This Thesis was created by André J Guardia, rising senior at Illinois Institute of Technology. I’m a Dorm Room Fund BIT Fellow, Republic VFA and GenZ Scout. This thesis was created during the summer of 2022 for my Internship @Decasonic.
There is a massive opportunity to invest in service-oriented DAOs. Service DAOs are set to revolutionize the way individual service providers organize and complete tasks. There is a clear value proposition for individual recruiters, consultants, marketing experts, attorneys and market researchers, as the middleman is being removed from the equation (by introducing the Decentralized Autonomous Organization component), their earning potential dramatically increases.
“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.”)” - New York Times
DAO stands for Decentralized Autonomous Organization. As such, it is the blockchain equivalent of a company, which is formed around a vision and mission, has key activities to perform and employs peers to complete said activities. DAOs are formed by groups of individuals rallied around a common goal, and powered by the innovation of smart contracts.
Before we understand the real meaning of what DAOs can do for Venture Capital, we must understand the technology behind them. Let’s break down the definitions:
Blockchain: “a type of shared database that differs from a typical database in the way that it stores information; blockchains store data in blocks that are then linked together via cryptography.” -Investopedia
Ethereum Blockchain: “At its core, Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether, or ETH. Ethereum can be used by anyone to create any secured digital technology they can think of. It has a token designed for use in the blockchain network, but it can also be used by participants as a method to pay for work done on the blockchain.” -Investopedia
Smart Contracts: “programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.” -IBM
Governance Token: ”Governance tokens are the first cryptocurrencies to represent voting on a blockchain by distributing the power of making major platform decisions from a centralized structure to an entire community. This is because token holders are not only users, but also owners of the protocol.” -Decrypt
Here’s the basics:
The rules for the functioning of DAOs are coded into a smart contracts, often deployed on the Ethereum Blockchain.
DAOs members communicate through invite-only chats on centralized platforms like Discord and Telegram.
When an individual purchases a governance token for a particular DAO, their liquidity is rewarded with voting rights in key decisions the DAO must partake in.
The members then enforce their voting rights through the governance token on platforms like Snapshot.
Key Takeaway - Tokenholders get to directly participate in the decision-making process by purchasing governance tokens.
In 2021, DAOs surprassed 1.6 million in membership, up 130x from 13k on Jan 2021 according to DeepDao
As of June 2022, there are approximately 3.6 M Governance Token holders , with a 1.9M increase just last month.
As of June 2022, there are approximately 673.5k Active voters and proposal makers, with a 54.5k increase in the past month
Incubation DAOs started to emerge, providing further value add to investment DAOs. Through Incubation DAOs, ideation programs are held and projects are pre-launched.
Based on these key insights and the Assets Under Management for each one of these sectors (in descending order), it is clear to see that DAOs have seen a spike in both interest and funding, and according to the sources cited in the AUM Table, it seems like this growth is not slowing down. Venture dollars are still flowing to blockchain projects at increasing rates and token holders are increasing by the millions, even in the current bear market lanscape (as of June 2022).
Service DAOs have the potential to further disrupt value add systems in web3. As projects hire service DAOs to perform key operational activities, in exchange for a % of the project’s token supply/equity or direct payment. According to 1kx, we can expect improved services for lowered pricing, thus improving upon the efficiency and unit economics of existing offerings.
If Service DAOs can improve upon the efficiency and unit economics of the services they are providing to small protocols, could they work with bigger clients?
The industries presented above are focused on providing intangible services to other firms through an internet connection. Given Service DAOs can greatly improve the services provided to the firms at better efficiency, Service DAOs are set to revolutionize the way individual service providers organize and complete tasks. There is a clear value proposition for individual recruiters, consultants, marketing experts, attorneys and market researchers, as the middleman is being removed from the equation (by introducing the Decentralized Autonomous Organization component), their earning potential dramatically increases.
