*This is a copy of the 2022 research report on decentralized autonomous organizations (DAO) by Cointelegraph Research. Unavailable from its original page, it has been provided here for reference purposes.
The DAO Phenomenon and Why It’s Important
Dear Partners, Investors and Friends,
The blockchain industry is still maturing, and every day, new applications of the technology are being created. Over the past few years, decentralized autonomous organizations, or DAOs, have captured the imagination of the blockchain space. DAOs are disrupting investment, corporations, social clubs, and even political parties. But what exactly are DAOs, and why should the average crypto investor care?
DAOs can be a more efficient form of organization
DAOs are the frontier of coordination. Even though we are individuals, we work together in order to survive. Decisions for how to deploy resources such as capital and labor can be made collectively in a transparent way with the blockchain technology. Members of DAOs can propose ideas and vote on how to use community savings. This reports provides a glimpse of how our society can function in the future without top-down structures. DAOs are a powerful way to make resource allocation more efficient, and there are many examples of DAOs that have already fostered a higher standard of living for its members. If you want to know how DAOs are shaping democracy, corporations, this report is a must-read.
Knowing what to look for can help future investments
The top graph shows the DAOs tracked by CoinMarketCap’s DAO Index vs. the total market capitalization. DAOs are not immune to global economic conditions and have reacted similarly to traditional markets from 2021 through Q3 of 2022. Some DAOs have produced a better return on investment (ROI) than Bitcoin (BTC). Not all DAOs are highly correlated with major cryptocurrencies. For example, Curve DAO (CRV) can improve a Bitcoin portfolio's risk-adjusted return since their daily price movements do not move together often. This means there may be investment opportunities for those who know what to look for, and this report can help provide a starting point.
Cointelegraph Research continues to bring up-to-date reports on the cryptoverse
Cointelegraph Research helps blockchain companies communicate their cutting-edge research to the world by writing, designing and publishing professional reports. We help companies gain wider audiences by developing educational materials in the form of in-depth reports. Our team of academics and seasoned blockchain technologists can cover a diverse range of topics, including tokenomics, macroeconomics, legal, tax, central bank digital currencies, decentralized finance, supply chain logistics and venture capital. To work with Cointelegraph Research’s team on creating a one-of-a- kind report, contact us at [email protected].
--Michael Tabone, Sr. Economist at Cointelegraph Research
Cointelegraph Research constructed a value-weighted index of DAO tokens that includes large projects, such as Aave, Uniswap and Dash, but also a variety of smaller DAOs. Although this does not represent the entire DAO space, which comprises several thousand organizations, it yields some insights as to how DAOs move independently from major cryptocurrencies such as BTC and ETH. The chart above shows that the correlation of returns has been rather high during the Bitcoin hype of late 2017 but high during the bear market that followed. Since late 2019, the picture has been more nuanced, with a lower correlation during the bull market of 2020 and 2021 but a high correlation in the early 2022 slump. Notably, the correlation to Ether has been consistently higher starting in mid-2020.
Key Highlights
As of mid-2022, there are currently over 4,000 active DAOs with a market capitalization of around $20 billion.
Cointelegraph Research identified three eras of the evolution of DAOs where 1.0 was the pre-Digital Revolution and Bitcoin, 2.0 was the advent of blockchain smart contracts, and 3.0 was an explosion of DAO infrastructure growth.
There was an early example called “The DAO,” which was hacked in 2016 for $60 million worth of Ether and eventually caused a major fork. Today, this split can be seen in the different protocols of Ethereum Classic and Ethereum.
In 2022, 40% of all DAOs are focused on decentralized finance (DeFi), but this is not the only application of a DAO.
DAOs can be applied to all different spaces, including gaming (5%), politics (4%), art & culture (6%), and the second largest focus for DAOs are nonfungible tokens (NFTs) at 17%.
Ethereum is the most popular blockchain for building DAOs, with 83 of the top 100 governance tokens by market capitalization.
Venture capital (VC) investment into the DAO space reached a local peak in Q1 2022 at over $160 million.
DAOs have respectable treasuries. Uniswap has a liquid treasury of around $1.5 billion, and BitDAO is sitting on $1.3 billion at the time of writing.
Over 50% of DAOs hold USD Coin (USDC) (a cryptocurrency pegged to the United States dollar on the Circle protocol), with close to 45% of DAOs holding MakerDAO’s stablecoin, Dai, and over 40% hold Wrapped Ethereum (wETH).
Alien Worlds, an NFT game where six different DAOs interact in the game and compete over limited resources, is the highest active non-DeFi decentralized application (DApp) by transaction volume, according to DappRadar.
DAO Timeline and Report Road Map
1960–1970
Academic journals talk about decentralization in its application in business, pre- Information Age.
1997
The term decentralized autonomous organization is coined when talking about digitally integrated houses in the context of the internet of things (IoT). These ideas gave birth to DAO 1.0.
2008–2009
Satoshi Nakamoto releases the Bitcoin white paper and mines the Genesis Block on Jan. 3, 2009. The Bitcoin network is said to the first example of a DAO.
2013
Father and son, Stan and Daniel Larimer, present the idea of decentralized autonomous corporation (DAC) as an “unmanned company” that operates without human involvement, which operates by business rules running on code that would be incorruptible or “sovereign corporations governed with inhuman integrity.”
2013–2014
Multiple whitepapers were published between 2013–2014 including Ethereums white paper, explaining how the promise of Bitcoin can be improved upon through smart contract application.
2015
Dash pioneered decentralized governance using blockchain technology with the launch of its two-tier masternode network. This marked the change to the next era of DAO 2.0. Dash is the longest-running DAO to this day.
