After spending several years working in DAOs, I’ve arrived at a conclusion that is yet to be discussed publicly, despite many agreeing with it privately: the most successful DAOs merge the build-fast culture of startups with the smart capital deployment and management associated with hedge funds.
It’s not that people are hesitant to express it; it’s just that they’re starting to realize its truth. Traditionally, hedge funds and startups have been entirely different entities, with hedge funds frequently funding startups. In the world of DAOs, however, where capital and creation are highly intertwined, they seem to be two critical divisions of the same organization. The issue is that only a few DAOs, if any, have successfully operated in this way. As we look to the future, I believe the most successful DAOs will operate on this model. Bull markets are temporary, and diversifying asset management in a manner that creates more project runway will be a crucial move toward allowing DAOs to mature in a crypto-native manner.
DAOs: Collaborative Chat Communities with Collective Financial Resources
In the early days of DAOs, many were formed by communities using Discord servers and shared bank accounts to monetize their work and create a collective treasury. Some of these groups launched their own native tokens, which were distributed through airdrops or sold on the open market. Others sold NFTs, which were used to gate access to their Discord servers. Token gating was not always required, but it created a sense of exclusivity and drove up demand, resulting in higher token prices. Both native tokens and NFTs allowed DAOs to accumulate shared funds that could be utilized by the community. While the methods varied, the end result was the same: a community-driven financial pool.The tokenization of communities, whether through native tokens or NFTs, has allowed certain DAOs to accumulate treasuries worth billions of dollars. It’s truly remarkable to think about how much value can be generated from a simple group chat, regardless of how one chooses to interpret it.
The Ascension of NFT Communities: Exploring their Interrelation with DAOs
The initial versions of these internet-based groups evolved into DAOs that focused on selling NFTs, such as PFP collections. To keep some NFTs in their communal treasury, these DAOs established smart contracts that generated royalties every time an NFT was purchased or sold, irrespective of its market trend. As a result, certain DAOs accumulated royalties rapidly, resulting in well-funded organizations with stable revenue streams.
The rise of NFT communities and their associated DAOs is important for several reasons. First, it demonstrates the potential of blockchain technology to enable decentralized organization and collective decision-making. Second, it highlights the power of NFTs as a new asset class that can generate significant revenue and value for communities that hold them. Third, it raises important questions about governance, transparency, and accountability in decentralized organizations, particularly when they accumulate large treasuries.
The emergence of internet-native organizations and DAOs that generate significant revenue through the sale and distribution of NFTs highlights the potential for decentralized finance (DeFi) and blockchain-based models to disrupt traditional financial systems. These DAOs enable individuals to pool their resources and invest in new projects, without the need for intermediaries or centralized authorities.
However, the rapid accumulation of wealth by these organizations can also present challenges. Without clear governance structures or decision-making processes, these organizations may struggle to effectively manage their resources or allocate funds towards impactful projects. Additionally, the lack of regulatory oversight in the DeFi space can raise concerns around transparency, accountability, and the potential for fraud or manipulation. This all leads to them floundering to achieve their goals and maintain the trust of their members.
Why is this significant? Unless the purpose of the DAO was specifically to amass and effectively manage a sizable treasury, many of these prosperous DAOs found themselves in a unique predicament. Within a short period, they had accumulated treasuries worth millions or billions of dollars, yet there was frequently no one with the authority or expertise to determine how to best utilize those funds.
Unlocking the Potential of DAOs: Developing a Sustainable Business Model
Conventional fundraising involves groups or organizations creating detailed plans for utilizing the capital they seek to raise. However, some Decentralized Autonomous Organizations (DAOs) have taken a different approach. Rather than outlining a specific plan for the use of funds, they marketed ideas such as startup ventures, communities, or digital art to potential investors, often earning substantial profits in the process.
While this approach may seem lucrative during a market upswing and bull markets when there is optimism about the potential value of their digital assets, be them native tokens or NFTs, it is not a sustainable strategy. Eventually, the excitement subsides, and the value of these assets may decrease as we have seen in the current bear market, AKA “crypto winter”.
