Tribute Labs CEO Aaron Wright and COO Priyanka Desai (above) at a Williamsburg, Brooklyn, mural of a popular nonfungible token (NFT). Their DAO service operation created Flamingo DAO, which turned a $10 million investment into a $1 billion NFT collection. Photograph by Jamel Toppin for Forbes.
The leaderless investing collectives known as decentralized autonomous organizations are generating a lot of eyerolls. Thanks to high flexibility and low regulation, they’ll also soon generate a lot of profits.
“This is an incredibly risky move. I don’t know if I agree with this.’’ Erick Calderon, the founder of a company named Art Blocks in a risk-oblivious field, nonfungible tokens, was nonetheless concerned. It was February 2021, and Calderon was one of 59 investors who had banded together to potentially buy a rare set of 150 popular NFTs, CryptoPunks, directly from their producer, Larva Labs.
The group, a decentralized autonomous organization (DAO) called Flamingo, had pooled $10 million and met weekly via Zoom (audio-only to protect those wanting anonymity) to figure out what to do with it. The CryptoPunk opportunity, at about four ether ($7,200 at the time) per punk, would eat 10% of that, which is partly why Calderon aired his concerns on the group’s Discord channel.
The tension got thicker when members discovered one of their own—someone going by the pseudonym “Pranksy”—had tried to front-run the deal, opening a back channel with Larva Labs to buy 150 punks for himself. In the end, Flamingo members voted to spring for the punks, which were recently valued at $30 million. As for Pranksy, he left the DAO “by mutual agreement,” telling Forbes he was “somewhat naïve [about] the DAO process.”
Most of America is. Sure, you’re probably familiar with the concept: leaderless collectives in which groups democratically make investment decisions, such as when 17,000 members of a DAO tried to buy one of 13 surviving original copies of the U.S. Constitution last year. Aaron Wright, CEO and cofounder of Tribute Labs, which set up Flamingo, calls a DAO “a sub-reddit with a bank account.” But while the headlines tend toward the splashy or the silly, a new model is emerging that has real legs as an alternative investment vehicle.
A quarter-century ago, an Illinois “investment club” run out of a church basement, the Beardstown Ladies, spawned a slew of bestsellers and imitators as stock-picking groups proliferated. DAOs have modernized and digitized the concept, incorporating many of the traits that make the blockchain so potent.
By using tokens, DAOs can efficiently allow votes, empower profit sharing and, crucially, supply liquidity, as tokens can be bought and sold—though for now, trading in tokens is not something the Securities and Exchange Commission is ready to bless.
By limiting membership to 100 people or fewer, some DAOs are also able to skirt SEC rules, since they fall under a quaint 82-year-old “investment club” exemption—so long as the participants are all involved in managing their kitty and don’t publicly offer their securities.
And while the leaderless model can be called, by another definition, anarchy, it also lets those interested in alternative assets play without having to outrun the 20% profit share that hedge fund, venture capital and private equity managers regularly charge for what too often is average performance. Syndicate, which makes DAO-in-a-box software, partners with another startup that can help you do all the legal and tax paperwork for $2,000 a year, while Tribute charges 2% a year of the DAO’s original investment to do all that paperwork and incorporate things like coordinating group calls (not coincidentally, the same upfront vig that funds charge). The difference here is that the profits are all yours.
Combine all that, and you have something that can’t be judged by all the dumb headlines. Instead, think of DAOs as a legal platform, much as nimble LLCs emerged decades ago as an easier way to incorporate than the lawyer-laden C Corp. The early adopters might seem silly. The second wave will make it mainstream.
Exhibit A: Kinjal Shah is a partner at VC firm Blockchain Capital, in San Francisco, which has a traditional fee structure on $1.8 billion under management. Nevertheless, Shah cofounded a DAO called the Komorebi Collective, which has 35 female investors, $400,000 in capital and a goal of investing in crypto startups with female and nonbinary founders. In creating an investment vehicle (leveraging Syndicate services) that isn’t weighed down by institutional investors or high hurdle fees, Shah says the DAO can “have a lot more experimentation and flexibility.” And those are two terms that tend to portend exponential growth.
The early days of DAOs did the model no favors. In 2016, early adopters of ethereum formed “The DAO” to back crypto projects, quickly attracted $150 million—and then lost one-third of that to a hacker before making a single investment. While the attacker was denied most of his spoils after developers controversially “forked” (reissued) ethereum, the point had been made: The DAO disbanded, and all DAOs carried a stink akin to that of early dark web marketplace Silk Road.
Nevertheless, the concept gradually spread. By 2018, roughly 10 DAOs had been formed. By 2020, there were nearly 200 of various types, according to DeepDAO. Yes, embarrassing incidents continued, including numerous “rug pulls”—scammers collect money for a DAO crypto offering and then abscond with the loot, a digital version of The Music Man. Just this January, BadgerDAO, a 24,000-member organization that lets people earn interest on their bitcoin, lost $120 million in a cyberattack.
But the sheriffs are flooding into this Wild West. Today, more than 50 companies offer blockchain security auditing, according to OpenZeppelin. And the number of DAOs keeps surging—it currently sits at more than 4,000, with over $8 billion in their treasuries.
Yes, the populist teams and populist themes attract the headlines. PleasrDAO, which has about $100 million in assets and a mission, according to its “chief pleasing officer,” Jamis Johnson, that varies between doing “dope shit” and building “a portfolio of assets that represent internet culture,” shelled out $4 million for the Wu-Tang Clan’s one-of-a-kind album Once Upon a Time in Shaolin (buying it from the feds, who seized it from Martin Shkreli, the jailed “Pharma Bro”). It also spent $5.5 million for the “Stay Free” NFT minted by fugitive National Security Agency whistleblower Edward Snowden and $4 million for an NFT of the original “Doge” image—the mascot of the cryptocurrency Elon Musk promotes in tweets. But look closer, and you’ll see that this isn’t the “stonks” crowd—investors include the platinum-chip venture firm Andreessen Horowitz (firms, as well as individuals, can invest).
A quarter-century ago, an Illinois “Investment Club” run out of a church basement, the beardstown ladies, spawned a slew of bestsellers and imitators as stock-picking groups proliferated. DAOS have modernized and digitized the concept, incorporating many of the traits that make the blockchain so potent.
While fans may have fantasized through the decades about banding together to buy their hometown sports teams, the Krause House DAO provides a legitimate group with a far more serious path to that unlikely goal, incorporating former players and superfans in a campaign to buy an NBA team.
A lot of this increasing legitimacy can be credited to Wright, the 41-year-old Tribute Labs cofounder and law professor, who has been obsessing over DAOs since the start. After graduating from Cardozo Law School in 2005, he vacillated between entrepreneurship, cofounding…