Written by Jonny Fry
Writers linkdin: https://www.linkedin.com/in/jonnyfry/

Decentralised Autonomous Organisations (DAOs) in the digital assets sector have been around since 2015 when by a team called Slock.it launch the first DAO. Slock.it’s  intention was to raise capital for different projects and start-ups. Using a smart contract, Slock.it programmed-in voting rights and ownership so that the initial investors in Slock.it received a token that gave them a share in the dividends, and capital loss and gains in direct proportion to the % of money that was raised. This was, in many ways, similar to an ordinary share.

However, the real difference was there was no central control, management, CEO nor CFO - actually no board. Rather confusingly, the first digital asset DAO was called ‘The DAO’ but unfortunately it did not get off to a great start. It was hacked and, having raised $150million, $50 million was stolen.

A DAO is established by codifying rules and decision-making processes and procedures of the venture, thus removing the need for paperwork and boards and management teams to govern the day-to-day activities of the entity. In effect, the organisation is created so that all the control is decentralised. Investors who own the DAO are given tokens and they can make proposals to the DAO regarding what to do with the money in the DAO, for example. It is then up to those members who own the DAO’s tokens to vote and decide as to reject or accept the proposals. The whole process is designed using smart contracts, which means all the profits and losses are equally share among the token holders with no central overhead/ management team taking a slice of the profits.  

In many ways it could be argued that a DAO structure shares a lot in common with the way that cooperatives were established (or indeed traditional with-profits funds) in that the rewards and gains from investing in a selection of assets were predominately reserved for the co-op members or those who had held their with-profits policy to the termination of their original policy date. As the Guardian newspaper explains: “Co-operatives are businesses owned and run by their members. Whether the members are customers, employees or residents they are everyday people who have an equal say in what the business does and a share in the profits”. 

With-profits funds date back to the 18th century and were used typically by insurance companies to help smooth out the volatility of investments, with regular savings plans being sold usually for ten years or more. Each year, the insurance company increased the value of the savings plan by a small amount so that at the end of the savings contract (10, 15, 25 years) a much larger bonus was credited to the saver, based on how well those underlying investments selected by the insurance company had performed. This type of savings plan lasted until 1980’s when the insurance industry began to be introduce unit-linked savings plans which could be valued daily, and are similar to the mutual funds as we know them today.

So, in essence, one can see the similarities between DAOs, co-ops and with-profits funds. However, with the use of Blockchain technology and careful scrutiny and third-party auditing of smart contracts (and in order to try and avoid the hack suffered by Slock.it’s DAO), we are now seeing more capital being committed to DAOs. For example, a DAO has recently been established to fund the acquisition of the Blockbuster Video brand with the intention to create a video production business and capitalise on the booming film and movie industry.

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Source: Giant Freakin robot

It is not only the film industry that is looking to use DAOs. The asset management firm, Index Coop (with $400million undermanagement) relies on its 6,000 members to vote on the way that the money is managed rather than employing expensive fund managers. Index Coop can be purchased via Coinbase and it offers a choice of five funds:

  • DeFi Pulse Index 

  • Metaverse Index 

  • Bankless BED Index 

  • BTC 2x Flexible Leverage Index

  • Data Economy Index (DATA).

There are also decentralised exchanges such as Sushi swap (which has been set up as DAO) and, with its 74,000 members, it is clear to see that the centralised nature of DAOs is gaining traction. We are also seeing some venture capital funds being established as DAOs: “We’re trying to democratize crypto investing and provide access to those that never had such access,” said Joyce Yang, founder of Global Coin Research, a DAO that “aims to disrupt the VC model.”

Once again history is teaching us old tricks and demonstrating how very little is actually really new.