I want to give another huge shoutout to @Addison_Bennett for being a total badass and helping me understand the state of the blockchain ecosystem. And my Dad, Luis A. Pérez. He talks about financial foundations on Youtube, go take a look.
Blockchain is the frontier of democracy in finance.
And DAOs are the future of participation in organizations.
And why care?
This is interesting to me. And I believe everybody should know about it. It’s happening soon, and you can be ready for it. That’s what I am writing about this issue. And should you choose to read, dear friend, then be clued into the future of a new class of organizations. I believe it’s important, because others are enjoying amazing returns from a radical departure from traditional organizations. And why not us, too?
DAOs can bring some seemingly crazy rewards, because the traditional frictions of misalignment, communication barriers, and salary don’t apply in the same way: financially. While the transaction fees are high to use the blockchain, the value it brings is greater still.
Access. Scale. Trust, and trustlessness. Gains. Sweet gains.
So stay a while, and listen: I’ll actually explain what DAO means. First, the acronym:
Decentralized
Autonomous
Organization
In the abstract? It’s the link between alignment of interests and the running of business done on the computer. Cheaply. And not in the way that you can buy a flimsy hammer, but in the way you can buy a mango in Alaska.
And what does that give you, in the concrete? Read after the next few paragraphs for an explanation.
;]
Also…
While the issue today centers around DAOs, it’s also about the journey I’m taking to come to these “aha!” moments. I’m here because it’s bonkers to think that value can be captured and distributed at this scale. I thought it was all doge, memes, and gains… the hype.
The macro trends can keep you up at night. First: world access to digital gold. It’s almost absurd, moving concrete value to the even-more-metaphorical… if it weren’t how the economy is going to need it to scale all this “business” of keeping our shiny world together. Second: it’s businesses in a box? When you take a look at it through conventional lenses, it is. You’ll need high-quality creativity, but only pennies for resources.
Who I’m writing this for
Before I start, I want to answer a question I had a couple of people ask me: who is this newsletter for? I think I’m coming to that answer more and more as I write. And you probably wonder if it’s for you. So hi. I write this for you. Make sure to get to the end.
Could you note, too: it’s not just for the rare geek and nerd who gushes about this. Most I know are very risk averse. Warren Buffet likes that kind of business person.
With due respect, he and most see the volatility in crypto as some kind of no-man’s land: worthy for fools and charlatans. I’d respond that something with a $2.31 trillion market cap is something to pay notice to, Mr. Buffet.
This newsletter is definitely for those done with being merely interested in all the news around crypto. It’s for people wondering why large institutions are taking notice now, when many are still calling it a scam. It’s a confusing world for even the celebrated of us. I’m writing this for those wanting more clarity, like myself. I’m doing this for you, because I think it’s a world that’s going to be coming upon us sooner than most believe.
If you’re just trying to get by paycheck to paycheck? I’d say to come back when you feel stable and have a savings plan to lean on, so you can put money you can afford to lose into this, like any other investment. This kind of investment is real. It just comes with a higher level of volatility and risk than a 401k or IRA.
(Or IF that sounded B.S. to you…)
D.A.O.
What Are DAOs?
Without picking up a dictionary, the first place to look here is from the Ethereum website, They define DAOs as:
Member-owned communities without centralized leadership.
A safe way to collaborate with internet strangers.
A safe place to commit funds to a specific cause.
The second bullet point is pretty tame. We do that nowadays already. But the first and third combine to be powerful when we add the idea of a difficult-to-disrupt blockchain technology: member-owned communities, without centralized leadership, where funds can be committed to a specific cause, and on a decentralized blockchain platform that is near-unassailable by centralized organizations. That’s like freedom of speech and finance had a child, and this child was Hercules. Ideas and ideals that can balance a checkbook. While the implications for good or evil can be weighed on a case-by-case basis, it’s undeniable that the concept could become a huge force in the future. That’s worth paying attention to.
Imagine a world where building a social-welfare program for underserved communities in ethnically-divided areas could thrive, driven by the investments of concerned citizens into that organization, and impervious to the antagonistic governments of whatever locale was being served.
How about a network of renewably-powered homes attached to the grid, that can set a portion of profits from selling back to the power companies, where those funds can pay into non-profits that develop carbon offsets? And those funds can generate dividends.
