DAOrayaki: The Rise of the DAO Era
Original Author: Mark Stein
Original: The Rise of The DAO Era
"...it has been said that democracy is the worst form of government except those that have been tried so many times...."
--Winston Churchill
Always looking ahead to the next big thing, progress and enthusiasm are two things that cryptocurrency investors and supporters possess.
Sometimes, however, the "next big thing" comes from behind.
DAOs (Decentralized Autonomous Organizations) have been around as long as Ethereum.
However, while it is often associated with the DAO 2016 hack, discussions about its potential are resurging.
Recently, some DAOs have attracted the interest of more orthodox investors, such as the famous Mark Cuban, who described them as "the ultimate marriage of capitalism and progressivism".
As crypto enthusiasts around the world predicted that The DAO would be the “next big wave” of the cryptonetwork 3 movement, mainstream investors took notice and asked the question: “What is a DAO and how does it work? "
"You don't own"web3". VCs and their LPs will. It never escapes their motives. It is ultimately a centralized entity with a different label. Know what you're up against..."
— Jack Dorsey, former CEO of Twitter
Even in the web3 movement of cryptocurrencies, where traditional venture capitalists remain the main power brokers and asset holders, key questions arise.
If DAOs are really the highest and best form of merit-based ownership, active investment in human capital by active member owners should be paramount, no?
Just like we've seen in traditional finance, we have many examples of venture capitalists dominating the space.
Take, for example, Andreessen Horowitz, a thriving venture capital firm that oversees multimillion-dollar funding rounds for companies assisting in the development of DAOs and for individual DAOs.
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The DAO controversy
According to the Financial Times, 9% of accounts hold 80% of the $41 billion NFT market capitalization on the Ethereum blockchain.
Bloomberg further concluded, "The practice of 'whitelisting' keeps the bulk of the nonprofit's profits within a small circle of insiders."
BitInfoCharts details Bitcoin’s further centralization, showing that the top 2% of accounts own 95% of the $800 billion Bitcoin supply, while 0.1% of Bitcoin miners are responsible for half of all mining output.
The logical conclusion is that if Bitcoin were a country, it would have the greatest inequality in the world.
So the question is, "Is there a safer, smarter, better way?"
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What are DAOs? 9 Principles of DAOs
Decentralized Autonomous Organizations (DAOs) collectively owned and operated by members are an emerging type of blockchain organization.
Operating without hierarchical governance, DAOs can serve a variety of goals.
DAOs are organized around rules defined and enforced by the blockchain, operating through community governance.
With no centralized leadership, the DAO is a blockchain entity that operates through these bottom-up decisions.
Decisions are reached through individual proposals and the result is a collective vote within a set period of time.
The blockchain records these group voting decisions.
The operating structure and process of DAO are based on smart contracts to define organizational rules, while performing protocol operations and governance functions.
It's still the same method of using DAO money controls when it comes to determining how these organizations spend their funds.
Access to the built-in DAO treasury is only authorized by members.
Empowering a network of freelancers, the DAO combines revenue from fee-included contracts with these charitable nonprofits, enabling stakeholders to approve payments, as well as a venture capital business managed by the group.
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How do DAOs work?
DAOs use smart contracts, codes that execute automatically when a set of criteria are met.
While currently used on many blockchains, Ethereum was the first to use smart contracts.
While there are various options for participating in the DAO, one must hold DAO Company Tokens in order to participate as a DAO member owner.
The rules of the DAO establish the operation of these smart contracts.
DAO members with stakes can vote to influence business functions by introducing new governance concepts.
This structure protects the DAO from mass proposals that require member votes.
The smart contract specifies the actual method of determining the majority, as this varies from DAO to DAO.
DAO is built on an open source blockchain, fully self-sufficient and transparent.
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5 Benefits of DAOs
Allow more people with different skills to participate in early stage investment
Provide strategic funding for new projects
Diversified Finance
Consolidating Network Effects in Blockchain Protocols
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What does a DAO really offer?
The real promise of a DAO lies not in its specific activities, but in its unique structure of member control and ownership.