2015
Altcoins, which provide additional functionality like smart contracts, such as Ethereum are publicly launched. The ability for code to act as a thirty-party arbitrator was another setp in the evolution in DAO 2.0. A myriad of altcoins with smart contract capability come to market as well during this time.
2016
“The DAO” is launched in 2016 and hacked for 3.6 million ETH ($60 million at the time). A hard fork takes place, breaking the Ethereum chain into two seperate blockchains: Ethereum Classic and what we know today as Ethereum.
2018–2022
An explosion of infrastructure and tooling applications come to the market and bring on the current era of the DAO, or 3.0. There are over 4,000 active DAOs with over $20 billion in market capitalization in 2022.
2022 and beyond
Does the blockchain game Alien Worlds exemplify all of DAO 3.0? Are Alien Worlds, Bored Ape Yacht Club, and other projects showing us signs of the next area of DAO 4.0? Legal Considerations for DAOs along with risks and drawbacks.
How It All Started: DAO 1.0
The concepts for DAO 1.0 started over half a century ago and evolved through the concept of an internet-connected home to the deployment of blockchain technology.
DAO 2.0 was born out of the addition of Dash’s governance mechanism and smart contracts in the next phase of blockchain protocols, such as Ethereum, EOS and Tezos. This allowed for more decentralization and wider adoption across decentralized applications (DApps).
The rise of infrastructure relating to DAO governance marks the transition to DAO 3.0, which has seen an explosion in DAOs created over the past two years to over 4,000 active DAOs.
Once upon a time ...
When we think of a modern business, firm or corporation, we think of an organization of people that uses a top-down structure where a single decision maker or group directs resources, including labor and capital, toward a goal. Business entrepreneurship can be traced back to around 17,000 BCE in New Guinea, where obsidian was traded for food, skins and other goods. [1]
Over the last few centuries, the number of firms has proliferated, and several economists have studied this growth. The Nobel Prize- winning economist Ronald Coase dedicated a large part of his academic career to studying what the structure of the firm is and why it exists. His work on property rights and the transaction costs of contracting with labor and managing resources helped identify reasons for a firm. [2] These ideas are focused on centralized decision making, but others have theorized if a more decentralized approach could be beneficial.
In the 1960s and 70s, academics in the business discipline started theorizing on concepts that would become important decades later. [3] In 1997, Werner Dilger wrote a journal article on a “smart home” that would be integrated as part of the “Internet of Things,” or IoT, which he termed a decentralized autonomous organization. [4] However the technology to integrate a home without human intervention did not practically exist at the time of Dilger’s writing. This time period, prior to creation of the Blockchain technology, can be called DAO 1.0.
Everyone alive has in some way been part of a DAO, albeit unknowingly. Every pickup basketball or football game, every spontaneous outpouring of support for a community in a natural disaster, and every voluntary interaction of a group of people have elements of what a DAO is. [5] With the advent of blockchain technology there may be a better way to organize ourselves in social and professional applications.
DAO Breakdown
Decentralized — decentralized means the relationship of participants in the organization is “no longer determined by administrative affiliation, but follow the principles of equality, voluntariness, reciprocity and mutual benefit, and driven by individual’s resource endowment and complementary advantage.” [6]
Autonomous — this interaction being managed by protocols creating a “code is law” voluntary agreement can not only impact the concept of the firm from the standpoint of eliminating bad actors or mistakes by management but, in some cases, could be used to remove the need for managers completely. [7]
Organization — a generic term that may or may not have legal considerations depending on the formality of what is connecting everyone together, which would also potentially include activities using smart contracts. [8]
Decentralized Authority Is Key to a True DAO
The Digital Revolution or Information Age, which came about with the explosion in personal computer use and the advent of the internet, lowered the barriers to entry and made information more accessible to everyone. [9] This made information more symmetrical, increasing the skill set and the ability of more people to do what could only have been done by a few qualified people previously. In 2008, an individual or group of individuals called Satoshi Nakamoto released the Bitcoin white paper outlining a peer-to-peer electronic cash system. [10] This was different from previous attempts, and it brought together several technologies (decentralized ledger, blockchain, cryptography, etc.) into one application. [11] On Jan. 3, 2009, the Bitcoin Genesis Block was mined, which marked the start of the Blockchain Revolution. Bitcoin is a generation one (Gen1) blockchain that does not have what is called smart contract capability. This allows parties to enter into a contract governed by code and not reliant on the actions of an outside party to enforce.
Father and son, Stan and Daniel Larimer presented the idea of DAC as an “unmanned company” that operated without human involvement and business rules running on code that would be incorruptible, or “sovereign corporations governed with inhuman integrity.” [12] They helped give rise to the blockchain protocol EOS, which, like Ethereum,was a Gen2 blockchain protocols. It is unclear if Vitalik Buterin, one of the co-founders of Ethereum, knew Dilger create the DAO term in 1997, when stating he invented the it in 2013. [13]
While the DAO, as seen through the blockchain lens, was still being worked out, several different entities were trying to innovate how these dispersed groups could interact in a meaningful way to accomplish like-minded goals. An innovation ushered in by Dash was a novel governance model that helped influence the evolution of the modern DAO.
A DAO is an entity that can operate with no central leadership. Decisions get made from the bottom-up, governed by a community organized around a specific set of rules enforced on a blockchain.
DAOs are fully autonomous and transparent. As they can be built on open-source blockchains, anyone can view their code. Anyone can also audit their built-in treasuries, as the blockchain records all financial transactions.
Investors or stakeholders can participate in a DAO without the presence of an intermediary, like governments, or financial institutions, like banks, giving many greater financial autonomy.
This allows participants to invest, borrow or raise money for any purpose as long as there is community consensus.
Traditional firms rely on governmental forces for the implementation of agreements between different parties, or contracts. DAOs utilize a “code is law” mentality, which means that the code automatically functions as the decision arbitrator.
