technology

The Latecomer’s Guide to Crypto

Kevin Roose

What are DAOs?

This is part of “The Latecomer’s Guide to Crypto,” a mega-F.A.Q. about cryptocurrency and its offshoots. Kevin Roose, a Times technology columnist, is answering some of the most frequently asked questions he gets aboutNFTs,DeFi,web3and other crypto concepts.

OK, start me off gently. What is a DAO?

DAO stands for decentralized autonomous organization.

That’s a mouthful.

Sure is.

What does it mean?

A DAO (pronounced dow) is a new kind of organizational structure, built with blockchain technology, that is often described as a sort of crypto co-op. (Or, alternatively, as a “financial flash mob” or a “group chat with a bank account.”)

In their purest form, DAOs are groups that form for a common purpose, like investing in start-ups, managing a stablecoin or buying a bunch of NFTs. ConsenSys, a blockchain organization, defines DAOs as “governing bodies that oversee the allocation of resources tied to the projects they are associated with and are also tasked with ensuring the long term success of the project they support.”

Once it’s formed, a DAO is run by its members, often through the use of crypto tokens. These tokens often come with certain rights attached, such as the ability to manage a common treasury or vote on certain decisions.

This sounds kind of vague. Can you give me an example?

Sure. The best-known DAO is probably ConstitutionDAO, a group of thousands of crypto fans who raised more than $45 million in the span of a week to bid on a rare copy of the U.S. Constitution that was being auctioned by Sotheby’s. But since that group disbanded after losing the auction (and was mired in controversy as it sought to return money to investors), it’s probably not the best example.

A better example might be PleasrDAO, a group of dozens of crypto artists, entrepreneurs and investors that was formed to bid on works by high-profile digital artists. The group spent $5.4 million on an NFT affiliated with the whistleblower and activist Edward Snowden, and also bought the Wu-Tang Clan album “Once Upon a Time in Shaolin” for $4 million.

Once they were purchased, these works became the property of the DAO’s members, who can manage them as they see fit. They can vote to exhibit them somewhere, or break them into 1,000 NFTs and sell the pieces to the public, or simply keep them locked away in a physical or virtual vault. In a classic DAO model, all of these decisions would be made “on-chain,” through a system of token-based voting.

I get why people might want to pool their money to buy stuff. But why is a completely new, crypto-based governance structure necessary for that? Couldn’t they just use a normal crowdfunding site?

They could. And, in some cases, a DAO might be better off using a platform like Kickstarter, because using crypto to raise large amounts of money can result in users paying exorbitant transaction fees. When ConstitutionDAO raised $47 million, for example, its users paid roughly $1.2 million in fees to the Ethereum network.

Ouch. Are there any other drawbacks to DAOs?

Some DAOs have found that decentralized, blockchain-based governance is messier than it looks. The first-ever DAO, which was simply called The DAO, raised more than $150 million to build a kind of crowdfunded investment firm, then went up in flames amid a host of legal, governance and security problems. Similar issues have plaguedother DAOs since then.

DAOs may also run into legal trouble if regulators decide that the tokens they issue are securities, thus requiring them to go through the same registration process as a company selling stocks or bonds. In 2017, the Securities and Exchange Commission found that DAO Tokens, the native token of The DAO, were in fact securities, and should have been subject to securities law.

The recent DAO boom has also raised eyebrows among regulators and law enforcement agencies, who are concerned that some DAOs may simply be fronts for fraud.

“In some cases, crypto investors and regulators say, the ventures amount to Ponzi schemes intended to do little more than bolster the value of the digital tokens they sell,” my colleagues Eric Lipton and Ephrat Livni wrote in a recent piece on some of the problems facing DAOs.

Even some crypto fans have argued that DAOs haven’t yet proved that they can do more than allocating cryptocurrency to crypto-related projects.

Grace Rebecca Rachmany, a DAO leadership consultant (yes, those exist), wrote in a 2020 article for the crypto news site CoinDesk that “DAO technologists have failed to create compelling technology for the problems that society is facing.”

Why would people choose to join a DAO, then?

Well, it’s all a bit new and unexplored. DAOs are still — to borrow a favorite phrase of crypto fans — in the dial-up phase, and proponents argue that better, more powerful examples will arrive in the next few years.

But if you ask believers, they’ll tell you that DAOs are capable of doing a few things better than traditionally run organizations:

• In theory, DAOs can be more transparent than traditional organizations, because the group’s important decisions get made “on-chain,” using governance tokens and votes that appear on the permanent blockchain ledger.

• In theory, DAOs can be more democratic than traditional organizations because every participant can vote on group decisions, not just boards or executives.

• In theory, DAOs can be more nimble and fast-moving than traditional companies, because they’re often project-specific and you can set them up and wind them down quickly, with significantly less red tape than forming a traditional start-up.

Why are you saying “in theory” so much?

