These are volatile times but especially so for crypto. The rapid freefall and complete failure of the Terra/Luna algorithmic stablecoin blockchain this week has left the markets reeling. There’s a huge question mark out there now on everyone’s mind and a new kind of uncertainty. What happens next is anyone’s guess. To be sure, Bitcoin, Ethereum and every other coin, token and NFT are all down big but not by as much as I expected given what we’ve seen with Luna. For highly speculative things, in many cases, with no tangible ties to the real economy, this, in itself is a win. I, for one, am taking this as a sign that crypto really is here to stay.
This month, I’d like to continue our exploration of this exciting world and welcome back my friend and partner in the CERES Fund, Alex Fleischman. A few months ago, when he first appeared here in these pages, he laid out a compelling contrarian argument for why Bitcoin mining might actually be good for the environment. I took particular pleasure when, within days of publishing this piece, a big story dropped about how Exxon Mobil was using Bitcoin mining to justify an investment in dealing with the problem of flare-off natural gas — i.e. exactly what Alex was talking about.
Anyway, this month, he has written another very thought-provoking article for you all about one of the most hyped emerging aspects of the cryptosphere: the idea of a DAO (short for Decentralized Autonomous Organization). Again, Alex comes at this topic with both a solid theoretical understanding and some actual experience participating in a real-life DAO. Before the market turmoil set in, DAOs were all people could talk about. DAOs were celebrated as the natural successor to the corporation, the answer to all the problems of Web 2, social media and censorship and as the way to break the trend of growing wealth inequality in the world. There was even speculation that Elon was going to fix Twitter by turning it into a DAO. DAO’s might indeed be all these things one day or they might not. Read on for some very interesting perspectives on this important topic: Crypto Collectiveness.
Previously, I discussed Bitcoin’s merits as an incentive for the development of renewable and zero-emission electricity production sites. To continue along the theme of ESG investing, let’s discuss the “social” aspects of crypto. But before we begin, let’s first cover a concept essential to my argument: Decentralization.
Decentralization is a word thrown around a lot in the crypto space with a seemingly nebulous definition. It’s literally defined as the dispersion or distribution of functions and powers — so no single force has the ability to effectuate autocratic change — but what does that mean in the context of crypto? Well, Bitcoin’s development is decentralized, meaning there’s no single company or individual that’s updating its code singlehandedly. Rather, any coders or companies can contribute to Bitcoin’s codebase, however any changes they suggest must be adopted by a majority in order to take effect. Are there a few notable companies that provide a significant amount of changes? Yes. Are there individuals also contributing changes? Yes. And everything in between, in fact.
An important distinction to make with regards to decentralization is that it isn’t a 0 or 1, yes or no, all or nothing system — it’s a spectrum. On one end of the spectrum would be a traditional company, like Apple or Tesla, where there’s a centralized power structure and governance system. Decisions are made towards the top and implementation is conducted at lower levels. On the other end would be geocaching, where users are responsible for their participation from beginning to end and no central authority has much power over individual experiences. I’d place Bitcoin’s development somewhere in between, though leaning towards the geocaching end, since coders are awarded grants for research and development from companies with interests in Bitcoin (as opposed to specific tasks and salaries). This doesn’t necessarily apply to all cryptocurrencies, however — take Ethereum, for example. Ethereum’s development is primarily managed by the Ethereum Foundation, a centralized entity, though it shares the same decentralized “contribution” format as Bitcoin. Ethereum would place slightly more towards the corporate end of the decentralization spectrum than Bitcoin in my opinion.
So how does decentralization fit into crypto’s social aspect? The CFA Institute literally defines the “Social” in ESG investing as the consideration of people and relationships. Some of the tenets they list are:
• Customer satisfaction
• Data protection and privacy
• Gender and diversity
• Employee engagement
• Community relations
• Human rights
• Labor standards
Suggesting Bitcoin or crypto can accomplish any of the above is like claiming the US Dollar could do the same. Practically, they can’t — they’re “things” meant for a function — but crypto does facilitate a new type of socialization that hasn’t been successful before: socialized investing.
Hold on, didn’t I just say that crypto isn’t social investing? That’s correct — crypto itself is not a “social” investment (there’s no central authority advocating labor standards for volunteer work), but crypto offers a platform for new investors to engage with one another for their mutual financial benefit — regardless of geographic location, background, or worldview. In the same way that the internet effectively allowed non-Wall St. individuals to easily act on shared investing ideas, crypto lets them act on those ideas at a global scale. The original limitation of internet brokerages like eTrade or Fidelity was geographic — most investors in Europe or Asia don’t have very easy access to US markets and vice versa — whereas those hurdles have been reduced
by the 24/7, permissionless, global crypto markets.
Because of the non-stop, worldwide availability of crypto, groups of individuals have come together to develop decentralized autonomous organizations, or “DAOs.” Functionally, a DAO is more similar to a standard company than Bitcoin’s developer network is, but retains a decentralized structure where no single individual has autocratic powers. At its core, a DAO is a community that combines their efforts to achieve some effect, whether that be bootstrapping up and coming developers, an investment club, or charity. However, one of the distinct features is that there’s very little infrastructure needed to operate a DAO successfully. Multibillion dollar DAOs have been created with nothing more than a few savvy, determined founders and social media.
To give an example, I was involved in a project called SquidDAO, which at one point managed a treasury of over 17,500 Ethereum (or about $56 million at $3200/Ethereum). I was using an anonymous profile to see how I could interact with the DAO, so nobody knew who I was or my background in crypto. I was surprised to see a group of over 500 members dedicated to this project, and how helpful they were when I acted as a newbie. The mission of the DAO was simple: Use treasury funds in various complicated DeFi strategies to grow (essentially an investment fund). Anyone could contribute funds, time, or skills to the DAO and would be compensated with the SquidDAO governance token — essentially a vote on how to operate the DAO. Most decisions were run through a vote with a team of executors in mind, then carried out by the chosen team.
What I found to be most interesting was the breadth of knowledge that these other anonymous participants had — there were quant traders, investment bankers, marketing specialists, and more. At no point was I asked about who I was, but rather what I wanted to contribute to the DAO. Any information about who someone was, was readily shared by that person at their preference. Ultimately, the SquidDAO project failed and the fund dissolved, returning capital to its investors, though everyone seemed to be happy with how the project wound up. It was certainly not my most profitable venture, but it was an interesting education in how a decentralized operation functions. Much to my surprise, it was a lot smoother and more honest than I’d have imagined.
While the concept of a DAO might initially appear as communistic or socialist (and you wouldn’t be totally wrong), the sentiment and undertaking felt more like a meritocracy to me. Those who took the time and effort to contribute more, ended up reaping more of the rewards. I found that the coders, traders, and marketers earned competitive compensation for their efforts — most of the DAO’s “employees” were earning between $2,000 and $10,000 per month in the SquidDAO token.
Of course, this is just one example of the now-thousands of DAOs in the crypto industry. Crypto communities are gravitating to this structure over a traditional company structure, as they feel they have more impact than they would as a shareholder of any publicly listed equity. Users are engaging more, regardless of their background, and therefore take a much more active interest in the benefit and growth of their DAO. I think this will end up being a tremendous boon to society, as the feeling of ownership in a DAO, company, or any endeavor changes one’s perception of the world and how they treat others. If DAOs end up breeding a generation of owner-contributors in a world dominated by passive ETF investors, then that makes me all the more bullish on the future of finance.