DxDAO - Type: Incubation - Members: 529
1Hive - Type: Incubation - Members: 19
Strider DAO - Type: Incubation, Game Developer - Members: 931
Song Camp - Type: Incubation, Record Label - Members: 3319
YGG - Type: Incubation, Game Developer - Members: 62545
Macro DAO - Type: Recruiting, Auditing - Members: 597
Third Academy - Type: Recruiting - Members: 1282
WGMI DAO - Type: Recruiting - Members: 154
Code Arena - Type: Auditing - Members: 3887
Spearbit DAO - Type: Auditing - Members: -
Tribute DAO - Type: Incubation, Legal - Members: 642
Holder - Type: Marketing, CRM - Members: -
It is important to note that the early adopters of these technologies will be web3 - native firms in search for recruitment, consulting, legal and market research services. As these DAOs scale to greater numbers of members and bigger treasuries, bigger clients will begin to take notice.
Poor infrastructure: According to Signvm, given the decentralized nature of DAOs, they often lack the right tools to engage with their communities in an efficient manner. Many DAOs have to design their tools and infrastructure. There is a lot of work to be done with existing infrastructure providers. Solutions are starting to take shape in the form of:
SyndicateDAO
Snapdragon
Aragon
DAOstack
DAOhaus
Recruitment and Retention Risk: there is great issue with proper recruitment practices. DAOs must find ways to ensure and enforece proper recruitment objectives are met, so the right peers join the community. The successful DAOs of the future will manage this risk by imposing well-designed, balanced recruitment and incentive models. This must be done to ensure the most active peers are the ones being rewarded the most, thus increasing retention.
Complex DAO Governance Schemes: there is great risk of overcomplication in organizational structures. According to Layer3, as DAOs scale, their governance structures are getting increasingly complex. This is a factor that, in conjunction with poor infrastructure, will significantly hinder the growth of the Investment DAO sector.
Legal Compliance: Given DAOs are purely decentralized without a particular domicile, the laws governing them are unclear. DAOs are currently battling with regulatory issues such as:
Taxation of DAO tokens and treasuries.
Insurance on investments
AML and CFT policies
Solutions in the horizon:
The state of Wyoming recently introduced legislation to support DAO operating activities, having them operate with the same legal requirements as LLCs, under the Wyoming Limited Liability Act (recognizing smart contracts ass the legal documentation governing a DAO)
A blockchain-native legal wrapper for DAOs was released by OpenLaw DAO (now Tribute Labs). This has the potential to provide DAOs with the shield of Limited Liability in the form of a wrapper. This further allows DAOs to own physical assets in the real world, while limiting the legal exposure of tokenholders. Read more here.
Given the problems presented above, it is clear that the Service DAOs that will succeed in the long term have most if not all of the following traits:
Improved Infrastructure: Given current DAOs are at most building their own infrastructure to operate, the user experience can more often than not be clunky and un-interactive. The successful DAOs of the future willl be characterized by the simplest UI possible, to maximize tokenholder engagement and thus improve the DAOs outcomes. This problem is currently being addressed by DAOs like SyndicateDAO, DAOhaus, etc.
Proper Incentive Mechanism Design: Directly addressing free-rider, retention and recruitment problems. Further research can be done to design a proper inventive mechanism for future DAOs.
Simplified DAO governance: As true as it is with any other emerging technology, they key to mass adoption is simpllicity. The future winners in the Investment, Incubation and Service DAO space will be characterized by their ease of governance and eas e of onboarding new members.
Full Legal Compliance: As with most emerging technologies, there are regulatory hurdles that must be maneuvered around if DAOs are to expand in a true global capacity. The future winners in this space will be those who are legally compliant, and are legally allowed to own and operate both on-chain and off-chain assets.
Investment DAOs (1st Gen) were the first major use case of DAOs, and initiated a massive disruption in the Service Economy.
Incubation DAOs followed the development of Investment DAOs (2nd Gen), with improved community dynamics and a more solid value addition to projects they invested in.
Service DAOs (3rd Gen) are set to profoundly disrupt the VC service offer, with the potential to expand their improved efficiency and enhanced unit economics to major services markets
The initial markets set to be disrupted by widely scalable Service DAOs are:
Online Recruitment
Online Management Consulting
Online Marketing Services
Online Legal Services
Online Market Research Services
There is a clear value proposition for individual recruiters, consultants, marketing experts, attorneys and market researchers, as the middleman is being removed from the equation, earning potential is set to dramatically increase. Thus driving mass adoption
For DAOs to reach their full potential, they must directly address the following issues
Poor Infrastructure
Recruitment and Retention Risk
Complex Governance Schemes
Legal Compliance
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