Crypto, Running It Back With Investment DAO’s – Block Street Journal

I think one of the most fascinating things about the crypto space is that it became a platform for capital formation for most startup open source blockchain projects like EOS. Although the ICO easy money days from 2017/18 are completely finished but the following list puts into perspective what the crypto bubble aside from Bitcoin and Ethereum looked like.

The large-scale token offerings really started with the original DAO, Decentralized Autonomous Organization, in 2016 (#15 on the list below). The 2016 DAO was a revolutionary organization that aimed to democratize venture capital by allowing regular investors to participate in a venture capital fund through a Ethereum-based smart contract. Investors just needed to purchase DAO tokens in exchange for Ethereum and take part in the collective decision making process of the fund’s activities. The DAO did not have a centralized leadership structure and ultimately aimed to become the decentralized business model for commercial and non-profit organizations in the future.

PWC Crypto ICO/IEO Report

During its initial token sale, the DAO raised roughly $150 million worth of Ethereum from about 11,000 investors. Unfortunately, hackers exploited loopholes in the code and took off with roughly $50,000,000 worth of Ethereum. This created an existential crisis at the time for all of crypto, and led the split in the Ethereum community.

Fast forward to 2020 and there has been a resurgence in the interest for the decentralized investment organization model. As Multicoin Capital pointed out in their report “The Unbundling of Ethereum”, Ethereum’s ultimate product fit is settling around DeFi products. DAO’s are not the most commonly referenced example of Decentralized Finance, but they definitely qualify under the category.

Things have progressed considerably since the early 2016 days, so becoming a part of a DAO is not as simple buying into an investment DAO and voting on investments every once in a while. The new investment DAO’s, like MetaCartel Ventures use a LLC legal structure in the US that allow them to operate without running afoul of regulations (basically). This way the DAO’s are able to maintain their inclusive nature while addressing the accredited investor requirement. However, the investors must also be an active member of the fund so it isn’t as simple as watching your money passively grow.

I started looking into the DAO’s with a lot of questions as to whether things are different now vs 2016 and whether they can compete against traditional angel investors. Why would a decentralized early stage venture capital fund be able to succeed? It is hard to imagine a fund without a centralized power structure making the right investment and management decisions. In addition, there are already many angel investors in the crypto space so how does a DAO hold any advantage against the other funds? Generally speaking, there is simply too much capital chasing too few good deals. What do the DAO’s bring to the table

I think, as with all things crypto, you kind of need to set aside all standard convention. The best example is Bitcoin. No one can explain why Bitcoin today is worth as much as it is. Even though I drank the Bitcoin Kool-Aid, I am still a little shocked that 10 years after the launch Bitcoin is worth close to $10,000. Even blue-chip financial services companies like Fidelity, the CME, and the NYSE have all launched business unit dedicated towards bitcoin. What it comes down to is that the only way you could’ve been a part of the best investment opportunity of the decade early on, was if you were a part of the few small communities that talked about this magical new internet money. The small bitcoin communities directly and indirectly played a key role in developing other new communities that were interested in this new internet money.

After reading into the investment DAO’s, I discovered that it is exactly this community aspect is exactly what gives the decentralized funds their competitive advantage. One of the questions I asked Peter Pan of MetaCartel Ventures was what was needed in order to create a product that develops a mainstream user base. His answer, “Mainstream is a myth and a poor mental model. I think in terms of creating value for one user community at a time. We can leverage some fairly more powerful tools to do so such as crowdfunding and DAOs to do so.”

When I read the words “creating value for one user community at a time” is when it finally hit me. In crypto, it really takes a group to source new projects and it takes a group to develop the community around the project. There is a limitation to what modeling, projecting future forecasts, and wearing a Patagonia vest can do when assessing early stage crypto projects. It ultimately is just about creating things that a small community of people believe in. In order to facilitate this, an early stage fund just needs to provide a sandbox for developers and community members to create and test new ideas.

With this in mind, a hierarchical and exclusive organizational structure might in fact be a disadvantage. The formula for success just might be let a group of people get together and build some cool stuff together. After all, it was Bill Gates who was quoted as saying that venture capital’s hit rate is pathetic so who is to say that these crypto fanatics don’t know the proper way to fund crypto startups. The Kauffman Foundation, a long-time investor of venture funds, has found that in the long run, venture capital firms have returned 1.31 times what was invested. This is including the extremely rare hits, like the Googles and Facebooks. To put it into perspective, some of the smartest people in the world work in VC but still fail to beat the S&P 500.

The investment DOA’s are probably on to something but there are still additional legal, organizational and security related issues that remain to be resolved. To read into those discussions I recommend reading the articles below. However, I learned a really valuable lesson after discovering ETH at $7 and thinking that it was a worthless token. Check with someone that actually understands crypto before making a conclusion. And after seeing people in crypto that know crypto repeatedly mention DAO’s, this is probably something worth paying a little attention to this year.