The Web 2.0 era connects the vast majority of people on the planet, but because companies exist as private networks that cannot have any impact on individuals, the Web 2.0 era is not enough.
Currently, most creators and entrepreneurs are providing rich audiences to these private platforms that neither invest nor take a stake in.
To make things even more troublesome, users leak private data to these businesses, which then sell that data to individuals for free.
As the structure of the new digital economy, token systems represent a solution to these problems.
DAOs issue tokens based on an investment in a platform or company—providing content and even relevant data, as examples of compensation for members’ participation.
What if every post you make on Instagram or Reddit involves you in a company's decision-making?
Perhaps more importantly, what if the platform continued to compensate you for your contributions after you left?
It's easy to see why the DAO system has piqued the interest of web creatives.
"Ownership" is a powerful concept for those who provide great value to Internet sites without getting much in return - and this includes not only professional artists, but any visitor browsing the Internet.
The decentralized search engine Presearch is a notable example.
However, adopting a fairer ownership structure does not always mean greater democratic control or a better end product.
Most DAOs still treat tokens like shares, so members with more tokens have more power.
In these early stages, we must always do justice to the downside of the unknown.
Regulations – whether legal, safety or taxation, are major considerations.
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Why DAOs Are Leading the Way
Since the DAO operates as an organizational structure, raises funds, manages tokenized assets, and allows for transparent governance.
Chris Dixon and Carra Wu of venture capital firm a16z said: "The DAO is likely to have a huge impact on the adoption of Web3 products."
Wyoming passed legislation earlier last year allowing DAOs to gain legal recognition as limited liability companies.
Wyoming-based CityDAO is a DAO structure company building "blockchain cities" in the real world.
CityDAO purchased 40 acres of land in remote Wyoming and intends to purchase more in the future.
Each parcel of land is considered an NFT and can be owned individually or collectively by the DAO.
As a governance mechanism alternative to a company's standard board structure, DAOs are being promoted as a new way for crypto companies to go public.
According to DeepDAO data, current DAO assets under management are $8.3 billion.
BitDAO claims to be the largest DAO in the world, and it was established to invest in DeFi.
Earlier last year, Peter Thiel, Dragonfly Capital, Pantera Capital and Founders Fund initiated a $230 million private placement transaction, and BitDAO treasury now holds more than $2.5 billion in crypto assets.
Additionally, PleasrDAO was formed early last year by a coalition of NFT collectors, DeFi leaders, and digital artists to purchase Pplpleasr’s Uniswap V3 NFTs.
With some high-value NFTs as collateral, the DAO secured more digital artwork and in July 2021 received a $3.5 million loan from CREAM Finance’s Iron Bank.
As people start to believe in the concept of digital public action, more DAOs will emerge around new and exciting use cases.
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History of DAOs
The DAO concept arose when blockchain developer Dan Larimer coined the term DAC (Decentralized Autonomous Company) back in a 2013 blog post.
His blog post describes the DAC as a profit-driven organization, where the code defines the constitution, that buys shares in the decentralized company to obtain its operating services.
A few months later, Vitalik Buterik coined the term DAO as we know it today in one of his reflections:
"If, with the power of modern information technology, we could codify the mission into code; that is, establish an inviolable contract that generates revenue, pays people to perform certain functions, and finds for itself the operating Hardware, all without the guidance of a top-down human?"
- Vitalik Buterin， 2013
Years later, in May 2016, one of the first DAOs was launched—the DAO, a crowdfunding venture capital fund.
The DAO raised 11.5 million ether, worth $150 million at the time.
The fund was hacked three months after its launch and lost $50 million, with previous hacker Phil Dalian first reporting details of the breach.
The DAO accounts for approximately 14% of the circulating ETH supply and is one of Ethereum's largest projects.
On July 20, 2016, the Ethereum community finally decided to save investors money by hard forking Ethereum and rolling back to the block before the hack.
The pre-fork version of Ethereum became the classic version of Ethereum, while the hard fork version is the current version of Ethereum.
On July 25, 2017, the U.S. Securities and Exchange Commission (SEC) issued a ruling that the tokens sold by the DAO were securities and therefore subject to federal securities laws.
