Will DAOs revolutionize the media or create playgrounds for the rich?

ConstitutionDAO, a decentralized autonomous organization with thousands of cryptocurrency fans, has crowdfunded nearly $45 million to buy a copy of the U.S. Constitution.

Although they lost the auction in the end, the DAO also received a lot of attention. Social media is flooded with countless memes and calls to join crowdfunding related to this DAO.

Will DAOs revolutionize the media or create playgrounds for the rich?

However, ConstitutionDAO is just a typical case of the decentralized autonomous organization (DAO) that is all the rage in the venture capital circle.

Much like open source projects like Bitcoin Core, DAO projects involve both willing participants and passive followers, often led by paid core contributors. How projects raise funds to pay these contributors varies widely by project.

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The Friends with Benefits (FWB) DAO, backed by venture capital firm Andreessen Horowitz, has over $600 million in assets under management.

FWB lead organizer, former DJ and event coordinator Alex Zhang, who took over the lucrative DAO in May 2021, said the club now has a scholarship program that enrolls up to 40 scholarship members per quarter. The program is funded for a maximum period of three years.

People often start DAOs spontaneously, to see if an idea will quickly attract people to crowdfunding, or fail, and join DAOs for various networking opportunities, including trying to experiment with cryptocurrencies in more social ways.

Many DAOs are essentially crypto-driven media companies. There is a lot of overlap between the DAO and traditional subscription funding organizations like The Information, the main difference being that the FWB DAO hosts parties rather than news events.

In short, FWB was founded by a group of investor friends who pooled their funds in September 2020 and invited any Ethereum fans who wanted to join their club to buy some tokens.

They then hosted exclusive parties for token holders in Miami, Paris, New York and Los Angeles. According to Alex Zhang, FWB now includes 2,000 full members.

Will DAOs revolutionize the media or create playgrounds for the rich?

FWB’s party for fans

Alex Zhang said:

We have a full editorial and content team that creates multimedia assets like magazines and will definitely move to other forms of content. We’re going to be launching a radio station soon where we’re going to book different DJs and we’re moving from a paid subscription model to asset holding.

The most famous DAOs include Dirt, a newsletter DAO project founded by journalists Daisy Alioto and Kyle Chayka. Art-focused DAOs like PleasrDAO, raise and distribute millions of dollars for quality art collections.

PleasrDAO co-founder Jamis Johnson, who participated in the original Ethereum token sale in 2014, stated:

We are writing the script and the total number of PleasrDAO members is currently 74. Our DAO, like any DAO, will have its ebbs and flows. We now have about 5 full-time employees, and the main communication method is Telegram.

So far, most DAO participants from different DAOs have relied on companies in the portfolio of Ethereum co-founder Joe Lubin, including MetaMask, Gitcoin, Gnosis, and Infura, especially MetaMask.

Additionally, the Gitcoin DAO is estimated to have a “vault” worth over $643 million. In 2021, a study sponsored by Gitcoin showed that 33% of the 422 DAO participants surveyed were earning between $1,000 and $3,000 per month from DAOs such as FWB.

Respondents are mainly young people who have been involved in a large number of Ethereum projects before 2020. Even though most DAO participants today appear to be wealthy cryptocurrency fans, this is not the broader goal of the movement.

FWB investor Li Jin’s goal is to make The DAO “the front door for many newcomers to cryptocurrencies.”

Li Jin is an investor behind creator economy companies like Substack, Patreon, and crypto blogging platform Mirror.

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Meanwhile, some institutions have embraced DAOs by doing business with them. For example, PleasrDAO purchased the extremely rare album of the rap group Wu-Tang Clan directly from the US Department of Justice.

Earlier in 2021, Wyoming became the first state to recognize the DAO as a unique legal organization, although the application process remains difficult and potentially limited.

At least the DAO movement is getting people to donate to charity, says DAO Masters and FWB member David Phelps, founder of the environmentally-focused EcoDAO. The space is indeed full of scholarship programs and multi-million dollar donations to various charities.

David Phelps mentioned his own DAO, which to date has raised more than $37,000 for Indigenous land reform and rainforest reforestation-related charities. “But for now, our goal is to create a sustainable economy for artists where they support each other and potentially earn a lifetime income.”

