Year of the DAO: How Web3 will change the organizational landscape
Authored by Ryan Selkis is the CEO and co-founder of Messari
In the last 18 months, Crypto, or the recently en vogue “Web3” space, has taught the finance and business world that it’s an unstoppable force in the long-term. Arguably, institutional adoption has increased dramatically from household names launching NFT collections, and traditional finance adding crypto to their balance sheets and tech stacks. If 2020 was all about DeFi, and 2021 was all about NFTs, 2022 is sure to be the year of the DAO. This article serves as a primer to DAOs and how they will disrupt the work economy in the years to come.
DAOs are one of the most important constructs in crypto, and they will change every aspect of the economy, politics, and probably even social life in the years ahead. But before we get ahead of ourselves, let’s start by answering, what even is a DAO?
DAOs are fluid online communities whose assets are managed by the community’s
contributors. The organizing primitive of a DAO is code committed to a public ledger vs. articles filed in Delaware, and the blockchain guarantees user accessibility, transparency, and exit-rights (via forks). A DAO’s token determines voting power, allocates funds according to group priorities, incentivizes participation, and punishes anti-social actions. We also like this simple definition proposed by the Bankless podcast team: “digitally native communities that center around a shared mission.”
It’s great that this economy seems to have grown within a niche crypto community, but larger tooling for general users is needed to make this work, right? These same questions were posed pre-DeFi summer, and the tooling that developed during that time set the groundwork for the most important needs for DAOs: Wallets and staking.
The backbone of the Web3 economy and the wild world of DAOs are personal wallets, which are sort of like personal data vaults. Whether it’s Metamask or Coinbase on Ethereum, Phantom on Solana, TerraStation on Terra, or something else, these tokens within these vaults unlock a person’s access to the crypto realm, and will only become more important in the years to come. We’re getting closer to a time when our wallets can double as universal identifiers and data managers.
Working in Web3
After learning a bit about a project, workers might want to start diving in and contributing a little on the side. That gig work could be spread out across projects, or a precursor to a full time offer from a DAO or one of its related companies. Part-time responsibilities span DevOps, Research, Governance, Data Science, and more. Both the centralized and decentralized communities are also hiring for full-time roles at a rapid clip.
What’s wild about the Web3 ecosystem, though, is its global accessibility. A worker doesn't need to be born in the right city or earn admittance to the right computer science program. The bottoms up model and opt-in membership of DAOs invert the talent sourcing model. You can join a discord server with one click. They can earn bounties and display their proof of work to earn reputation points with the community’s decentralized HR, community vouches. They can apply for grants or submit proposals for full-time employment directly to the DAO membership. Web3 token incentives are something that can’t be uninvented.
Hierarchies, Pods, and Fluid Organisms
How do we balance between choosing new benevolent dictators and maintaining decentralized decision making? Crypto communities have caught on pretty quickly to the fact that decision making in DAOs needs to be stratified very similarly to (gasp) traditional companies. Governance accountability, community “HR”, user and contributor engagement and communications, etc. are all significant, but surmountable challenges. Jai from Rari Capital has a good playbook. He suggests breaking roles into “bubbles” which allows for sub- DAOs and discrete, fluid teams, something that Yearn pioneered and currently uses. We think this is the right framing, and it also pushes organizations to scale via written documentation.
We’ll need to see 100x improvements in information flow and decision support tools. You can govern a global DAO or a subDAO with NFTs or social currencies more easily than you might a global corporation (anyone who’s remote first and international knows what a nightmare it is to set up this infrastructure), but that doesn’t change the fact that without delegated functions, progress in a DAO can move to a standstill when every micro-decision turns into a proxy vote.
DAO Treasury Management
DeFi’s current bull market is one of the top wealth generating events in crypto’s short history. Some of the top DeFi protocols themselves are now sitting on hundreds of millions, and sometimes billions, of dollars in value, mostly in their native tokens. Two of the most active DAOs, Uniswap ($4bn) and Compound ($1bn) sit on particularly large reserves.
You might look at the numbers and think DeFi protocols are financially set for life, but a deeper look into the composition of each treasury suggests the opposite. The vast majority of the “value” in these token treasuries is coming from the reflexive belief that the market will always absorb the new supply. That may happen in bull markets, but things can unwind sharply when volumes subside. In fact, that’s exactly what happened during May’s market crash.
Token treasury management best practices aren’t the only issues here, it’s also about the lack of professional treasury managers. The entrance of real financial managers for DAOs presents a big market opportunity, and would help protocols diversify intelligently to ensure they are well-capitalized under all sorts of market environments.
Legal Frameworks for DAOs
One of the things that is going to be difficult to figure out is how DAOs actually work in the real world from a tax, contract law, and compliance standpoint. On paper, DAOs are actually pretty good at eliminating the “banking services” concern, given the entity itself is a shared bank account. They’re not bad at addressing the personal liability concern either...if you’re cool working anonymously and staying off the grid and you’re confident that the rest of your compatriots in the DAO will do the same and feel comfortable taking on the group’s liability risks if anything goes wrong. But they are really bad if you think you can join as a member, report your taxes from the DAO, and somehow not tip off the government that you’re working with/for an unincorporated partnership.
For most normal people, fixing the contributor liability issues, and bringing DAOs and their communities into global and local tax, banking, and employment compliance is going to be important. A few players have created some good proposals, but given how aggressive some governments have been (namely the US), we expect them to take a hard-lined approach towards unincorporated DAOs as well.
The Year of the DAO is Upon Us
There are many challenges and opportunities to the innovation set in motion by DAOs. For organizations looking to further their footprint within the incentivized economies they will create, keeping their eyes on the development within this next year could be critical for their talent structures, and balance sheets.
About the Author
The author Ryan Selkis is the CEO and co-founder of Messari, a leading crypto data ingestion platform and market intelligence company. This article is a shorter version of Selkis’s annual Crypto Theses for 2022. Download the full report.