A traditional or usual organization follows a top-down hierarchical model of leadership with a centralized authority on top, for example, a CEO. Generally, financial decisions are made by a chief financial officer. This is not the scenario at a DAO. Here, the leadership and decision-making are transferred to a distributed network of autonomous participants.
Companies are often registered in a country or given operational authority through a government entity. DAOs operate in a completely decentralized manner and, in many cases, without a governmental body overseeing the enforcement of contracts and the daily activities of the organization.
The Next Step: DAO 2.0 Blockchain Governance Innovation by Dash
Humble beginnings
Bitcoin was once considered a DAO because most network participants had never met, and the network evolves through community agreement that requires miners and nodes to signal their support. However, Bitcoin is no longer considered a DAO by today’s standards, as a true DAO must have complete autonomy; it must fund and manage every aspect of its operations independently, free from outside interference or centralized control, thereby reducing the risk of single points of failure and potential conflicts of interest.
Innovating blockchain decentralized governance
Dash (a fork of Bitcoin) was the first cryptocurrency DAO to have a self-funding, self-governing protocol. Dash pioneered decentralized governance by blockchain with the launch of its two-tier masternode network in 2015, and it remains the industry’s longest-running DAO to date. Dash allocates 10% of all block rewards to fund its own development in a competitive and decentralized manner, unlike other cryptocurrencies that depend on donations, pre-mined endowments, foundations, volunteerism, corporate sponsorships or third parties.
The first superblock was mined on 7 September 2015, making Dash the world’s first DAO.
What are Dash masternodes?
Dash masternodes are a decentralized network of powerful servers backed by collateral held in Dash designed to deliver advanced services and governance over Dash's proposal system securely in exchange for a portion of the block reward. Dash believes that masternode operators make wiser decisions when they have something to lose as well as gain when they have “skin in the game.” Dividing the block reward may appear to be a minor detail, but it has a significant impact, as it allows Dash to hire everyone who works for the network rather than miners consuming the network’s entire revenue stream of the network.
Self-regulating incentivized infrastructure
Because of financial incentives, the governance of the Dash DAO is quick, efficient and very purposeful. Anybody can submit a network proposal for a small anti-spam Dash fee, which helps to ensure that only serious proposals are submitted. As a result of a free-market-competition funding approach, the best concepts and ideas that add value to the network are rewarded.
Each masternode can vote on each proposal once (yes/no/abstain). If a proposal is approved, the payment specified in the proposal is paid in a monthly “superblock” with all other proposals that passed that month.
On occasion, the network receives decision proposals for significant or divisive decisions. For instance, the outcome of a vote can be used to determine whether Dash’s developers should implement a feature or not.
As it is possible to submit proposals that pay out over several months, masternodes can revoke support from a project by amending the vote if the use of already-awarded funds is unsatisfactory. This incentivizes proposal owners to work honestly and diligently to gain the network’s trust and approval.
The DAO gold standard
The Dash DAO has stood the test of time and inspired numerous projects. Dash’s approach to decentralized governance hasn’t changed in years, but that’s by design. Dash is able to adapt to what works best for the network due to the DAO’s free market approach, as opposed to the limitations and restrictions in centralized traditional corporate structures.
To learn more about Dash, read our recent research report: Why Are Crypto Funds Investing in Dash?
How does Dash’s DAO solve problems that traditional structures cannot?
"Dash’s DAO stands out due to its simplicity, which makes perfect sense since it was the world’s first. It’s essentially an open book: Anyone can ask a question or request funding of the network, and Dash’s holders get to respond. After a vote is held, that’s it. It’s done. This allows projects to be funded and decisions to be made quickly on a consistent basis, without hoping for oligarchical structures to burn out or lose their power. It also lets anyone with Dash pool their funds to have a voice, rather than explicit shareholders or a board of directors. Finally, it’s anonymous, meaning it’s truly open to participation from anyone anywhere in the world, without geopolitical restrictions." — Joël Valenzuela | Director at Dash Marketing Hub
Smart Contracts and DAO 2.0
Smart contracts allow different parties to engage in an agreement locked in code relating to digital assets.14 This can include what makes DAOs possible: voting, proposing, signing and delegating coins or tokens in a way to support different functionalities that a DAO needs to operate. Any DAO participant is allowed to make proposals and vote on other proposals, with no one entity controlling the majority of tokens or votes.
Decentralized applications, or DApps, utilize smart contract functionality to allow users to log in to different interfaces and authenticate their cryptographic identity. Whoever signs the transaction has access to the private keys, making them the owner of all the assets in that wallet. This is why the blockchain and crypto community often says, “Not your keys, not your coins.” In DAOs, this means that a participant can identify themselves and utilize cryptocurrencies as a means of paying for a vote, proposals and other actions. These used to require a centralized gatekeeper to act as an intermediary, which was drastically reduced with the advent and adoption of smart contract technology.
DAO 2.0 Lessons Learned: “The DAO” Case Study
The use of Ethereum for decentralized finance (DeFi) was one of the earliest use cases for the protocol. The Ethereum network launched in July 2015, and in May 2016, “The DAO” was formed. This was one of the earliest entities built on Ethereum, and it received a large amount of attention in those early days. The DAO raised $150 million worth of Ether (ETH) and was one of the earliest crowdfunding efforts and high-profile projects built on the Ethereum blockchain. The DAO was hacked three months after it had launched, and $60 million of ETH was stolen. There was much discussion about the vulnerabilities of The DAO’s code before the attack took place from supporters who wanted to see the project be successful. However, as the code was reviewed by a few inquisitive computer scientists, concerns were expressed to Ethereum leadership. The dominant concern was a bug in The DAO’s wallet, which allowed funds to be drained. Programmers attempted to fix the bug, but an attacker exploited the vulnerability and began siphoning funds.15
The response to the attack by some in the community was to hard fork Ethereum’s blockchain. A hard fork is a radical change to a network’s protocol that makes previously invalid blocks and transactions valid, or vice-versa. A hard fork requires all nodes or users to upgrade to the latest version of the protocol software.
