The Idea Machine

Overview — What is a DAO?

Decentralized Autonomous Organizations, or DAOs, are collectives of individuals organized around a set of rules or beliefs. Built on a public blockchain, DAOs typically integrate around a token that provides the holder with governance rights over the entity. Think of a DAO like the government of a town, city, or country, with a constitution of rules determining the mission of the government and the rights of people residing within it. While we have only seen DAOs in their earliest iterations so far, we believe the current landscape represents a glimpse into of a new form of human organization that will coordinate resources more efficiently and fairly than ever before.

DAOs as a capital organization tool

Most DAOs currently are capital sourcing and distribution entities — resembling venture capital firms more than anything else. Entities like PleasrDAO have organized to purchase non-fungible tokens (NFTs) such as Edward Snowden’s inaugural NFT “Stay Free”, raising over $8mm to do so. Much like a government taxes its citizens to create a shared public good like a road or fire station, PleasrDAO sources capital from its members to finance and invest in culture in line with its values of decentralization and freedom. The result is a common good that members of the community enjoy together, even though none may have had the individual means to purchase that good.

When it was founded, PleasrDAO distributed fractional ownership of the DAO, including any future NFTs in its portfolio or treasury assets, to tokenholders. Holders can also purchase further ownership tokens as the DAO decides to distribute them. Critically, PleasrDAO’s token does not trade on the open market, but it essentially functions as an asset-backed security, entitling the holder to a fraction of assets owned by the DAO. While this scheme in itself is a novel way to organize capital between potentially anonymous individuals who don’t necessarily need to trust one another, the second iteration of DAOs as organizers of labor holds even more promise.

DAOs as a labor organization tool

Bankless DAO is a recently founded DAO organized around the values of decentralization, coordination and self-sovereignty. Unlike PleasrDAO, its goal is not to accumulate an investment portfolio, but to spread its principles worldwide. Its stated mission is to onboard one billion people to open money systems like Bitcoin and Ethereum. It does this by organizing people to promote its ideas, creating blog posts, podcasts, memes and other content that express Bankless values. The DAO compensates people who fulfill these tasks in its native token, BANK. Crucially, BANK does trade on the open market, providing liquidity to its members and definable value to the token outside of the assets held by the DAO.

Bankless DAO initially distributed BANK tokens to subscribers of the Bankless podcast and blog as part of the DAO’s initial formation. Its BANK token has a max supply of 1 billion and it requires 35,000 BANK tokens to access its forums on Discord. Voting power in governance proposals is also proportional to BANK tokens held. It’s founding Medium post calls the tokens “valueless”.

Curiously, however, turning to the market, we discover these tokens are in fact not valueless. Instead, they trade at about $0.07 per token (at the time of writing) or around $2,500 just to access the Discord! The fully diluted valuation of the token is measured at nearly $70 million. Unlike PleasrDAO, there are no assets backing this token, and, given that the DAO is organized around an idea, not a business, there is no hope of the DAO accruing future cash flows. So where is this value coming from?

Governance as a form of value

Historically, equity assets have been driven by two forms of value:

- Ownership share and governance of an organization
- Entitlement to future cash flows

These two forms of value have been always been inextricably linked. However, with the emergence of labor organizing DAOs, we may be seeing the first signs of tokens unlocking the inherent value of governance separate from the cash flow component of equity.

If grasping the value of governance is difficult for you, imagine for a moment that you are an environmental activist. One of your biggest concerns is the role oil companies play in the acceleration of climate change. Putting these companies on a path to decarbonization and investment in renewable energy would be incredibly valuable to you.

One route to enacting this change could be to purchase a majority ownership of the company and demand the board install an executive team more friendly to your objectives. To do this you would need to buy a large equity stake in the company, even though its future cash flows are not important to you. What you value instead is the ability to govern the oil company to direct its management and employees to achieve your sustainability goals.

As another example, think about the President of the United States. How much is it worth to be the most powerful person on Earth? Recent presidential campaigns have spent over $1 billion each to attempt to win the office. This despite the job’s salary of only around $400,000 per year, which is typically donated away anyways. If there are no cash flows available, why do campaigns spend so much money to win power? The answer is that governance itself is valuable independent of its claim on cash flows.