During the recent years, numerous organizations experienced a period of significant growth due mostly in part to the “bull market”. However, due to the lack of a coherent business model, many of these entities were unable to fully capitalize on the economic boom or make sound financial decisions. A well-established business model could have helped these decentralized autonomous organizations (DAOs) survive the current bear market by providing them with the necessary funding to continue their operations. Unfortunately, many DAOs have suffered significant losses to their treasuries as a result. Although not all DAOs are failing, certain DeFi DAOs such as Uniswap (UNI), Curve DAO (CRV), MakerDAO (MKR), Lido (LDO), Aave (AAVE), and others have amassed treasuries worth as much as or even surpassing Paul McCartney’s net worth, which is currently valued at $1.3 billion.
DAOs: Startup Business Model
Startups have an advantage in holding stable currencies such as the US dollar, which allows them to maintain a consistent value for their funds over time. While they may have raised a significant amount of money, their priority should be ensuring that their expenses align with their burn rate. Holding cash provides startups with the security of knowing that their assets won’t plummet in value overnight, unlike cryptocurrencies such as ETH or tokens that can experience drastic drops. This was exemplified by the collapse of stablecoin UST last year. Companies must be able to plan and budget over the course of several years, which is impossible if they are unsure of how much funding they will have in the future.
Now imagine a scenario set back in May of 2022 a month before Bitcoin dropped 30% and ETH by 40% in only a week! A successful startup raised $120 million in Series-B funding. They placed the funding in some token like ETH, only to see the value drop to $72 million a month later, a situation that would typically lead to a company’s failure. This holds true even for decentralized autonomous organizations (DAOs).
Numerous decentralized autonomous organizations (DAOs) experienced a similar scenario in the previous year. Despite having seemingly everlasting treasuries, they are now implementing widespread budget cuts. While it may not have been entirely avoidable, I think that if these DAOs had recruited more individuals with a background in traditional finance and a deep understanding of web3, the situation could have unfolded differently.
DAOs: Hedge Fund Business Model
Hedge funds typically aim to accumulate a large amount of capital and then employ various strategies to increase its value over time. These strategies can range from conservative to more innovative, such as utilizing leverage or trading derivatives to achieve market-beating returns. If DAOs adopted a similar approach, with separate teams managing the finance and product/community divisions, they could potentially benefit from the best of both worlds: ample capital and a strong community executing the roadmap.
The previous bull run presented numerous opportunities for DAOs that were not fully seized. Despite having massive treasuries, most native DAO tokens suffered significant price drops, resulting in dwindling treasuries. Additionally, liquidity has become scarce, making it impossible to sell large amounts of tokens without crashing the token prices, thus rendering the treasury numbers misleading. NFT projects have also been affected, with sales and floor prices plummeting. Furthermore, ETH prices have significantly dropped, and the global recession may exacerbate the situation.
Envision there had been individuals within these DAOs who possessed a distinct plan of action instead of simply fixating on numerical data, pondering over what to do with their excess ETH. What if these individuals focused on implementing strategies such as diversifying their treasuries by investing in assets other than their native token or ether? Perhaps they could have transferred some of their holdings into stablecoins, enabling them to have a financial cushion based on their expenditure rates. Additionally, effective treasury management doesn’t necessarily entail token swaps; with sufficient foresight, managing buy and sell pressure on a token would have been feasible. It would have been a whole different ballgame.
Although some companies attempted to implement these practices, many were unsuccessful due to being swept up in the excitement of the moment. In other cases, organizations failed to manage their treasury at all, leading us to the present situation.
A potentially exciting prospect is exploring mergers and acquisitions for DAOs. It’s possible that large voting rights in DAOs could be strategically purchased. Additionally, the concept of tokens and NFTs being separate from equity but not prohibiting the possibility of raising strategic capital in the future is intriguing. By waiting until product market fit is established, companies could potentially sell equity to strategic partners. For example, a gaming company could decide to only accept investment from Ubisoft and Apple. These business models offer endless possibilities, and the most successful DAOs in the future will likely adopt them.