Because the DAO and its investors violated securities laws, the DAO offering is subject to the same federal regulations as an initial public offering.
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Invest in DAOs
DAOs have grown to encompass different community and business needs.
Investing in DAOs, including venture DAOs, has become a way for the community to invest in early-stage projects.
Usually, the on-chain components manage the operation of the DAO in the form of smart contracts, and the off-chain components provide some legal liability protection for its members, that is, the legal structure of the DAO.
The investment process for a venture DAO is different from a typical venture fund, as each member of a DAO can act as a lead investor and submit investment proposals to the DAO.
Investment decisions are also based on DAO voting results rather than through investment committees.
According to the specific DAO smart contract, DAO members can "retire" or terminate participation in DAO at any point in time.
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Examples of Risk DAOs
1.MetaCartel Ventures
Founded by the MetaCartel community, MetaCartel Ventures is an early stage investor in decentralized applications (DApps).
Founded as a Delaware LLC, MetaCartel Ventures is the DAO's first venture capital firm in 2020.
Based on Moloch v2, members must be qualified investors or employees of MetaCartel Ventures.
MetaCartel Ventures is currently closed to new members.
2.LAO
LAO is a venture DAO created by OpenLaw.
It is structured as a Delaware LLC, using Moloch v2 for its on-chain smart contracts.
LAO members contributed more than 15,119 ETH.
New members must contribute at least 310 ETH to obtain a 1% share of LAO member units.
3.Flamingo DAO
Flamingo DAO is an investment DAO focusing on NFT, and it is also the first collective established by LAO in September 2020.
Flamingo DAO is a Delaware limited liability company that uses OpenLaw as a service provider for DAO management.
DAO uses Moloch v2 smart contracts, and members must be qualified investors under US law.
4.Stacker Ventures
Stacker Ventures, a Cayman entity established in May 2021, is a venture DAO that allows holders of STACK tokens to access different layers of the DAO.
Members can stake their STACK to get part of the DAO's income.
The DAO uses Aragon for their smart contracts and does not require certification as a non-US entity.
5.Angel DAO
Angel DAO is a British Virgin Islands (BVI) venture DAO run by a three-person team.
They invest in various blockchain projects, including blockchain protocols, DeFi applications, and DAOs.
The DAO uses Aragon and Gnosis Safe for on-chain logistics.
Consensys is majority-based, and any DAO member can make an investment proposal.
6.Honey DAO
Honey DAO is a profitable venture DAO with higher membership limits than MetaCartel Ventures, The LAO, and Flamingo DAO.
The initial 100 members each airdropped 100 shares. HoneyDAO recently cut inactive members and proposed to increase the number of members to 200.
7.Komorebi Collectiv
Komorebi Collective is a venture DAO investing in female-led blockchain projects.
The 37-member DAO is structured as an SPV LLC and uses Syndicate - a decentralized investment protocol that allows frictionless creation of investment DAOs.
They use Gnosis Safe for on-chain consensus and will migrate to Snapshot for off-chain voting.
A 4-member core team conducts due diligence on projects prior to DAO voting.
8.Delphi InfinNFT
Cryptocurrency investment and research firm Delphi Digital partnered with gmoney to create an NFT venture fund.
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DAO Jurisdiction
The choice of jurisdiction for a DAO's legal entity remains a key decision due to the potential for DAOs to be regulated
DAOs typically choose between U.S. or non-U.S. entities, with the nationality of their members, privacy, case law, and other variables all factoring into the decision-making process.
Non-U.S. member states can invest in U.S. or non-U.S. entities without the “pass-through” tax laws involved, but they may find that non-U.S. entities are more efficient vehicles.
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US DAO Jurisdiction
Similar to traditional venture capital fund structures, most investment DAOs currently use a U.S. legal entity, usually a Delaware LLC.
A Delaware LLC can provide DAO members with less liability for debts and financial claims against the DAO.
When creating the first "post-The DAO" investment DAO (the LAO), a Delaware LLC was determined to be the best choice and was recommended by OpenLaw, a legal on-chain protocol, which makes it Become an early leading benchmark.