Not everyone supported this action, but the process of the hard fork was completed. This hard fork resulted in two chains: Ethereum and Ethereum Classic. Those who refused to accept the hard fork, which altered the blockchain’s history, supported the pre-forked version; this blockchain is now known as Ethereum Classic. Ethereum Classic proponents support the phrase, “Lex Cryptographia,” or code is law. Code is law means that the code of a smart contract is the ultimate arbiter of the outcome of an on-chain interaction, as opposed to some overriding force from outside the network.16 As a result, applications are unstoppable and run exactly as programmed without downtime, censorship or third-party interference. The blockchain presently known as Ethereum is the one that implemented the hard fork and altered the blockchain’s history. As a way to atone for the lost funds, hacked funds were sent to an account available to the original owners.
This was an important step in the implementation of smart contracts and DAOs. The exploit brought along with it lessons that have been incorporated into DAOs and other Web3 projects ever since. The importance of a sound and secure system is vital, and the vulnerability of a blockchain protocol to unknown exploits is a risk that needs to be taken into account when getting involved in these ventures.
Rise in Infrastructure Sparks DAO 3.0
The fall of “The DAO” was a learning moment for the entire crypto space and is still a cautionary tale for new projects in the hopes of not repeating the same fate. While DeFi continued in its many forms, other projects started working on making the infrastructure and tooling applications, which would pave the way for an explosion in DAO growth. From 2019 to 2020, there was an increase of 660% in active DAOs.17 This was the start of DAO 3.0 or the major proliferation of DAOs that branched out widely to not just DeFi but art, social activity, politics, NFTs, gaming (often called GameFi in the crypto space) and beyond. Some of these tools, as we break down the categories a bit deeper in the following pages, made treasury management easier, voting and proposal less costly, or made the entire start-up and operation of a DAO so easy that it could be done without needing to know how to code.
Cointelegraph has been asking, “Are DAOs the new corporate paradigm?” for some time now.18 There continues to be positive momentum in the growth of DAOs as a testament to the growth from 700 in May 2021 to over 4,000 active DAOs in mid-2022.19 DAOs are still organizations, however, and just like any startup business or venture, they have a high percentage of failure in the first year. This report intentionally focuses on active chains with substantial treasuries and active participation. Unlike traditional companies, if a blockchain protocol is a token built on a layer-1 (L1) blockchain, like the Ethereum network, it is still a locatable record viewable by blockchain analysis tools. While just under half of all DAOs are concentrated on DeFi, there are a growing number of categories, which are broken down in the following pages.
DAO 3.0: Scaling, Adoption & Use Cases — DeFi and Tooling
DeFi and Investment — 45% of DAOs
DeFi is the largest application of DAOs, which entails the likes of Uniswap, Aave and MakerDAO. These DAOs serve the primary purpose of acting as an ownership and governance system for DeFi applications. Investment DAOs operate like an investment fund commonly seen in traditional markets.
The DAO with the largest daily trading volume on the Ethereum blockchain is Uniswap. Uniswap obviates the need for trusted intermediaries, prioritizing decentralization, censorship resistance and security. The purpose of Uniswap is to manage liquidity pools of different ERC-20 tokens, which assist users with completing swaps of different ERC-20 tokens. The UNI token sits at a $4 billion market capitalization,20 with a total treasury of over $2.2 billion.21
BitDAO is a powerhouse investment DAO that manages assets worth upward of $2.3 billion. BIT token is the governance token that has assisted in collecting of such a large treasure chest. Members of BitDAO are a part of the on-chain governance in which DeFi protocols receive sizable investments from the DAO. BitDAO’s BIT token has a $1.0 billion dollar market cap,20 with a $1.3 billion dollar treasury total.21
The LAO, is structured as a member-directed venture capital fund in the US. It is registered as a Delaware limited-liability company (LLC) and compliant with US laws but carries out its functions via a Decentralized Application (Dapp) and smart contracts.22 The LAO is sitting on a modest $9.7 million treasury,21 but is a novel approach in future investment sources.
Infrastructure and Tooling — 14% of DAOs
As DAOs have become more prevalent in the blockchain space, tools to accommodate DAO scaling have emerged. As more firms take on a DAO structure, there will likely be more “picks-and-shovels” tooling spawning up to address the unique issues DAOs face.
Some protocols, like the Ethereum network, suffer from high transaction costs, which prompted the creation of Snapshot, a tool for off-chain voting and proposals for DAOs. Snapshot is a voting system that removes the need for fees when it comes to a DAO’s voting process. It can be seen as a blockchain-based polling application to help DAOs understand how their members feel about certain changes and updates.23
Aragon is a protocol that makes the creation of a DAO simple with governance plugins and a simple user interface. Utilizing the Ethereum blockchain, Aragon has helped proliferate the use of DAOs as a global organizational solution without even needing to know how to code.24 The DAO utilized its own native ANT token for governance, currently sitting at $67.4 million in market capitalization,20 and has $122.8 million in its treasury.21
The ability to manage a DAO’s treasury is key, and Coinshift offers DAOs a multisignature solution for their regular operations There is a deeper dive into Coinshift on page 25 of this report. Coinshift is under the umbrella of the GnosisDAO, which has a treasury worth $1.1 billion,21 and whose token, GNO, has a $330-million market capitalization.20
DAO 3.0: Scaling, Adoption & Use Cases — Social and Metaverse
Social and Political — 15% of DAOs
The concept of a social DAO is best compared to a gym or country club membership a person may pay for in the real world. A membership with a social DAO is contingent on the number of tokens held.