These are some yet-to-be-realized possibilities. But DAOs are a step to making them happen, without the need for large organizations or government intervention. But how does it work?
DAO Theory: How it works
Since I’ve been looking for the clearest description, I’ll do better justice by lifting mostly from this article, though I hope my diagrams can help bring some form to it:
[There] are several general phases a DAO must undergo to launch in a sustainable manner:
Smart contract setup: Before a DAO can be deployed, the underlying rules must be defined and encoded in a series of smart contracts. Given that future changes to the DAO’s operational workflows, governance system, and incentive structures will need to be voted on in order to take effect, this phase is arguably the most important step to creating a sustainable and autonomous DAO, as any initial mistakes or overlooked details can potentially destabilize the project down the line.
Funding: Once the creators of a DAO have established its governing smart contracts, the DAO needs to receive funding in order to operate. The DAO’s smart contracts must entail the creation and distribution of some form of internal property, such as a native token that can be spent by the DAO, utilized in voting mechanisms, or used to incentivize certain activities. From there, individuals or entities interested in participating in the DAO’s growth can purchase or otherwise acquire the DAO’s native token, which typically results in acquiring voting rights.
Deployment: Once a DAO receives enough funding to be deployed, all of its decisions are made via a consensus vote. As a result, all token holders become stakeholders who can make proposals regarding the DAO’s future and how its funds are spent. If the DAO’s token distribution policy and consensus mechanisms defined in its underlying smart contract architecture are well-designed, the DAO’s stakeholders will naturally work towards the most beneficial outcome for the entire DAO network.
The resulting DAO organization can therefore operate independently from its creators or any other central authority.
Things are just beginning
It’s crypto, and I know what you may be thinking… so what could go wrong? If you’ve been watching the space for a while, you might recognize the occasion of The DAO hack. From the article on Gemini:
The DAO was a decentralized autonomous organization (DAO) that was launched in 2016 on the Ethereum blockchain. After raising $150 million USD worth of ether (ETH) through a token sale, The DAO was hacked due to vulnerabilities in its code base. The Ethereum blockchain was eventually hard forked to restore the stolen funds, but not all parties agreed with this decision, which resulted in the network splitting into two distinct blockchains: Ethereum and Ethereum Classic.
Take this little bit of imagination from a usually-crufty industry giant, AIG:
Attracted to the opportunity, insurance companies have devised new ways to calculate premiums. Christopher Lin, the head of AIG’s North American Cyber Insurance practice head, compared the crypto industry to a digital armored car service.
There’s nothing better to underscore the fact that the world of blockchain is still a kind of Wild Wild West than a major hack. But that was back in 2016, and now we’re five years into decentralized finance and twelve into blockchain in general.
Look, there’s even blockchain insurance. Things are going up from here. Quoted from the appropriately named industry magazine, Insurance Journal:
However, Henry Sanderson, who oversees cyber and technology coverage for Safeonline LLP, a Lloyd’s broker, argues cryptocurrency insurance can help the young industry mature while creating new business for insurers.
This whole space is maturing and growing,” he said. “If we don’t embrace it now, it’s a missed opportunity for insurers.”
If the most risk-averse industry is licking its chops at the probability of profits, then you might as well get in on the hunt yourself.
Insider Takes
My good friend @Addison_Bennett is a Web3 developer who’s been in the scene since 2011, spoke about it this way:
Imagine being able to do work on any project you want, and if the code is deployed, you get residuals. Traditionally, otherwise, you’re locked into a salary cap.
I’ve also been a software developer for quite some time, and what I can tell you is that the eye-watering returns that are possible in software aren’t usually accessible to the coder on the laptop working the 9-to-5. To the few who do grind and hit it big, I salute them. But creating a world where the accessibility to the kinds of financial freedom where both technical skill and the future of the blockchain come together, that is what I’m looking forward to. Direct value to a structure that already scales to millions, and direct value in return.
But don’t the alarms, traditional employment isn’t under attack here. From the ShapeShift article:
I had assumed a DAO would be a death blow to regular employment, but Jon and Ogorzaly say that traditional “jobs” are still possible within the DAO ecosystem. They imagine that some people will work as part-time contributors, some will hop on for discreet projects and some might even be hired as employees.
