This week, in <5 minutes, we’ll answer these questions and more as we cover DAOs:
• What is a DAO? 👉Attributes, Actors, Incentives
• Key/Recent DAO Projects 👉Augur, MakerDAO, Constitution, Climate Carbon Credits
• Can This be Done with Stonks? 👉Securitization of Asset Management
• Just because we CAN doesn’t mean we SHOULD 👉DownsidesWho's your DAO-ddy
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Nic Cage is an absolute wreck right now.
Unfortunately, he may never know if there really is a treasure map on the back of (a copy of) the declaration of independence.
In case you live under a rock and are wondering what the heck I’m talking about, last week a group of people got together online and tried to purchase a copy of the U.S. Constitution.
Similar to the declaration of independence that Benjamin Franklin Gates (Nic Cage) tried to steal in the terribly terrible movie National Treasure.
Also the Constitution that Wall Street Bets’ public enemy #1: Ken Griffin (CEO of Citadel) beat out a DAO to buy.
But what is a DAO? Why are they getting a surge of interest now?
This week, in <5 minutes, we’ll answer these questions and more as we cover DAOs:
What is a DAO? 👉Attributes, Actors, Incentives
Key/Recent DAO Projects 👉Augur, MakerDAO, Constitution, Climate Carbon Credits
Can This be Done with Stonks? 👉Securitization of Asset Management
Just because we CAN doesn’t mean we SHOULD 👉Downsides
Let’s get started!
1. What is a DAO? 👉 Attributes, Actors, Incentives
DAO stands for Decentralized Autonomous Organization. There are many of these now in existence, not be to confused with “The DAO” which is an organization upon itself that really kicked off this idea, so let’s start there.
“The DAO” was launched back in April 2016 as a form of investor-directed venture capital and launched as a crowdfunding campaign via a token sale. It went on to raise $150M by May 2016, and the largest investor in DAO held less than 4% of all DAO tokens.
The DAO had an objective to provide a new decentralized business model for organizing both commercial and non-profit businesses and was initiated on the Ethereum Blockchain.
It had no conventional management structure and the code itself was open-source. A great idea in theory - but what this early concept lacked was security, execution, and well-written code.
In June of 2016 users exploited a vulnerability of the DAO code to enable them to siphon off one-third of the DAO’s funds to a subsidiary account. Nearly $50M was stolen in this event by an anonymous hacker.
After a controversial hard-fork, by September, the value token of The DAO was delisted from major currency exchanges and had, in effect, become defunct.
This was one of the first major stumbling blocks for Ethereum.
Remember that crackdown a while back when you saw the letters ICO and SEC in the same headlines? The SEC deeming The DAO a currency would add to a list of these problems.
But what we did get out of this whole science project was two ideas that would go on to build the foundation of where DAOs are now and where they are headed.
In order for a DAO to succeed the rules encoded into the computer program have to be transparent and secure. These rules have to be governed by the organization’s members and not influenced by a central government. The transaction record and program rules then are maintained on a blockchain.
A core tenant driving this is to lower the “middle-man” transaction fees, although recent gas prices in Ethereum are currently proving otherwise.
Vitalik Buterin (Ethereum Founder) proposed that after a DAO is launched, it might be organized to run without human managerial interactivity, provided the smart contracts are supported by a Turing-complete platform.
Ethereum, built on a blockchain and launched in 2015, has been described as meeting that Turing threshold, thus enabling such DAOs. DAOs aim to be open platforms where individuals control their identities and their personal data.
Let’s walk through a couple of recent examples to get a better grasp of the idea.
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2. Key/Recent DAO Projects Augur, MakerDAO, Constitution, Climate Carbon Credits👉Augur
Augur is a decentralized prediction platform built on the Ethereum Blockchain that allows any user to create a prediction market on any topic.
The whole premise behind this is one that I find of particular interest because one of my favourite books (Super Forecasting by Philip Tetlock) covers the topic of trying to predict events.
The main premise of this book is an experiment where they try to see who can predict global events. The Good Judgment Project involved tens of thousands of ordinary people, and found that everyday people (a Filmmaker, a retired pipe installer, a former ballroom dancer) outperformed experts and even intelligence analysts with access to classified information.
On Augur, an event is listed and users can wager on the outcome of events. The software itself maintains an order book where there is no limitation on what event could be wagered on (which becomes a problem on the dark web…).
When users predict outcomes correctly, they are rewarded with REP, the crypto asset that powers the Augur network.
Pretty awesome self-governing concept in theory, but like alot of products that require a marketplace, you need to achieve critical mass. As of late, the active users on Augur have really fallen off which has waned interest for the crypto and the platform overall.
We’ll put this one in the bucket of “cool idea, but not big enough.”
This is where it gets interesting. MakerDAO is a DAO that facilitates smart contracts to create a stablecoin called Dai. As a stablecoin, Dai aims to keep its value as close to one USD as possible through an automated system of smart contracts on the Ethereum Blockchain.
Dai and MakerDAO together are considered as some of the first examples of decentralized finance (DeFi) that has widespread adoption.