Bored Ape Yacht Club is an NFT collection that issued its own token, ApeCoin (APE), as a DAO.26 Comprising famous members, such as Tom Brady, Mark Cuban, Stephen Curry, Madonna, Jimmy Fallon and Gary Vaynerchuk, the Bored Ape Yacht Club’s social member status is a driving force behind its market value. APE has a market capitalization of $1.7 billion. 28
AssangeDAO, a political DAO, uses its native token, JUSTICE as a means to support and free media activist Julian Assange. While being a small DAO compared to the rest of the cryptocurrency market, this demonstrates the laser-focused efforts one community can have by issuing tokens. The market capitalization of JUSTICE is $0.7 million.28
If you contribute to a DAO as an independent freelancer, you may not have access to many different benefits which come from being employed in the traditional world. Opolis provides access to medical insurance, retirement plans, tax compliance, and other benefits for those in the Web3 gig economy. This is changing the way people approach employment and see themselves in society, as Web3 jobs are mostly remote, the ability to pick up and move at a moment's notice if a more favorable political or social geographical region becomes available. Through Opolis, someone working in Web3 can process all their various streams of income into various tax documents like a W2 in the United States.30
Metaverse, GameFi, and NFT — 26% of DAOs
The metaverse, a computerized world that is a blend of real life and digital experiences, with which someone may interact through the use of augmented or virtual reality, is a growing sector in the blockchain space. Part of the metaverse experience is through the use of NFTs for the user to wear or otherwise interact with in these digital worlds. DAOs are popping up in NFTs, metaverses and in GameFi as a means of community engagement.
One of the oldest NFT cultivators and curators in the blockchain space, Pleasr DAO has made a name for itself outside of its own industry. It’s famous for purchasing a one-off album by the Wu-Tang Clan called Once Upon a Time in Shaolin and turning it into an NFT.31 The 74- member collective goal is to “fund culturally significant pieces” and take that to another level by sharing it with the community. While its treasury is just under $4 million,29 the members of the DAO can raise capital dynamically depending on the circumstances.32
Receiving investments from the likes of Binance, Polygon and Solana, Avocado DAO focuses on investing in virtual games and the NFT space.27 The token for AvocadoDAO is AVO, which took a large hit in the market decline in the first half of 2022 and sits around $1.36 million in total market capitalization. 28
Perhaps the most complex ecosystem of DAOs in a metaverse game that utilizes NFTs and its own native cryptocurrency, TLM, Alien Worlds combines all these elements into an immersive experience for players. A more detailed case study is outlined below and potential implications for the future of DAOs.
Popular Blockchains for DAOs
Unsurprisingly to anyone with knowledge of the crypto space, Ethereum is by far the most prevalent L1 technology for DAOs. Among the top 100 governance tokens by market capitalization, 83 of the respective DAOs primarily link into the Ethereum ecosystem. The network effects that come with employing the second-largest cryptocurrency by market capitalization are a strong pull factor for DAO launches. DAOs on Ethereum can leverage a large pre-existing user base that has already set up browser wallets, transferred funds to their addresses, and is connected to the ecosystem’s communication channels on social media. Thus, it becomes easier for a project to reach a critical mass of token traders required to frictionlessly exchange governance tokens on DEXs without unsustainable price volatility.
Depending on the type of DAO and use case for the token, this is essential for the success of the organization. Token emissions are often used as economic incentives, and in many cases, the native token constitutes the majority of a DAO’s treasury. Violent price fluctuations risk destroying a DAO’s ability to provide incentives and a loss of confidence in the DAO’s value proposition and treasury. The quantitative data shows that the aforementioned constraints are tight, and not many organizations make it across the critical threshold just described. More than half of the DAO projects surveyed by DeepDAO do not have more than 100 tokenholders. Merely 4% of the projects had more than 10,000 tokenholders. Over 80% of these rare successes deploy Ethereum as the main treasury chain, and it is plausible that many of them would not be viable without the strong network effects of Ethereum’s ecosystem.
What would it take for DAOs to be embraced by traditional entities?
"Established businesses tend to look at results vs concepts to estimate potential. Conversely, and perhaps because they are still in their infancy, DAOs tend to focus on the big idea, often failing to clearly define goals and measure success accordingly. There is a middle ground to be reached, whereby traditional corporate entities bring their mastery of process, delivering results to the cultural priorities of more democratic DAOs." --William Vandyk COO Pollen
What are the main obstacles to DAOs and DeFi entering the mainstream?
"The biggest elephant in the room is regulation. Traditional entities are hesitant to take part in DeFi and DAOs without the support of governments and central banks. Yet more and more individuals look to these new paradigms as distrust in governments grows and a new financial crisis looms. With this in mind, financial education is another key challenge, but one that can be addressed from the bottom up, unlike the rigid, top-down process that regulation is." --William Vandyk COO Pollen
Tokenomics
Behind every DAO is a carefully designed set of rules that govern the inner workings of the DAO. As with any other crypto project, these “tokenomics” are supposed to ensure that the DAO can fulfill its purpose. Crucial elements of tokenomics are the rules regarding the supply of tokens and incentives for participation in a DAO’s governance. Naturally, tokenomics for different DAOs will depend on the purpose — i.e., for a gaming DAO, the tokenomics will differ from those for an investment DAO.
Genesis supply — The original supply of tokens
When starting a DAO, a certain number of tokens is minted and distributed among investors, participants, founders and the DAO’s treasury. Tokenholders will, in general, hope for the DAO’s business model to be successful insofar that income streams are generated, which will then be used to drive up its token’s price by either burning or purchasing tokens. Good tokenomics will ensure that there is no inflationary supply of tokens after the initial minting so that supply does not outpace demand.
