They Said, “Let’s Buy the Constitution”
It was the auction featured on newscasts around the world. A copy – yes a copy, not the original document – of the US constitution was going up for sale. As far as utility to the world, the value of the document was as a historical artifact and collector’s item. Yet, it was featured everywhere from Forbes and CNBC to NPR and the New York Times.
What was so newsworthy about another Saturday afternoon auction at Sotheby’s? A group of 17,437 contributors from across the world had pooled together their money into a Decentralized Autonomous Organization (DAO) to bid on the historical document.
There was only one problem. The group gave away their reservation price for the world to see. They had put together $43 million for the document. An anonymous private collector, who was later revealed to be the evil villain of the year’s Robinhood scandal Ken Griffin, just barely outbid the group to secure the artifact.
And if you thought the story ended there, you would be wrong. That is just where the mainstream news stopped reporting.
The constitution DAO did not just end. Participants were given two options after losing the auction: redeem your $PEOPLE tokens and lose money to gas fees, or claim the token and keep it in your wallet. Many opted to keep the token. And its price has surged:
As of writing, the token has a market cap of $610M. If you had put $2,500 dollars into the constitution DAO – the average amount – and held your $PEOPLE tokens, they would now be worth about $30,000.
Did you earn $27,500 last month?
There is clearly more to the story of the constitution DAO, and DAOs in general. Indeed, every product and strategy leader worth their salt is asking themselves: should we do something with DAOs at our company? This article is here to help you with that.
To get there, we’ll explore:
- History of DAOs
- Major DAOs Today
- The Future of $PEOPLE
- Applications of DAOs to Companies
History of DAOs
To better understand how you can use a DAO at your company, it makes sense to have an understanding of their history.
Like most things in crypto, DAOs have their origin from Vitalik Buterin, the founder of Etheruem. Vitalik began writing about them in his prolific crypto writing phase of 2010-2012. Then, in 2013, Vitalik included a definition of DAOs in the Ethereum Whitepaper:
A virtual entity that has a certain set of members or shareholders which, perhaps with a 67% majority, have the right to spend the entity’s funds and modify its code.
In typically Vitalik fashion, the definition is deceptively simple. Its straightforwardness betrays its prescience. Beginning with “a virtual entity,” Vitalik gives a good primary subject to the term: a group of people organized on the internet.
Then, when he describes the mechanic of consensus to change code based on majority ownership, it gives the blueprint for everything DAOs have become today. DAOs enable voting through collective ownership. Majority gets the right to change the code. With the power of Ethereum’s smart contracts, this means the majority get the right to make the decisions.
There is no legal entity, or employment contracts. Instead, there is machine consensus around token governance rulesets.
In 2015, early groups began getting together. One such group was MakerDAO, whose $DAI token has a market cap of $6.5 billion as of writing.
But it was not until 2016 that the world really saw the first DAO out in the world, called The DAO, and also referred to as Genesis DAO. It was meant to operate as a decentralized venture capital fund for crypto. It had a creation period, which allowed people to exchange Ether sent to a wallet address for DAO tokens. The creation period went unexpectedly well. It gathered 12.7M $ETH, worth $150M.
Unfortunately, a few days after the creation period ended, hackers found a crack. The group walked away with $70 million unrecovered. This began the spiral towards Genesis DAO’s ultimate demise. The DAO’s public failure was a setback for the space. Compared to ICOs, DAOs made relatively little noise in the crypto boom of 2017.
But, ultimately, DAOs roared back from the “DAO winter,” in 2019. In January, 2019, MolochDAO released to fund infrastructure projects on Ethereum. This kicked off what is known as, “the year of the DAO.” Several now prominent DAOs were born.
Major DAOs Today
The momentum has continued strong. And these days, there are hundreds of DAOs managing tens of billions of dollars in assets. The past three months have been particularly monumental, with assets locked (popular crypto metric TVL) into the ecosystem doubling from ~$7B to $15B.
It is worth understanding the main types of DAOs behind this explosion in value.
The most prominent group is protocol DAOs, encompassing all of the top DAOs by market cap. These look and feel quite different from the Consitution DAO. This group includes Uniswap, which I wrote about a few weeks ago, the largest decentralized exchange (DEX). If you recall, Uniswap is a protocol: a way to create liquidity for long-tail trading pairs. Its governance token $UNI currently has a market cap of $11.6B. That’s more than the highly talked about failed Zoom acquisition Five9, which has a market cap of $9.7B.
This protocol group also includes AAVE, whose $AAVE governance token has a market cap of $2.7B. That is more than recently IPO’d Allbirds, which has a market cap of $2.2B. Aave’s protocol for borrowing and lending plays a similar role to money markets in traditional finance. It enables token holders to deposit them into liquidity pools while earning interest in real-time. Other users can borrow the assets through Flash Loans, which require no collateral.