The concept of Dai is to make a currency that is stable and actually spendable, thinking it more as a note of record rather than a hedge against inflation. By staking assets, you can also earn interest on your Ether that you stake against Dai.
It is truly decentralized because a community of MKR toekn holders govern the Maker Protocol, which are the smart contracts that power Dai.
The more and more platforms and apps that adopt the acception of Dai, the more ubiquitous this currency can become.
This is one thats definitely worth doing a bit more work on for a deep dive, and now has a $6.5B market cap.
What an example of a “sign of the times.” This was an experiment in whats called a single-purpose DAO. Whereas the other projects are closer to platforms that facilitate long-term transactions, this was simple aggregation in order to perform one transaction: buying a copy of the Constitution from a Sotheby’s auction.
All was going well as the organization pooled together north of $40M to win the bid. The idea was that each person contributing their Ethereum would then own a piece of history, which could later appreciate via a resale of fractionalized ownership, then let the market set the price.
This idea is very cool because it provides both access and liquidity to an assetclass historically reserved for billionaires. This also remind me of a company that I have worked with called Masterworks that does something similar.
But at the end of it all, the consortium lost in the last minute to Citadel boss Ken Griffin.
My problem with all of this is the transparency of the amount that the DAO had raised. I get that you want to provide your community an update with the amount you have raised in total but this is not smart when it comes to a bidding process. The founder of this seemed to have skipped the economics class that covered auctions.
If you are constantly updating the amount you have raised (your intended bid), the incremental rich dude buyer will come in and beat your bid by $1. Since you are the only one publicly announcing your bid amount in a typically blind process, of course, there will be no other bids because people knew what the DAO was bidding.
Why put in a bid lower? You know the floor bid amount.
Great intention. Poor execution.
Climate Carbon Credit DAO: KlimaDAO
KlimaDAO was put together to organize a consortium that purchases carbon credits and carbon offsets in open markets.
KlimaDAO’s goal is to accelerate the price appreciation of carbon assets. A high price of carbon forces companies and economies to adapt more quickly to the realities of climate change and makes low-carbon technologies and carbon-removal projects more profitable.
Klima’s treasury ensures that every token is backed by 1 tonne of verified, tokenized carbon reduction or removal. These can be locked in treasury indefinitely or sold to balance the price of Klima.
This project still getting started: only $100M in it so far, but definitely one to keep an eye on.
But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. Can This be Done with Stonks?👉 Securitization of Asset Management
There has also now been alot of buzz around the tokenization of equities - the creation and issuance of “coins” that represent shares in a corporation.
Tokenized equity has been used in the form of initial coin offerings (ICOs) for blockchain-based projects, although its legal and regulatory status as a traded security is very grey.
Now, tokenized stocks are one of the newest things in crypto. You can trade 24/7 the token version of stocks like Tesla, Apple & Netflix and be entitled to dividends.
It’s an attractive idea to be always on all the time. The stock market opens and 9:30 and closes at 4:00, but what if you could trade all the time? My hedge fund friends hate this idea because they want a break – and I get it – but I also get that you can’t stop innovation. Just like factories work on shifts – so may money management.
And it looks like the volumes are picking up on tokenized stocks:
“FTX has seen “record-high” trading volumes (in October). It’s been an “electric month” for tokenized stock trading, the update confirmed while adding that FTX saw more than $94,000,000 in monthly volume traded on its exchange “across 27 different tokenized stocks this month.” Notably, that is “a 571% spike in volume from September’s $16,000,000,” the report revealed.”
Making the co-founder of FTX, Sam Bankman-Fried, dubbed the “crypto wunderkind” who was on the cover of Forbes in October richer by the second.
4. Just because we CAN doesn’t mean we SHOULD 👉 Downsides
While the underlying idea is solid and can be a bastion of democratization and decentralization, there are several problems with this system we need solutions for.
By not having to report holdings and not having any speedbumps built-in, you leave the possibility for frontrunning, price manipulation, insider trading, and all the things the SEC was built to stop.
I get that the people need power, but we also need rules or else we will descend into anarchy and chaos. But more importantly - we’ll also have another “The DAO” or a scam built in where the powerful crypto bros that hold a majority of the float screw over the average Joe who will be left holding the bag.
Power to the people, but protect them as well!
The concept of DAOs is at the centre of the whole Web 3.0 movement where decentralizated organizations are giving power back to the people. There are so many imbalances in the current system that have provided the momentum for this uprising.
But we still have to be careful. Trusting everything to an online entity that has a self-governance aspect always leaves the problem of lack of responsibility for a breach. If the security aspect is not done properly, the little guy can end up holding the bag.
DAOs are an incredible movement from a socioeconomic standpoint that are truly a “sign of the times” and something that should not be missed.
Which is why we are looking into creating a GritDAO investment club. Where we would share our investment ideas, deal flow etc and vote together on what to invest in.
A beautiful intersection of democratization and social investing!
Can’t wait to share more with you soon ; )
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S. If you loved bitcoin at nearly $70k you’ll love it at $57k.
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