Demand — The value of a token
The value of a DAO’s token will eventually be determined by supply and demand. Demand for a given token can come from several conceptual features of that token. First, it can be an investment or store of value, such as Bitcoin, which often comes with the additional benefit of being considered as collateral by many counterparties. Second, the token can be used to pay for services — e.g., Chainlink’s LINK token. Third, the token can offer cash flows, such as those from staking. Finally, a token may offer additional voting power in the governance of the token issuer, such as a DAO.
Demand for a token can also increase indirectly if a DAO generates revenue. Revenue from a DAO’s business will often be denominated in other tokens, such as USDC, as people outside the DAO pay for the DAO’s services. Thus, the DAO can start to convert these tokens into native tokens on the market, leading to a positive return for existing tokenholders. In general, a DAO with a profitable value proposition will attract demand from investors who hope for a positive return on their token investment. This will depend both on the DAO’s business model but also on the DAO’s tokenomics: How many tokens will be created in the future? Can tokens easily be exchanged for other tokens?
Governance
As we have shown, tokenomics are crucial for the success of a DAO in terms of its token becoming valuable for investors. However, with DAOs being in a constant state of change, tokenomics may also be changed over time if the DAO community decides to do so.
Proposals
Members of a DAO’s community can make proposals that all governance tokenholders can decide on. A successful proposal will be a binding decision for the community and has to be implemented by the DAO. These proposals can range from paying other organizations for services to investment decisions related to the DAO’s treasury. Only members with a pre-specified amount of governance tokens can make proposals (again depending on the DAO’s internal guidelines).
Snapshot
Voting on proposals is a crucial feature within a DAO’s ecosystem. Yet high gas fees may deter some tokenholders from participating, especially if their stake in the DAO is not very large. Thus, Snapshot has evolved as a tool to facilitate voting without incurring large gas fees.
Voting
Once a proposal has been put up for a vote, members can cast their vote. Some governance tokenholders may choose to delegate their voting power to other members. This form of indirect democracy means that tokenholders can participate while not actively making decisions. Data from Snapshot displayed in Figure 4 shows that nearly half of all voters only voted once. While some power users may vote several times and in several DAOs, the majority of users only participated in a limited way. As the referenced data from Snapshot has been collected since the beginning of 2020, some of the limited participation may be explained by unsuccessful DAOs that have only drawn limited attention from their members. If you consider the data displayed in Figure 5, the average votes per proposal appear to be more stable over time. While it cannot be ruled out that the continuously high number of average votes is purely driven by new DAOs being successful for a short period of time, it seems more like those DAOs that are successful continue to attract interest from members.
Key Metrics
Data on DAOs
DAOs are diverse and so is the data available for DAOs. Extensive research in this report has identified a number of high-quality sources for the most important DAO metrics. Token prices and market capitalization can easily be gathered from established data outlets, such as CoinGecko. However, not all DAOs have tokens that trade on exchanges or are liquid enough to yield accurate price information. Depending on the project, some DAOs may have a very active community without having an actively traded token. Nouns DAO, for instance, is governed by Nouns (NOUN), which are themselves NFTs rather than conventional tokens. Thus, this report will look at traditional metrics, such as the ones listed below, together with “activity” metrics obtained from DeepDAO and Snapshot.
Traditional metrics that are closely related to a DAO’s tokenomics will be discussed on page 17. Among these traditional metrics are:
- Maximum token supply
- Token price
- Trading volume
- Circulating supply
- Market cap
- Fully diluted valuation
A DAO investor may additionally be interested in the health of a project that may yield some information in the long term:
- Active members
- Votes
- Proposals
- Treasury value (vested and liquid)
Such data is more difficult to obtain; for example, treasury wallets need to be identified through on- chain analysis. Proposals and votes may happen on-chain or off-chain through tools such as Snapshot. The charts on the right display the number of DAOs on Snapshot. While this only highlights the explosive growth of DAOs since late 2021 on Snapshot, it can be seen as a proxy for the entire space. Other data outlets, such as DeepDAO, currently track more than 4,800 DAOs.
Participation in DAOs
Despite the impressive growth in the number of DAOs, the sheer number does not tell us much about the activity within the DAO space. Figure 8 displays the number of daily voters active in the DAO space as tracked by DeepDAO. Although one voter may be active in different DAOs, the chart tells a clear story about the rise and fall of DAO activity. Despite the impressive activity in late 2021, the number of voters has retreated back to levels of early 2021. While this is by no means the end of DAOs, it is a clear sign that interest has been waning together with the general market downturn in the crypto space. Nevertheless, a healthy consolidation phase will likely result in DAOs that have a clear value proposition for users and clients surviving.
As discussed on the previous slide, there are two ways of evaluating a DAO’s ecosystem. One would be the investor perspective that is primarily concerned with the performance, scalability and liquidity of DAOs and their tokens. The “activity” perspective, on the other hand, would merely look at the engagement of DAOs and their members. Figure 8 has shown that interest seems to have faded compared to the heydays in late 2021. Figure 9 below displays that activity within a DAO is not necessarily associated with its reaching a large valuation. While these stylized facts do not mean that DAOs with a large community engagement cannot be successful, it is evident that the mere quantity of interaction within a DAO is not a guarantor of success.
How have YouHolder maintained high yields during the recent downturn in the market?
"The yield percentages you see on our platform (up to 10.7% APR + compounding interest) are powered by the fees from our other features (crypto-backed loans, turbocharge loans, crypto-fiat, fiat- crypto exchange, and Multi HODL).
Due to the current bear market, clients will likely use these features in more conservative ways. So it’s only natural our rewards are more conservative as well. When the market is down as it is now, returns in both traditional financial markets and crypto markets are lower. That’s just a fact. As a result, we temporarily lowered our yields slightly to match the current market condition. We will raise them again when conditions improve.