The DAO structure goes as far as the organization needs it to go. It’s not an economic or organizational amoeba, it’s an oasis.
DAOs in the wild
If you’re looking at an example of how a company is transforming into a DAO, take a look at ShapeShift. They saw the opportunity to create more value as a DAO during the pandemic, but the key point is that it aligned “the ethos of decentralized finance,” so in all fairness this was not just a bold move, but a right one for a company steeped in decentralized finance. In their words:
“It has become clear to us that decentralization is the only way to achieve borderless, immutable finance. Therefore, decentralizing ShapeShift is how we choose to maintain fidelity to the principles first established by Satoshi and the Bitcoin whitepaper.”
Or to be more blunt, Jeff Wilser from CoinDesk says:
“In a way, this takes the ideas of “free market economics” to the bleeding edge: the idea that even for-profit companies are too bloated and bureaucratic to compete. This is [ShapeShift’s] vision: no more conference rooms, no more pointless meetings, no more corporate infrastructure. All of that would be gone. All that remains is the actual work of DeFi.”
That’s the world we’re looking ahead to.
Other major DAOs
BadgerDAO: OSS, dedicated to projects and infrastructure related to Bitcoin as collateral, across smart contract platforms
Rari Capital DAO: Financial products for simple and safe dividends on all crypto assets
Uniswap: Decentralized exchange that allows trading between crypto assets and individual profit from providing liquidity
OlympusDAO: crypto reserve currency
What I’ve been trying out: OlympusDAO
So what? What am I doing with all this information? I’m putting down some more stable roots into crypto’s ecosystem with a simpler entry into DAOs and DeFi: staking for dividends in OlympusDAO. Why? Because their tokenomics
So how’s this experiment gone? Here’s the facts:
I started on 10/5/21 with roughly $1000.
The total cost in gas fees to convert dollars to OHM was around $102.
1 OHM at the time was 896 roughly $896.
That yielded 1.259 OHM
8 days later, 1 OHM is at roughly $1270
The growth from compound interest has brought the total OHM to 1.3782
As of 10/13/21, the total account is worth $1750.
What. The. Blazes.
Each OHM token will be backed by 1 DAI in the treasury. The protocol has a burn/mint mechanic.
When OHM trades below 1 DAI, the protocol buys back and burn OHM
When OHM trades above 1 DAI, the protocol mints and sells new OHM.
The protocol profits every time there is a buy or sell.
Most of the DAI in the treasury is also being deployed in yield farming. Which generates even more profits.
These profits will be value-adding to OHM. Initial profit distribution will be 90% to stakers and 10% to DAO.
I’m not surprised at the current gains from this experiment, since a whole host of tokens and coins are driven by the price of Bitcoin (BTC), and that behemoth is currently going through another growth cycle after a big dip, thus pushing up the price of OHM as winning holders of BTC look to take their gains and multiply them through smaller, yet-to-explode projects. Without a doubt, this will go through pretty wild swings like the rest of the market.
NOTE: I don’t have any connection with this DAO other than following their twitter and staking on their platform.
Coinbase video
I promised that I’d share more about using Coinbase, so I’ve gone ahead and looked for the best tutorial I can find for getting started with the best exchange I believe new users should use.
How to Use Coinbase App in Under 10 Minutes (Coinbase Beginner's Guide)
NOTE: I just want to share that while Coinbase is the exchange that I would recommend for new users, they have recently shared about a hack that happened back during the spring. It impacted about 6000 of their 43 million strong userbase. However, Coinbase have reimbursed their clients, like a trustworthy platform would.
Talk to me
If you’ve read this far, I bet you’ve got some questions or comments. Send me a message, I’d love to chat about them.
DAOs are the future of participation in organizations.
Wow, Alex, thank you for introducing me to DAOs! What I'm impressed about this asset and technology is the potential it holds for "the rest of us" (especially working America). The greatest challenge I see will continue to be how in God's green earth working America will be reached with this new gospel. A good news -- cryptocurrencies -- that has the amazing potential to reshape financial freedom "for all, not just a few." Thank you for helping make it understandable for me and others trying to get the word out. Let's continue making that our common mission. Great job (and loved the illustrations). Of course, I'm biased. I'm your dad and you're my son. :)