DAOs' business model understanding is still in its infancy, therefore finding the ideal organizational and governing structure will necessitate further experimentation.
Finding a successful business concept is one of the hardest obstacles. Sharing bank accounts in chat rooms gave rise to the first DAOs. This strategy might hold up during a bull market, but as we have all seen, a DAO can suffer greatly in a bear market from poor financial management and a lack of a compelling business plan.
The combination of startups and hedge funds is a paradigm that Azeem Khan, Head of Fundraising and Partnerships at Gitcoin and Researcher at BanklessDAO, examines this week as one that can enable DAOs to flourish. DAOs need funding to get started, just like start-ups, and are well-positioned to take action on a particular mission or product.
Hedge funds are knowledgeable about how to raise money and give investors long-term profits. They will enable the DAO to do what it does best, which is act collectively for a common goal, by efficiently managing the DAO's financial resources.
We might find the best solution in a fusion model that blends shrewd money and the dynamic culture of startups.
From Azeem, here are some suggestions:
The clever money distribution and management strategy along with the nimble startup mentality will make for the most prosperous DAOs.
People are only now becoming aware of it, not because they are frightened to bring it up. Hedge funds and start-ups have historically been two quite different types of businesses; hedge funds may even provide startup funding. Nevertheless, in the world of DAOs, creation and capital are so closely related that they resemble two significant departments of the same company.
The issue is that not many DAOs have done this successfully. I think this technique will be used to run the most prosperous DAOs in the future. Bull markets won't last forever, and allowing DAOs to develop in a crypto-native way will require them to decentralize assets under administration to provide them more runway.
Chat Rooms for Shared Financial Accounts in Early DAOs
The concept of leveraging a common money account as a conversational bond pervaded several early incarnations of DAOs. In order to build a treasury, the community first joined together in Discord and then began brainstorming revenue-generating ideas. Several of these groups made the decision to introduce native tokens. These tokens might be given as airdrops to the earliest community members or they might be sold on the open market.
NFT sales have been used by other communities as a barrier to entrance for their Discord sessions. Although it is not always required to own tokens in order to participate in a community, many do so in order to establish a sense of status, which raises the value and increases demand. Both native tokens and NFTs enable the DAO to amass a certain amount of pooled cash that can be used by the community, despite being distinct in some ways.
It is incredible that a chat group can manage so much money, whether native tokens or NFTs, but the tokenization of the community has allowed certain DAOs to create treasury treasuries valued over $1 billion.
The Expansion of NFT Scene
Early versions of these Internet-based businesses took the form of group conversations, which resulted in the sale of NFT by DAO for 10,000 PFPs (avatars).
Many DAOs will build up their smart contracts so that they can receive royalties from each NFT transaction, regardless of whether the price of NFT rises or falls, in addition to maintaining a portion of the NFT in the community treasury.
Several of these DAOs have speedy royalties accumulation, which enables well-capitalized enterprises to generate continual revenue. This strategy is well-exemplified by Moonbirds, which combines fundraising with community development.
Why is this crucial? Most of these prosperous DAOs are in a very fascinating position, unless the goal of the DAO is to amass riches, create a sizable treasury, and manage it properly. It doesn't take long for them to have treasuries in the eight and nine figure range, but frequently no one with the authority to make decisions knows what to do with that money.
DAO Requires a Business Plan
In the conventional model, you have a detailed strategy for how the money will be spent if your team or organization wishes to raise a significant amount of money. The simplest is this. With DAOs, however, such is not the case. They earn a little money by pitching individuals on startups, communal ideas, and animal images.
What could be so horrible about that, you may be asking. There's basically nothing wrong with it when everyone believes that your NFT or token prices will continue to rise during a bull market. Nevertheless, this is not how things really are; the thrill will always wear off.
In the last few years, people have been in such an upbeat frame of mind. These organizations lacked any business models to direct financial decisions and were not designed to maximize revenues. They can withstand a down market regardless of whether they are in a bear market if they have a solid business model. These DAOs have adequate funding to carry out their objectives.