As for our sustainability in general, we prioritize a conservative and sustainable approach to FinTech. Unlike other platforms, YouHodler’s business model is contained within the platform. We never take clients’ funds for financial activities outside of the platform. Doing so is risky and goes against our conservative approach to FinTech. At YouHodler, everything is kept inside the platform. This is how we maintain liquidity and balance. Furthermore, we never lock clients' funds inside the platform. Users are free to withdraw whenever they want, regardless of market sentiment.
Once again, the fact that we keep all funds within the platform results in more conservative returns than some high-risk DeFi platforms but we believe our business model is better in the long- term for safety and sustainability during volatile market conditions. The same cannot be said for other platforms using riskier strategies." --- Ilya Volkov CEO YouHodler
DAO Token Correlation and Return vs Bitcoin
In any given asset class, it is important to identify the theoretical risk-free rate if you were to invest solely in that category. In crypto, that is Bitcoin, as it has the largest adoption, market capitalization and longest record. The two important areas of the analysis are correlation (how each asset moves in relation to Bitcoin’s fiat valuation) and whether there is any return higher than simply purchasing Bitcoin. As we can see from the chart, over the past few years, there has been a strong correlation between the crypto market, in general, and the largest cryptocurrency, Bitcoin. Although most DAOs run on the Ethereum protocol, the tokens of each DAO have some idiosyncratic movement that can be attributed to the financial performance of the DAO’s activities or general market sentiment toward the DAO’s sector of business.
The chart above sheds some light on how the most popular tokens of DAOs have performed in recent months and to what extent they have moved independently from general market developments. DAOs such as Aave and Uniswap outperformed many of the other big DAOs on this chart during the last year and a half. During this period, it would be a prudent time to consider selling off a portion of a particular holding to lock in gains before risking riding down the position of the asset to a zero or negative return compared to Bitcoin.
DAO Token Correlation and Return vs Ethereum
While most DAOs exhibit a lower correlation to Bitcoin compared to Ether, there is nonetheless a rather strong co-movement, especially since early 2021. Since Ethereum has a high correlation to Bitcoin, it is no surprise that the charts on the previous page show similar results. PancakeSwap is the only represented DAO token that has out outpaced both Bitcoin and Ethereum the entire time from January 2021 through 2022. All other DAO tokens would have provided a negative return to the alternative of holding Ethereum.
ETH is the L1 coin which many of these long-standing, high-market-capitalization DAOs in the chart above operate on. Many DAOs operate as a layer-2 (L2) blockchain, riding along with the rails of an L1. Aave is a great example of this, utilizing ETH for gas fees to make transactions. When looking at a particular DAO to invest in, the popularity of the DAO may impact network effects on the L1 blockchain, theoretically increasing the value of the L1 blockchain more than that of the L2, as the L1 will have to be continuously spent for transactions, increasing its demand. This is one reason why DAOs often hold assets like ETH. It is important to factor in not only the utility of the token but any yield that can be had by staking or for hodling the asset to offset simply holding onto the L1 coin.
Case Study: OlympusDAO
To illustrate how tokenomics can shape the initial attractiveness and long-term sustainability of a DAO, this report takes a closer look at an infamous DAO that started in 2021. Olympus DAO was subject to a heated debate both due to its unique mechanism and its seemingly unsustainable value proposition. Yet the protocol’s features deserve some attention from investors.
A potential problem for new protocols is how to maintain liquidity on decentralized exchanges. As some investors only provide liquidity during periods with strong incentives but quickly withdraw liquidity once a new protocol offers preferable terms, the retention of liquidity is of central importance to new crypto tokens. Olympus addresses this issue by offering so-called “bonding,” which means that investors hand over their funds to Olympus in exchange for OHM, the protocol’s native token. Technically, investors deposit their funds and receive OHM tokens at a discount after a specified vesting period. By doing so, the investors’ funds directly go into the treasury of Olympus, increasing its liquidity. Currently, the value of Olympus’ treasury stands at nearly $300 million, invested in more than 50 cryptocurrency tokens.
An additional step that increases the return for investors is Olympus’ “staking” option, which allows tokenholders to deposit their tokens in a pool to earn additional rewards. With more tokenholders staking their OHM and receiving sOHM in exchange, there is less supply in the market, driving up the price. Thus, there is an incentive never to sell OHM, given that other tokenholders act in the same way. This concept has brought Olympus some allegations of running a Ponzi scheme, as returns can only be distributed among investors as long as other investors don’t sell.
Despite these allegations, there is some lower bound for the price of OHM coming from the protocol. OHM will never be valued below 1 Dai, as the Olympus DAO stablecoin treasury acts as a backstop. Additional OHM can be issued if its price is above 1 Dai. But Olympus does not only collect funds from new investors — it creates revenue streams by selling liquidity to other protocols and by staking tokens from its liquidity pool.
While returns from buying and staking OHM have initially been large, the performance was rather poor in the first quarter of 2022. Even though staking OHM should eventually compensate for the dilution arising from the issuance of additional tokens, the chart above shows that the total return from staking OHM is below the return of holding Bitcoin or Ether.
In conclusion, investors are presented with a variety of investment possibilities in the DAO space. Although the price of Olympus has faced some headwinds, the jury is still out to what extent protocol-owned liquidity can generate substantial returns for investors. In any case, innovations such as bonding and staking may continue to attract investors’ attention in future use cases.