Circling back to Bankless DAO, we now have a framework to understand why BANK tokens are valuable. Members value the ability to govern and direct the labor and assets the DAO accrues since the DAO’s mission is in line with their deeply held beliefs, creating demand for the BANK tokens issued by the DAO and paid to members.

This is not all that different from how governments and currencies interact in the existing world. The U.S. government issues dollars, which entitle holders easier access to its founding values of life, liberty and the pursuit of happiness via the ability to direct resources (buy goods and services) within the U.S. economic system.

As long as it is managed responsibly, the U.S. dollar has value because it entitles holders governance over a valuable economic system organized by a government that was founded to promote the shared beliefs of its members. If Bankless DAO does something that is valuable to its membership and potential new members (spreading its decentralization values), the BANK token retains value in the same way government-backed currencies currently do.

DAOs monetize the spread of ideas

If Bankless DAO’s ideas and values don’t particularly resonate with you consider the some of the following ideas:

-Economic Systems (Capitalism vs. Socialism, etc.)
-Sports (Football, Baseball, Golf, Soccer, etc.)
-Religions (Christianity, Islam, Judaism, etc.)
-Political Issues (Marijuana legalization, Voting rights, Environmental policy, etc. )
-Music (Hip hop, Electronic, Country, etc.)
-Political Systems (Democracy, Autocracy, etc.)

Chances are you or someone you know well cares deeply about at least one of these ideas. In fact, all of them have many people who are incredibly passionate about them, people who would place huge value on spreading these ideas and beliefs to others in society.

With DAOs, they can create an autonomous organization of people worldwide to coordinate capital and labor to advance the idea. The entity remains economically viable as long as its mission aligns with the native token’s value i.e. 1. Encouraging existing members to create goods and services that are valuable to the DAO’s members and 2. Convincing non-members of the DAO’s beliefs and encouraging them to join.

Like governments and companies before them, DAOs can become self-sustaining organizations, but rather than providing rights or goods/services to society, they will spread ideas.

DAOs will compete with companies for labor and win

As DAOs scale to sufficient size, members may be able to earn income solely from their work for the DAO, like most currently do from working at traditional companies. However, working for a DAO offers an even more attractive compensation structure.

Members of a DAO are united around common ownership of the token and in a set of shared beliefs. The dual compensation of equity incentives and intrinsic rewards that active contributors receive are an incredibly powerful motivator. This structure may promote more efficient workers than we see today given the strength of intrinsic motivation as an indicator of productivity. Contrast this to the salary that most workers receive today. A salary is extrinsically motivational but doesn’t align the interests of the employee particularly well with those of the company. Companies rely on culture to generate intrinsic motivation of their workforce, with mixed results. It may be difficult for them to compete with organizations that can offer employees the chance to contribute to ideas they are truly passionate about.

DAOs will dramatically accelerate the spread of ideas

Like the printing press or the Internet before them, DAOs have the potential to make ideas spread across the globe more quickly and more pervasively than ever before. However, whereas those innovations increased the ease of spreading information, DAOs increase the incentive to do so.

DAOs determine what is valuable to them internally and the world’s population determines whether their goal is valuable to society. The more pervasive the idea becomes, the more people join the DAO. In turn, the DAO becomes more valuable, enriching early adopters of new ideas who can persuade others of their validity. Ideas will no longer battle it out in the court of public opinion, but in the financial markets, with bigger DAOs gaining the capacity to organize more people and further promote their ideas.

The accelerated spread of ideas has far reaching effects that are difficult to consider today. Innovations in information technology like the Internet have had both positive and negative implications but have inarguably vastly accelerated economic activity and improved standards of living nearly worldwide.

While the Internet was said to create an economy of information, what it really did was create an economy of information products. Businesses still needed to understand what customers wanted to use or buy in order to succeed. DAOs, by contrast, have no desire to know what customers want to buy, but instead what they believe in and care about.

Spreading ideas has never before been an easily monetizable activity. DAOs, however, turn ideas into nuclear reactors driving human economic activity. Native crypto tokens will bootstrap the spread of ideas like they currently do with decentralized protocols. As people organize around DAOs, ideas will propagate themselves and in time take on a life of their own as tools of human culture and society just as important as any business.




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Nick Hotz

Nick Hotz

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