Another prominent protocol making waves in the world of decentralized finance (DeFi) is Compound. Compound is an interest rate protocol. It creates a floating, short-term interest rate for assets. This allows anyone to borrow assets. Further, interfaces built atop Compound’s protocol, like Compound Treasury allow users to simply earn 4% APR on USD without any crypto complexity. The DAO’s governance token, $COMP, has a $1.4B market cap. That’s nearly double the market cap of recently IPO’d Rent the Runway, which currently has a $700M market cap.
Where do DAOs come into these protocols? They are the consensus mechanism to govern the code changes. Nowadays, their code is heavily publicized and audited at cost. This helps to prevent hacking and trust problems, like encountered with the Genesis DAO.
Then, there are a bunch of DAOs that are more similar to what we think of with Constitution DAO and Moloch DAO, made for investing. These are investment DAOs. They pool together cash to make purchases they could not have individually. Prominent examples include Flamingo and Neptune, which each are worth over $25M with the $ETH added. There are also subcategories of collectible DAOs, focused often on NFTs, and grant DAOs, often focused on a web3 objective. Some in this group are primarily social; others, primarily returns-focused.
Then there are a bunch of more work oriented DAOs. These include service DAOs. These operate dev and design agencies for web3. The canonical example is RaidGuild. It also includes media and creator DAOs. These create content. Prominent one’s include Bankless, cited in this piece, and Personal Corner.
This overview of the landscape of the DAOs can help us better contextualize how to build for companies. But, just before we get there, let’s return to Constitution DAO.
The Future of $PEOPLE
The constitution DAO was a turning point in the history of DAOs. Google search interest has spiked from ~15 in October to 100 now:
Now, DAOs have sprung up to buy NBA teams and even the Dune bible.
But what is to happen with the $PEOPLE token? For now, it appears to have reached meme coin status. The people running the community have no plans to continue it.
This is a bit of a bizarre position for the community and token. It has accrued great value, and helped the ecosystem, but has relatively few prospects for itself.
At least as currently construed. One of the interesting developments about blockchain is that everything is in public. A derivative project of Constitution DAO has popped up. PEOPLELAND lets donors in the original 17K to mint virtual plots of land for free. Future projects like this could pop up to make $PEOPLE’s rise in market cap worthwhile still.
For now, ownership of $PEOPLE is kind of like ownership of an NFT. It is something to show off in your wallet.
The Constitution DAO was never established as intentionally as many of the big protocol DAOs, which undergo verification. Governance was never quite ironed out to enable future evolution. As the creator said:
Like all great things on the internet, it started as a meme
Now we can return to the original question in the title.
Applications of DAOs to Companies
For DAOs not started as memes, there are several potential applications to companies. The misinformed skeptic would immediately write off DAOs as applied to companies. But, actually, like the blueprint for DAOs lived in Vitalik’s early works, the blueprint for DAOs applied to companies also live there.
In 2014, Vitalik wrote a blog post further clarifying key DAO terminology and he wrote about Decentralized Autonomous Corporations (DACs). As he says, the simplest version is:
A DAC pays dividends.
The layer deeper is that DAOs are non-profits. But DACs have the concept of a purchasable share, which potentially entitles holders to receipts based on the DAC’s success. In this way, they offer a web3, decentralized option for corporate shares.
That is the first, and most important, layer for implementing a DAO at your company to ask yourself. Do you want to allow decentralized autonomous ownership and consensus control of changes? A DAO virtually requires those.
Beyond that, DAOs could work for virtually any type of business – code-based and real-world. For instance, in a real-world e-commerce business, inventory could be kept on the ledger, and customers could trigger a smart contract to trigger invoice creation, setting off a real world process to ship. As automation begins to run more of these operations – for instance, if the shipping was a push to an Amazon API – DAOs will be able to do even more.
The second layer for implementing a DAO is: why, what is the use case? That goes back to the major types of DAOs today. DAOs work particularly well at achieving protocols for DeFi. They can raise capital quickly. They also work well as investment groups, or creator groups.
In terms of other categories outside those three, generally, DAOs also work well to wring out inefficiencies by removing middlemen from the picture. There are less middle managers and more doers. So that might be another reason to pursue a DAO.
But anyone considering going DAO should be cautious. DAOs are hard. It is difficult to coordinate extremely large groups of people towards a common goal. DAOs are almost like running a nation, vs running a company. Sushiswap is one recent example of major drama. A disgruntled ex team member wrote a tweet thread questioning the transparency of its running committees, forcing them to scramble to respond.
As a result, so far, not too many companies that are not web3 native have actively made the switch. Of the web3 protocols, many, like Uniswap, actually launched their governance token well after establishing their projects. So anyone can really DAO their business at any time, if they are willing to give up the requisite control.
For some, the benefits will be worthwhile.
Web3 bros believe that will be most companies. The vision is orgs-as-code will help replace the corporate workforce model of the past. No bosses and crypto pay. The crux of this vision is based on the fact that as more assets move on-chain, smart contracts and programmatic incentives will naturally replace the legal system we have to enforce corporate law. If as many things really do go on-chain as the crypto-optimists believe, then not just your company, but every company will be going DAO.