The problem with this, though, is that basically everyone, even Ethereum veterans, has no idea how members of these multimillion-dollar cryptocurrency clubs are going to be taxed. Without realizing it, many middle-class participants in the DAO movement are accumulating thousands of dollars in tax liabilities.

“We’ve seen a lot of contractors or developers, and people working for DAOs, who don’t know the tax reporting requirements,” said Andrew Gordon, a tax lawyer at Gordon Law.

Additionally, Gordon added, there are dozens of DAOs that pay freelance writers and operators in their own membership tokens rather than dollars or ether. This means that “the onus is on the taxpayer to determine the fair market value of the token”.

This could also raise questions about tax liability if the DAO automatically gifted NFTs to its members. When the 2022 tax season rolls around, some DAO contributors may be liable for more taxes than they can afford if the prices of these digital assets plummet.

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There are many young people who are unable to join some of the DAOs mentioned above, so they imitate these DAOs and launch their own DAOs. This is the case with Shannon Li.

She graduated from college in 2018 and left her hated job early in the Covid-19 pandemic, and has been attending coding bootcamps online ever since.

She’s now creating her own DAO because she can’t afford membership fees for those popular ones, and her application for a free membership has never been answered. She started with no tokens, which subtly reduces legal risk.

Shannon Li said:

The biggest concern of the DAO is actually legality and legal fees, and some DAO tokens may be regulated as securities. This is a big reason why I wanted to create a service-for-service DAO, not a token service for the secondary market.

Li founded WECrypto DAO, an 80-person organization focused on providing crypto educational content to women. Currently, during the bootstrapping phase, she is focused on “learning more about crypto and publishing this crypto-related information for others to use and hopefully building relationships in a shared learning journey”.

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It remains to be seen what the future of the DAO ecosystem will look like as the DAO’s governance moves beyond the companies cultivated and backed by Ethereum founders like Lubin and Vitalik Buterin.

On the bright side, DAOs such as FWB and Index Coop have made many efforts to improve the diversity of DAOs.

Speaking of FWB, Alex Zhang said:

Our community has launched a scholarship program with 18,000 tokens to reward artists and creatives, as well as others who cannot afford to join but can apply based on merit. We offer common basic asset ownership. If you create something in this world, you should be able to retain some value.

Even today, the tools used by these DAOs are still widely considered experimental.

Awesome People Ventures founder Julia Lipton, who owns multiple DAOs, said that holding millions of dollars worth of digital assets in the widely used Gnosis Safe wallet still “feels risky” and that it often takes a lot of time to solve the DAO’s technology aspect issues.

In addition to technical difficulties, transaction fees are sometimes too expensive for middle-class users.

Lipton said:

We still have a long way to go. There are still many unknowns about DAOs, not just taxes and regulations, but also about DAOs’ performance in general. The various aspects of community ownership are still being researched. We have A/B tested all of these projects and conducted public trials.

That’s why Julia Lipton helped found DAO Masters, crowdfunding hundreds of thousands of dollars worth of ether to help newcomers understand the opportunities, skills, and risks associated with DAOs.

One of the things I’m most passionate about is value creation in relation to value attribution and distribution. How can we create a fairer and more just system?

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The DAO is like a tribe, and for many people joining the DAO may give a sense of belonging. As a result, they are willing to spend money or labor on the media and experiences they deem representative.

As with any crypto trend, this sense of belonging is amplified by the hope of getting rich. Several DAO participants who only commented on background emphasized that they are currently involved in the DAO in the hope of connecting with investors who may invest in their own startups or DAOs in the future.

It is clear that DAO advocates believe they are working towards a more equitable and decentralized media ecosystem. As compliance models emerge, only time will tell how risk and liability will be distributed across these networks.

Julia Lipton argues:

DAOs may open up new ways of working in the labor market and new economic incentives. The long-term impact of community tokens is inconclusive, but the concept of community ownership has always existed.

Will DAOs revolutionize the media or create playgrounds for the rich?Author Leigh Cuen

The author is a founding member of both DAOs.

 

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