However several DAO treasuries are no longer in existence. Not all DAOs fail, though. DeFi DAOs like Uniswap, ENS, Gnosis, Lido, Frax, Aave, and a few others have treasuries that are at least many times as valuable as Jay Z's net worth.
Startups Using DAOs
A group of people band together around a common goal, come up with an idea, produce something to sell, earn money while doing so, and then establish a treasury. This is how DAOs and startups are similar.
Startups hold a more stable currency, such the US dollar, which is the main distinction. Say they raise $30 million; after it is in the bank, less expenses, that side will essentially be worth the same in a year. All they need to worry about is making sure they manage their money wisely.
Companies with cash do not need to be concerned about their stablecoins devaluing to zero, like UST did last year, or about the price of their stockpile of ETH or other tokens plunging 40% in a week.
If you don't know how much money you'll have next week, how can you run a business for years? Assume that a month after Truepill raised $142 million, they discover that its worth has decreased to $60 million. Typically, this results in a business failing. As to why a DAO would be any different,
This is the predicament that a lot of DAOs have been in over the last year. Their coffers appeared to be endlessly deep, but suddenly valuations are being drastically reduced. Was it possible to avoid this? Maybe not exactly, but events might have developed very differently if these DAOs had been joined by more experienced members of traditional finance who are familiar with web3.
Hedge Fund Model for DAO
The outcomes might be substantially different if the treasury and product/community of these DAOs were divided into two distinct departments, each led by a different person with a different set of pertinent talents.
The approach used in hedge funds is to raise substantial sums of money and then try to increase those funds over time. They essentially employ a variety of ways to actively manage capital pools.
They can be risk-averse at times, but they are frequently more innovative. They strive to outperform the market average by trading futures or purchasing assets with borrowed funds. The product team can continue to implement the roadmap it has established for its community now that the financial issues are handled. Both the community and the capital benefit from this.
DAO lost too many good chances during the most recent bull market. The enormous treasury has been nearly completely depleted, and all DAO native token prices have fallen. The tokens' limited liquidity makes it unable to sell significant quantities of them, making the amount held in the treasury misleading because a large sale would cause the token price to fall.
Then there are NFT projects, whose floor price has dropped, their sales volume has reduced, and whose ETH price has reached an all-time high. Additionally, the current global economic downturn may cause things to worsen.
Imagine if someone in one of these DAOs could think about what to do with the ETH in the treasury and not just look at the numbers because they had a clear plan instead of simply looking at the statistics. If they're attempting to diversify their holdings in order to hold more than just their native token or Ethereum, for example.
To maximize capital use based on their holdings, perhaps they will exchange some of them for stablecoins. Token swaps are not a need for effective financial management; with the right preparation, it is feasible to control the impulse to buy and sell tokens.
Businesses are attempting to achieve this. But, the majority of them fail because they become overexcited and give up. Sometimes, these companies don't even consider managing their finances, which results in the situation we are in today.
Going the M&A route can be one of the more exciting concepts. What if significant voting rights in DAOs began to be obtained by devious means? It's a wonderful idea that you can raise strategic money later on even using tokens and NFTs that aren't backed by equity.
Once your product has established a market, you can sell an ownership position to a strategic partner. For example, a gaming company may opt to only accept funding from Epic Games and Sony in the future. To put it mildly, it's a fascinating mental experiment. As there are countless alternatives, these business models will be the foundation for the smartest and most complete DAOs in the future.
Dedicated Funding to Support Communities
In hindsight, it all makes sense, but in a bull market, it's challenging to resist being motivated by irrational emotions.
DAO divisions will eventually be divided like other industries are doing right now. Traditional finance experts who are interested in web3 will appear and offer suggestions on how to continue or raise funding to give the DAO more opportunity to operate.
The technical team will develop the product autonomously and without concern about money. Yet, because these groups will be working in unison toward the same objective, there will be an unparalleled convergence of startups and hedge funds within the same company.
Things are going to change drastically in this future.