In the NFT ecosystem, the concept of community is ubiquitous. All successful NFT projects have a large community following, interacting and investing in the projects. Moreover, a lot of the fundamental ideologies behind the blockchain challenge the systems of governance that have been in place and propose presumably better solutions to govern communities and organizations. Decentralized autonomous organizations (DAOs) are at the epicenter of these solutions and have been growing in popularity. The following article will explore the concepts behind DAOs and investigate their relevance in the NFT ecosystem. In particular, the following topics will be covered:
1. Definition of DAOs
2. DAOs in the context of NFTs
3. Snapshot into the most popular DAOs in the NFT ecosystem
1. Definition of DAOs
DAOs can be defined as an organization without a central authority and that is governed by a set of rules enforced on the blockchain. They have 2 main properties:
DAOs are collectively owned and managed by their members. Unlike most of the traditional organizations, DAOs do not have a hierarchy or a central authority. This means that decision-making regarding the governance of the organization is based on a bottom-up model, rather than top down. A decision is made based on votes of members of the DAO, and voting in DAOs is linked to ownership of tokens. When a DAO is created, the members are given new tokens; typically, members vote based on the number of tokens that they hold. As the DAO increases in popularity, its successful governance becomes primordial which leads to the value of tokens increasing.
The foundation of a DAO is its smart contracts. These contracts define, verify and execute the action and rules of the DAO. Moreover, these smart contracts hold the treasury of the DAO. This means that the DAO is fully self-running after it is launched. The smart contracts work in such a way that no one member will be able to take an action that is against the rules of governance set by the DAO. Though the founder of the DAO establishes the first set of rules, once these rules are minted, they are irreversible. This is once again facilitated using smart contracts.
DAOs tackle a fundamental problem in governance referred to as the agent-principal dilemma. It occurs when members of an organization (the agents) have the ability to make decisions on the behalf of the whole organization (the principal). The agents can face decisions that would benefit their own interests more than the interests of the organization.
The bitcoin network can be thought of as the first DAO. It enables an operating system for financial transactions that is independent of a central authority (like banks or governments). However, it wasn’t until the launch of Ethereum where smart contracts allowed the development of more complex rule of governance that the number of DAOs started raising. The prevalence of DAOs in the crypto world has been consistently increasing. According to deepdao, the AUM of DAOs went from $290M in September 2020 to $9.2B in August 2021. This represents a 3072% jump in less than a year!
2. DAOs in the context of NFTs
DAOs reinforce the sense of community
A pre-requisite for success in the NFT ecosystem is strong community backing. Similarly, NFT projects often serve as a medium to bring a community together. Being a part of a community provides a rare sense of belonging and status. In his essay, entitled “status monkey”, Packy McCormick distills the “Status as a Service” essay from Eugene Wei and argues that NFTs match the criteria of a successful social network. Two of the fundamentals behind “Status as a Service” is that people are that “people are status-seeking monkeys” and that “People seek out the most efficient path to maximizing social capital”.
In the NFT world, owning an NFT represents a lot more than the investment upside that it could generate, it provides an upside in social status. Analogously to wearing an expensive watch in the physical world, owning an NFT in the digital world is a status symbol. This status proves the ownership in an often very exclusive community. Perhaps, one reason why Cryptopunks are one of the most sought after NFT projects is because they provide the proof that one is a member of the first community associated with NFT.
Now, we argue that DAOs reinforce the sense of community behind NFTs. On one hand, DAOs provide an additional layer of belonging and on the other hand, DAOs provide governance for these communities. There exists a growing number of DAOs that are formed with the purpose of buying NFTs. Taking part in one of these DAOs allows one to be a member of a subset of a larger community. Moreover, DAOs enable this subset to interact with each other and take collective decisions which strengthens the utility of the community. While being the sole owner of an NFT can already provide a sense of belonging to that NFT project, being a member of a DAO that purchases the NFT allows belonging in a social hub.
Also, a DAO allows the community to be self-running and governed by a set of transparent rules. For instance, the famous NFT-based game Axie Infinity claims that it will gradually evolve into a community-owned decentralized organization. This will enable the players of the game (community members) to vote on future decisions that can affect the gameplay.
DAOs enable better risk/return payoffs
The NFT ecosystem is viewed by many as a way to increase financial wealth and is seen as a valuable investment vehicle. From that standpoint, a DAO can be a great way to get exposure to NFT assets. First, because many sought after NFT assets tend to be very expensive and volatile. A DAO enables ownership of these assets at a fraction of the price by collectively owning it. For instance, not so long ago, 478 people pooled their resources on PartyBid (a product that lets people form teams to bid on NFTs), to purchase the multi-million-dollar Punk against rich whales. The implication is that it provides a hedge against the volatility of a given NFT, this is because a DAO tends to purchase multiple NFTs.
Second, it is because being part of a DAO can increase the value of an NFT. In fact, a DAO can not only help in crowdfunding and investing but it can also support and market a given NFT project thereby increasing its value. Once again, the characteristic of a DAO allows for shared interest between the member of the community. For instance, the members that are the most active in marketing a product can be rewarded differently.