The Wyoming DAO Act passed on July 1, 2021, which allows LLC structures to operate similar to Delaware LLCs with liability protections for DAO members.
As is the case with specific LLC or corporate disclosures, Wyoming law requires DAO LLC registration to display "DAO," "LAO," or "DAO LLC" (rather than the typical "LLC") in its name, and Wyoming A registered agent exists in order to comply with the physical jurisdiction of the ongoing DAO.
Classified as "member-governed" or "algorithm-governed"; a DAO LLC can likewise choose a manager or a member-governed LLC.
The law has been debated since it was enacted, with many arguing that the definition of "algorithmic governance" captures the structure of a DAO's decisions through smart contracts, rather than being subject to the discretion of a small group of people.
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5 Leading Non-US DAO Jurisdictions
For non-US joint venture DAOs, there are several jurisdictions to choose from.
Switzerland and Singapore, currently the crypto-friendly regulatory regimes, are the countries with the largest number of cryptocurrency and blockchain companies.
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Let's review the 5 most discussed jurisdictions
1. Cayman Islands
For foundation companies, the Cayman Islands appears to be the frontrunner, with Panama and Nevis likely new options offering stronger levels of privacy.
A Cayman Islands Foundation Company operates similar to a corporate trust while retaining the limited liability of a corporation.
Foundation companies can designate beneficiaries (i.e. "token holders" or "node operators") based on categories and reward these beneficiaries.
As in the case of Nevis, since the DAO has no fixed location, the foundation corporation has no tax liability with the Cayman Islands, making the foundation globally tax neutral.
Members need to verify the applicability of any alternative pass-through tax laws to make tax liability effective in the jurisdiction where their personal residence is located.
2. Switzerland
Switzerland is one of the most crypto-friendly countries in Europe, home to the headquarters of the Ethereum Foundation, Cardano, Solana and Polkadot.
As a structure for these leading blockchain foundations, the Swiss Association (“Verein”) combines with a charitable or non-profit entity to provide a tax-exempt entity.
Since Swiss authorities do not yet recognize DAO entities, Swiss legal firm MME has drafted a model constitution for a decentralized autonomous association (“DAA”) for the functioning of a Swiss association.
3. Liechtenstein
A Liechtenstein Venture Cooperative (“LCV”) is a limited liability company with no initial capital requirements.
This structure is not suitable for DAOs due to strict operational requirements (including bank accounts).
4. Malta
Malta initially led all countries with its crypto-friendly government regulations.
In July 2018, Malta adopted a blockchain and cryptocurrency regulatory framework called the Digital Innovation Framework.
DAOs and smart contracts are part of the Act defining Innovative Technology Arrangements (“ITAs”).
The law requires a service provider to run the ITA, which is not feasible for many DAOs, but also recognizes the blockchain protocol as the ITA entity.
5. Singapore
Singapore has a relatively friendly crypto environment and is home to several crypto companies such as CoinGecko, Kyber Network, BitGo, and KuCoin.
While Singapore does not have a clear framework for recognizing DAOs, it is neutral on cryptocurrency transactions and imposes zero capital gains tax on cryptocurrencies.
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DAO smart contract
DAOs must also consider on-chain smart contracts when managing DAO decisions and logistics.
These smart contracts determine the logistics around voting, investment proposals, issuance, and management of DAO member accounts.
Investing in DAO has already used DAO smart contract platforms such as Moloch v2, Aragon, Colony, and Tribute DAO.
LAO has incorporated Moloch v2 and Minion into their current smart contract platform.
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Risk DAO Smart Contract Platform
1.Moloch
Moloch is designed as a for-profit structure, granting DAO members limited legal liability through a limited liability company or C-Corp entity.
Moloch v2 created under the cooperation of MetaCartel, The LAO and Moloch with MetaCartel Venture DAO is the first user of the smart contract.
Moloch v2 uses ERC-1843 Claims tokens to represent each member's investment in the project.
Proceeds from project investments are sent to the DAO Custodian for liquidation of tokens (i.e. stablecoins or ETH) suitable for distribution.