VC Investment in DAOs
There are two aspects to the venture capital (VC) side of a DAO: VC investment in DAOs and DAOs as the VCs themselves. Venture capital involvement in funding DAO projects has been on an uptrend since 2021, often coinciding with macroeconomic and crypto market cycles. In Q1 2022, VC investment hit a local peak of over $160 million. Due to the easily malleable way in which DAOs can form and be focused on different goals, it is no wonder VCs can see these potentially good vehicles for a return on investment while still holding a higher degree of risk than other crypto-based opportunities. DAOs also allow firms to receive funding from a non-traditional source without having to deal with some of the sacrifices sometimes associated with the strings attached to VC backing — i.e., giving up the autonomy of a project’s direction. DAOs may not offer some of the natural benefits of having a VC either, like a network of already-connected companies and individuals
DAOs, which were VC investing in another project in the crypto space, made up around 9% of all VC investment in Q1 2022 and dropped to less than 6% in Q2. This follows the same current patterns seen in traditional financial institutions and VCs. As we will see on our next page, some DAOs have even invested in other DAOs. What should be of note is that these decentralized organizations can gather information from different parts of the world perhaps better and faster than traditional systems, which may learn of trends or changes in a given industry later than the members of a DAO. This can give DAOs an advantage. However, a potential downside is the proposal and allocation of funds process in order to capitalize on that information.
Some Notable Investors In The Top Ten DAO Funding Rounds
From 2020 to mid-2022, there were 60 DAO and DAO infrastructure firms that received investments from venture capital. Often, a firm raises money from more than one source, and these 60 deals have over 540 different VCs involved in raising capital. The most active 20 VCs were concentrated in 32 DAO projects. The top 10 projects over the last two years involving VCs and DAOs are broken down below (source: Cointelegraph Research VC Database).
Seed Club had a Strategic Raise of $15 million in May 2022
Seed Club is a DAO that brings together upcoming and alumni projects into an ecosystem in incubating the next generation of Web3 projects. It’s backed by top investors, such as Union Square Ventures, The Chernin Group, Placeholder, Collab+Currency, Blockchain Capital, Framework Ventures, IDEO CoLab Ventures, Distributed Global, Kindred Ventures, Nascent, Multicoin Capital, The LAO and Hutt Capital.
Yield Guild Games Southeast Asia (YGG SEA) had a Seed Round for $15 million in December 2021
YGG SEA is a blockchain gaming sub-DAO (meaning it is a sub-group within broader DAO groups), and over two rounds, it raised $15 million from Crypto.com Capital, Animoca Brands, MindWorks Capital, Poloniex, Jump Capital, Digital Currency Group, Hashed, Polygon, Arca, OKX, Yolo Ventures, SevenX Ventures, LongHash Ventures, HashKey Capital, Morningstar Ventures, Dialectic Capital, SweeperDAO, PetRock Capital, FBG Capital, Circle, Infinity Ventures Crypto and Yield Guild Games.
Rift Finance held a fundraising round and brought in $18 million in February 2022
Helping to create liquidity markets to reduce friction in trading cryptocurrencies, Rift Finance had an $18-million fundraising round that included Pantera Capital, Two Sigma Ventures, Coinbase Ventures, Hashed, DeFiance Capital, Spartan Group, Jump Capital, Vessel Capital and Morningstar Ventures.
CreatorDAO’s Seed Round raised $20 million in August 2022
Imagine a DAO that embodies the idea of mutual enrichment and support for all participants involved. CreatorDAO is that type of organization that promotes and builds on commentary within its ecosystem. It also has some of the largest investors, including a16z (Andreessen Horowitz) and Initialized Capital among its investors.
Coinshift raised $15 million through a Series A round in May 2022
A treasury management tool for DAOs, Coinshift announced a $15- million Series A lead by Tiger Global, as well as Sequoia Capital, Alameda Research, Spartan Group, Ethereal Ventures, Alpha Wave Global, HashKey Capital, Quiet Capital, Polygon Studios and Volt Capital.
Syndicate DAO finished a Series A round of funding for $20 million in August 2021
Giving the ability to easily start the process of creating, launching and running a DAO in one place, Syndicate DAO attracted funding from long-term investors in the space, such as a16z, IDEO CoLab Ventures, Electric Capital, Coinbase Ventures, Aave and Protocol Labs.
Orange DAO held a strategic round for $15 million in March and an $80-million round in August 2022
OrangeDAO is an investment DAO specifically geared toward helping to incubate the next generation of the blockchain and crypto industry. The Algorand Foundation and Near Foundation invest heavily in Orange DAO, which invested in some of the other DAOs on this list.
Alliance DAO’s Seed Round raised $50 million in January 2022
Like Orange DAO, Alliance DAO is a Web3 incubator that has a systematic process called the Accelerator with different cohorts. Some of the notable investors included Alameda Research, 0x Labs, Avalanche Foundation, BlockFi, Chainlink, CMT Digital, Coinbase Ventures, CoinFund, CoinShares, Crypto.com Capital, Apollo DAO, 1inch, Dragonfly Capital, Injective Protocol, IOSG Ventures, Jane Street Capital, Kyber Network, Nascent, OrangeDAO, Protocol Labs, Solana Capital, Ready Player DAO and Polygon.
Utopia Labs raised $23 million in a Series A in May 2022
Utopia Labs is a DAO tooling and infrastructure firm that provides payments, expense management and compliance features for tax accounting, among other products. The Series A in Q2 2022 included some of the following investors: Paradigm, Circle, Coinbase Ventures, Infinity Ventures Crypto, Distributed Global, Fourth Revolution Capital, Spice Capital, Chainforest, Global Coin Research, Yield Guild Games, Paragons DAO, Woo DAO among others.
Neptune DAO’s $20-million strategic round was in April of 2021
The LAO and Flamingo DAO incubated Neptune DAO in 2021 to be a liquidity provider and produce ROI for its holders. The initial investment by the separate DAOs into Neptune was $13 million, which it then went on to source another $20 million in investor capital.
[ continue to Part 2 of the report ]
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