodes on crypto networks that bring in real profits and are redistributing some of that profit back to DAO members. For a refresher on how that's possible, you can check out my past entry on proof-of-stake networks.
I'll be sharing a deeper dive next week on one of the DAOs I just paid more than $2,000 to join. Lunacy? Genius? You'll have to be a paid subscriber to find out. You can sign up for just $4.99 a month here.