NFT tokens can be used to govern DAOs
While DAOs can be very important in the NFT ecosystem, we argue that NFTs can equally be very important in the DAO ecosystem. As previously mentioned, important decisions of a DAO are made on the basis of a collective vote. Typically, members vote base on the number of tokens that they own. Recently, we have seen the emergence of DAOs that use NFTs as the voting tokens instead of ERC-20 tokens. These NFT tokens can be used to capture the utility that a given member of the organization will have. The implications entail that users who are the most useful to the DAO have the most say in its governance and get the most out of it.
For instance, Mintable, an NFT marketplace that operates as a DAO rewards users with a MINT token that holds the number of vote a person has. When a transaction occurs on the Mintable marketplace — the buyer and seller both get votes added to their NFT, or a newly minted NFT if they don’t already have one. They argue that by using NFTs, governance voters are not considered investors – the implications are that there is less risk of pump and dumps happening and that voting is controlled by users who are involved with the platform.
3. Snapshot into the most popular DAOs in the NFT ecosystem
Concurrent to the NFT boom of 2021, many DAOs were formed with the sole purpose of operating and purchasing NFTs. Similarly, many NFT platforms decided to operate on the foundation of a DAO. The following section will provide an introduction to some of the most popular NFT DAOs.
Founded in 2020 by Alexei Falin and Alexander Salnikov, Rarible has quickly carved out its niche in the NFT world as one of the foremost art-focused and creator-centric marketplaces available. Rarible operates as a decentralized autonomous organization and brands itself as the world’s first “community owned marketplace”. Members of the Rarible DAO own the RARI token. This allows them to vote for platform upgrades and amend existing protocols as a community. The RARI token can only be earned by participating in activities of the RARI marketplace such as buying and selling artworks. Furthermore. RARI holders can be part of Rarible’s community-based moderation and can vote to curate the content available on Rarible.
YGG DAO was founded in and raised ~$1.3M for the development of its concept in March 2021 and sold 25 million of its native tokens for $12.5M in July. YGG DAO was founded by the renowned Axie Infinity player, Gabby, and is positioning itself to own the NFTs and tokens powering gaming economies built on blockchains today. Naturally, YGG invests in the Axie Infinity ecosystem through the scholarship method. They recruit “managers” that identify and train Axie scholar and loan them assets to play. The scholars then share a portion of their income with the managers and YGG. Currently, YGG has 19 managers that manage more than 4,500 scholars. Furthermore, YGG is game-agnostic, and it has sub-DAOs within its DAO. Each sub-DAO represent a different game. Each sub-DAO operates independently of the other DAOs and optimize for returns. Members of YGG hold the $YGG token; the token has many functionalities within the DAO including voting and participation in the organization, along with receiving exclusive content or subscribing to exclusive merchandise.
PleasrDAO is a DAO that was created to collectively purchase high-value NFTs. The total cost and the ownership over the digital asset are shared between the members of the DAOs. PleasrDAO was formed in March 2021 to purchase a Uniswap V3 NFT artwork titled “x*y=k” that was designed by @pplpleasr1 to celebrate the forthcoming update of the decentralized exchange – Uniswap. PleasrDAO later purchased the only Edward Snowden NFT, “Stay Free”. Members of PleasrDAO constitute early NFT collectors, Defi leaders and digital artists. PleasrDAO’s intention is to use the skills and ideas of its members to enhance the value and utility of a given NFT before releasing it back to the community. PleasrDAO is governed by the $PEEPS token which has seen very little transfer of ownership over the last 3 months (less than 5 per month).
DAOs have been around since 2016 which in the blockchain standards sounds like a very long time. They are re-gaining popularity and undoubtedly seem to be relevant in the NFT world. However, as DAOs are full organizations, they have certain legal barriers that are yet to be established.
Buterin, V. (2014, May 6). DAOs, DACs, DAs and More: An Incomplete Terminology Guide. Retrieved from Ethereum: https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-guide/
Fong, G. (2020, November 4). A Gentle Awakening — Mintable NFT DAO. Retrieved from Medium: https://cryptocurrencyhub.io/a-gentle-awakening-mintable-nft-dao-fdd86cfe76e7
Grounded. (2020, November 3). The Revolution of NFT DAO. Retrieved from Medium: https://medium.com/grounded-work/the-revolution-of-nft-dao-5684c2cc054
Hanacher, A. (2021, April 10). The Next Big Thing in NFTs: Breaking Them Apart. Retrieved from Decrypt: https://decrypt.co/66046/the-next-big-thing-in-nfts-breaking-them-apart
Interaxis. (2021, June 17). Explained: How NFTs and DAOs coexist. Retrieved from Interaxis: https://www.interaxis.io/blog/explained-nfts-daos-coexist/
Liberlion. (2021, August 2). Decentralized Autonomous Organization (DAO): The Brief History, Challenges, and Lessons Learned. Retrieved from Adapulse: https://adapulse.io/decentralized-autonomous-organization-dao-the-brief-history-challenges-and-lessons-learned/
McCormick, P. (2021, August 9). Status Monkey. Retrieved from Not Boring: https://www.notboring.co/p/status-monkeys
Robbins, C. (2021, July 6). Fractionalized NFTs. Retrieved from Medium: https://medium.com/the-zap-project/fractionalized-nfts-d3fa7458ae5
Xie, L. (2021, March 12). A beginner’s guide to DAOs. Retrieved from Mirror: https://linda.mirror.xyz/Vh8K4leCGEO06_qSGx-vS5lvgUqhqkCz9ut81WwCP2o