Because there aren’t a lot of DAO success stories yet, and most of the benefits are still unproven. Some people are skeptical that DAOs can make more complex business decisions, while others think they amount to little more than thinly-veiled pyramid schemes.

Some DAOs, in fact, have allegedly been outright rug pulls — like AnubisDAO, a dog themed DeFi project whose creator is accused of stealing $60 million from investors.

In addition, leaderless corporate structures haven’t really worked outside of crypto, and most of today’s successful DAOs are what are known as “protocol DAOs” — meaning they’re designed to manage infrastructure-type projects for crypto itself. We don’t really know how the DAO model would work if applied to a regular, noncrypto business.

I’m not a blockchain engineer or a crypto investor. I’m just a normal person with a normal job, living a normal life. Why should I care about DAOs?

Right now, most people don’t encounter DAOs on a daily basis. But I’d argue that it’s important, in general, to know what kinds of problems technologists are trying to solve. And a lot of well-funded technologists are looking for ways to turn all kinds of organizations — including ones you might belong to or care deeply about — into DAOs.

Some people have even predicted that DAOs could become a force in politics, enabling a kind of loose, unregulated crypto PAC that could swarm campaigns and lobbying efforts with money and organizing support.

In its most basic form, a DAO is a new way for a group of people to aim a large amount of money and organizing energy at a project — whether it’s buying the Constitution, building a new social network, or influencing an election. That’s a big, transformative idea, and it would be wise to pay attention while it’s taking shape.

What are the most interesting uses of DAOs right now?

Crypto buffs are starting to experiment with “social DAOs,” which are a kind of community-owned social club that you have to pay (in the form of buying tokens) to join.

The best known social DAO is Friends With Benefits, which has thousands of members and recently raised $10 million from investors including the venture capital firm Andreessen Horowitz.

Friends With Benefits has been compared to a “decentralized Soho House,” and it works a bit like an online country club. Members have to buy a certain number of so-called $FWB tokens to get in. (Currently, a full membership costs 75 $FWB tokens, or about $4,000.) Once they’re in, they get invited to a Discord chat room where members chat about crypto, trade job leads and investing tips, and hold town halls to talk about the group’s future plans. The group hosts members-only parties at major crypto conferences, and members organize local meet-ups in their home cities.

Wait, I thought crypto was all about decentralizing power and leveling the playing field. An exclusive club that you have to pay $4,000 to join sounds like the opposite of that. What gives?

It’s a good question. And I posed it to Alex Zhang, one of the leaders of Friends With Benefits. He responded:

In most cases, and with FWB in particular, the token price was initially quite low, and it grew as the value of being a member — real or perceived — increased over time.It’s important, then, to remember that tokens are an asset, instead of the typical recurring fees you’d pay to belong to other kinds of social organizations. At any point in time, if necessary or desirable, someone can sell their tokens. Nevertheless, it will be important for DAOs to continue to create onboarding opportunities for people who can’t afford to acquire tokens. For instance, we pay FWB tokens to writers, curators, designers, event volunteers, and other roles that benefit our mission and allow these contributors to earn their way into having an ownership stake in the community.

So it sounds like DAOs can get messy and complicated, and some are outright scams, and even the ones that are doing something interesting might be expensive to join. So … what’s the good part? If DAOs are so useless, why are investors funding them, and why are people joining them?

As with any crypto project, DAOs have attracted people for all kinds of reasons: speculative gambling, trend-chasing and utopian true belief among them.

Among the more serious-minded DAO advocates, a common theme is collective ownership. Like believers in web3, DAO proponents believe that we need a radically different ownership model for the next phase of the internet. DAOs, they argue, could allow us to build a new set of organizations and platforms that are owned by their users, governed in fair and transparent ways, and native to the internet.

You could have, for example, a DAO-governed social network, where users could vote to take down certain types of inflammatory posts, or award tokens to people who posted lots of valuable or enlightening content. Or a DAO-ified version of Amazon Web Services that was run like a co-op, with members pitching in to build new features and keep the network humming.

Chris Dixon, a venture capitalist and crypto investor, recently argued that DAOs “can help course correct the internet back to its original, idealistic vision: power and money pushed to the edges, networks growing and flourishing together, a level playing field for talent anywhere in the world, a thriving creative middle class, and a generally diverse and interesting place.”

But, of course, it could also become an expensive, unruly mess, as DAOs confront the challenges involved in corralling any group of people toward a common goal, regardless of whether crypto is involved or not.

Go deeper:

“The Dao of DAOs” In this 2021 essay, Packy McCormick, a crypto investor, offers a lengthy analysis of DAOs and their potential future applications, from a pro-DAO perspective.

“Crypto Cities” A 2021 blog post in which Vitalik Buterin, the co-creator of Ethereum, sketches a vision of how DAOs could be used to govern entire cities.

“The Biggest Crowdfunding Project Ever — the DAO — Is Kind of a Mess” This 2016 Wired article about the collapse of The DAO, the original decentralized autonomous organization, is a cautionary tale about the pitfalls of decentralized governance.

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