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ICYMI – NFT Innovation Continues with the Rise of Decentralized Autonomous Organizations

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13 May 2021

TLDR – Non-fungible Tokens (NFT) are the latest crypto asset to capture the public’s imagination as record prices for NFTs make headlines. From artwork to memes, NFTs have sparked interest in much the same way as initial coin offerings (ICO) once did. Interestingly, Decentralized Autonomous Organizations (DAO) are emerging as effective bidding participants for NFTs at auction as well as serving as NFT creator communities.

DAOs first emerged eponymously and somewhat confusingly as The DAO in 2016 whose goal was to serve as a decentralized venture capital fund on the ethereum network. It was hacked shortly after certain vulnerabilities were identified and investors lost 3.6 million ETH, worth about $50 million at the time, due to improperly secured and executed code. Although most of the funds were recovered, The DAO’s failure ultimately featured as a driver of the hard fork on the ethereum blockchain that same year.

In 2017, the US Securities and Exchange Commission (SEC) concluded that The DAO sold securities in the form of tokens on the ethereum blockchain, violating portions of US securities laws.

While DAOs as venture capital funds like The DAO have not fully resurfaced, work on the concept of a DAO continued unabated, with many DAO development platforms leading to some 1,600 DAO communities. Decentralized Finance (DeFi) has progressed through DAOs; the altcoin Dash, for example, operates as a DAO with no central responsible authority governing its development.

DAOs may also hold promise as both NFT creator organizations, bypassing talent agencies and their fee structure, and bidding conglomerates for certain high-value NFTs, allowing pools of investors to combine bids for NFTs that might otherwise be out of individual reach.

Coindesk recently published an opinion piece, linked below, that made an effective argument for how DAOs will revolutionize the creator economy by allowing individual creators to take advantage of the strengths and resources of traditional media organizations albeit with more flexibility for creators and equal participation in revenue as shareholders for the content generated as NFTs.

 As the authors noted:

“[a]ll digital assets created by the DAO are minted as NFTs. Through that, every asset becomes managed, monitored and owned. This means creators, operators and participants are all collaborators on the NFT asset. Outside of pure ownership and participation, this means an asset returns royalties based on the performance of the content, delivering returns for participants in perpetuity… With NFTs, digital media now becomes a liquid financial asset secured through cryptography, and programmable through smart contracts.”

On the buy side, a DAO recently made headlines for placing a $525,000 winning bid for a promotional video about the crypto platform Uniswap created by the digital artist Pplpleasr. The DAO was organized quickly as 30 individual collectors came together on social media to place a collective bid rather than attempt to outbid one another.

Proponents of this approach argue that DAOs will revolutionize the collectibles market allowing investors to pool their funds and profit from high-value NFTs through fractionalization.

Fractional ownership is not a new concept, as companies and funds already exist to manage real estate, aircraft and boats but the crypto economy is not only democratizing management through DAOs but also automating conditions for sale and profit distribution through smart contracts on the blockchain.

Decrypt notes that the SEC, having already ruled on the flaws in The DAO’s original design, is paying close attention to how fractionalized NFTs, which embody royalty rights, and any NFTs sold with the promise of future gains or rights and services from the issuer, might fulfill the criteria of securities.

Investopedia has a well-sourced look at DAOs as well as brief history of The DAO:

  • https://www.investopedia.com/tech/what-dao/

Coindesk opinion piece on the role of DAOs in the NFT creator economy:

  • https://www.coindesk.com/nfts-daos-new-creator-economy

Decrypt article on DAOs as investor collaboratives for NFTs:

  • https://decrypt.co/66046/the-next-big-thing-in-nfts-breaking-them-apart

Rabbithole article on the rise of a new form of DAOs as venture funds:

  • https://howdeepistherabbithole.com/2021/04/04/we-can-dao-it-how-a-new-wave-of-cypherpunks-is-disrupting-venture-capital/

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