Tokens can only be transferred to other DAO members or DAO whitelist addresses.
Moloch v2 builds on the original Moloch smart contract:
The DAO's whitelist of which contribution tokens they will accept
DAO removes members via guildkick.
A guild "kick" effectively allows a DAO to remove a member's voting privileges and then redeem that member's stake via ragekick (the DAO equivalent of ragequed).
2.Aragon
As the governance protocol for DAOs, Aragon enables DAOs to add customizable functionality to their smart contracts.
The Aragon Association (AA) is a Swiss not-for-profit entity that manages the Aragon treasury.
Aragon is used by DeFi asset managers such as Melon Protocol, PieDAO, BarnBridge, Stake Capital, and Curve Finance.
Aragon's governance is "optimistic," which assumes that DAO members act rationally and with good intentions.
Any malicious behavior submitted can be challenged by the malicious member losing money and the challenger gaining the malicious member's collateral.
Unnecessary challenges lose momentum by requiring challengers to lock up collateral, and failed challenges can result in reputational damage.
Currently, Aragon provides 5 open source products for DAO:
Aragon Client - A UI for creating DAOs.
Aragon Voice - Gas-free on-chain voting verification.
Aragon Govern - Smart contracts to manage DAOs and DeFi projects.
Aragon Court - A plugin arbitration platform accessible by any dApp.
Vocdini - An auditable mobile, censorship resistant, anonymous voting protocol.
3.Colony
Colony released its v2 on xDAI in February 2021, another DAO framework.
Colony is compatible with Gnosis Safe and new features will be released in Q3 and Q4 2021, benefitting from venture capital DAO.
Improvements in Q3 include Coin Machine, token sale mechanism, combined with KYC and address whitelisting.
The Q4 release includes improvements to financial functionality, financial reporting and transaction tracking.
4.Tribute DAO
Tribute DAO is the latest set of venture smart contracts that OpenLaw has worked on.
They built a more modular architecture based on Moloch v2, allowing:
1) Off-chain voting
2) An upgradeable framework after the release of DAO
3) Customized user experience
4) Use optimistic smart contract execution to reduce costs
5) More customization via adapters and extension smart contracts
The contract of Tribute DAO aims to solve some problems of Moloch v2:
Improved Modular Architecture
The new modular framework separates DAO functions into separate contracts, making upgrades and improvements easier.
Flexible, Inexpensive Voting Modules
The voting module aims to improve Moloch v2, allowing batch voting, off-chain voting, integration into Snapshots, and eventually allowing different voting mechanisms such as quadratic voting.
Multiple Token DAO Structure
DAOs can now have different tokens for governance and economic share
This makes bookkeeping and creating subgroups in the DAO easier
NFT support
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Two well-known DAO service providers
Two prominent all-in-one startup DAO service providers are emerging that address the legal complexities and smart contract technical details surrounding startup DAO setups.
Leveraging economies of scale to create an umbrella network of venture DAOs, these platforms are similar to Moloch and DAOHaus.
1.Syndicate Protocol
Backed by Ideo CoLabs, Syndicate Protocol is a DAO framework.
Their services include:
1) Off-chain legal entity formation
2) Smart contract customization on the chain
3) Ongoing administrative services.
While still in beta, Syndicate has several VC DAOs on its platform - ideo Founder Collective, Komorebi Collective, Delphi InfiNFT, Terra Ecosystem, and Audacity Fund.
2.Coinocracy Finance
Coinocracy Finance is a full-service venture capital DAO service provider.
Their services include:
1) Off-chain legal entity formation
2) Smart contract customization on the chain
3) DAO member interaction report
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Final Thoughts on DAOs
While regulations have lagged in recognizing DAOs as legal entities, the current pool of venture DAOs is adopting a hybrid of traditional legal entities with on-chain DAO governance.
The early success of The DAO, and its multi-layer win-win appeal, shows that venture DAOs have a place in the crypto ecosystem.
We have every reason to believe that DAOs will surpass this early hype and thrive in the future.
With all due respect to those embracing and starting their DAO journey while proposing meaningful change through the "future of work" and safer, smarter, better meritocratic structures.