The Future of DAOs: Startups and Hedge Funds within the Same Organization
The startup model involves raising funds from investors to develop and grow a business, with the goal of eventually becoming profitable. The hedge fund model, on the other hand, involves pooling money from investors to make high-risk, high-reward investments. By merging these two models, the new DAO model can not only raise funds to launch and scale its operations but also invest in other projects to generate returns for its members.
This new DAO model could be a game-changer for the blockchain industry, as it provides a more sustainable way for DAOs to operate and grow. By leveraging the strengths of both the startup and hedge fund models, DAOs can achieve both financial success and decentralization, which is the core value of blockchain technology. As the technology and infrastructure supporting DAOs continue to mature, it is likely that we will see more experimentation with new business models that seek to further optimize the benefits of DAOs.
As time goes on, the divisions within DAOs will likely become more defined, similar to those in other industries. Professionals from the traditional finance world who are interested in web3 will bring their ideas on how to effectively manage and expand treasuries, providing DAOs with greater flexibility. Meanwhile, tech teams will focus on creating and delivering products to the masses without worrying about treasury concerns.
To make this a reality, DAOs should diversify their treasuries by investing in assets other than their native token or ether, such as stablecoins. They should also manage buy and sell pressure on their tokens with sufficient foresight. Additionally, exploring mergers and acquisitions for DAOs can be a potentially exciting prospect, enabling them to strategically purchase large voting rights.
Final Thoughts
Looking back, it’s understandable, but in the midst of the bull market, it was challenging to resist the hype. The frenzy that ensued was unprecedented, and I doubt it will ever be replicated. As time goes on, the divisions within DAOs will likely become more defined, similar to those in other industries. Professionals from the traditional finance world who are interested in web3 will bring their ideas on how to effectively manage and expand treasuries, providing DAOs with greater flexibility. Meanwhile, tech teams will focus on creating and delivering products to the masses without worrying about treasury concerns. Despite working independently, all of these teams will be collaborating towards a shared goal, leading to a unique combination of startups and hedge funds within the same organization.
This future will undoubtedly disrupt the status quo.
FAQs
- What is the new DAO model that combines startup culture and hedge fund management?
The new DAO model combines the startup culture of raising funds from investors to develop and grow a business with the hedge fund model of pooling money from investors to make high-risk, high-reward investments. This allows DAOs to not only launch and scale their operations but also invest in other projects to generate returns for their members. By merging these two models, DAOs can achieve both financial success and decentralization, which is the core value of blockchain technology. - How can DAOs diversify their treasuries to ensure financial stability?
DAOs should diversify their treasuries by investing in assets other than their native token or ether, such as stablecoins. This provides a financial cushion based on their expenditure rates and helps maintain a consistent value for their funds over time. Managing buy and sell pressure on their tokens with sufficient foresight is also crucial for effective treasury management. - What is the potential role of mergers and acquisitions in the future of DAOs?
Mergers and acquisitions can play an exciting role in the future of DAOs, as large voting rights in DAOs could be strategically purchased. This could lead to collaborations between different DAOs and create new opportunities for growth and innovation. Additionally, the concept of tokens and NFTs being separate from equity but not prohibiting the possibility of raising strategic capital in the future is intriguing and offers endless possibilities for new business models. - How will the roles of traditional finance professionals and tech teams evolve in the future of DAOs?
As DAOs continue to mature, professionals from the traditional finance world who are interested in web3 will bring their ideas on how to effectively manage and expand treasuries, providing DAOs with greater flexibility. Meanwhile, tech teams will focus on creating and delivering products to the masses without worrying about treasury concerns. While working independently, all of these teams will be collaborating towards a shared goal, leading to a unique combination of startups and hedge funds within the same organization. - How does the new DAO model provide a more sustainable way for DAOs to operate and grow?
By leveraging the strengths of both the startup and hedge fund models, the new DAO model provides a more sustainable way for DAOs to operate and grow. It enables them to raise funds for launching and scaling their operations while also investing in other projects to generate returns for their members. This helps DAOs achieve both financial success and decentralization, which is the core value of blockchain technology. As the technology and infrastructure supporting DAOs continue to mature, it is likely that we will see more experimentation with new business models that seek to further optimize the benefits of DAOs.