DAOs Will Replace Conservation-Focused Foundations
The era of organizations focused on owning land for the purpose of conservation may soon come to end.
Those organizations will likely be replaced by DAOs (decentralized autonomous organizations).
Before I jump into why and how this shift may occur, it may be helpful to read my article Can DAOs be a game-changer for environmental conservation?
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As a refresher, using the tools of crypto, DAOs are able to raise money and make investments without much of the friction inherent in setting up foundations or investment funds in the non-digital world.
Instead of having an executive team make decisions on behalf of the shareholders, DAOs are governed collectively and their rules are embedded in automated “smart contracts”.
DAOs emit tokens that can represent the value of the assets of the DAO and/or can be used in the DAO’s governance systems.
To understand how DAOs can replace conservation-focused foundations, we first have to understand how DAOs will impact real estate as a whole.
How will DAOs re-organize real estate?
First, as DAOs become bigger players in the world of real estate, in the future it is highly unlikely that many people will own a single property.
For example, I owned an apartment here in Quito, Ecuador, and it represented a significant part of my net worth. In fact, when I initially took out a loan to pay for the apartment, I in theory had a negative net worth, since I had more debt than assets.
After a few years, I sold the apartment to my mother-in-law. Despite goodwill between the buyer and seller, it took approximately 9 months and thousands of dollars in fees to complete the transaction. The primary delay was dealing with the official property registrar.
Understaffed, overworked, and drowning in processes to prevent fraud and money laundering (despite those processes, both are rampant), the property registrar can’t keep up with demand. As a result, anyone in Ecuador that owns the property has a highly illiquid asset because it takes so long to convert it into money.
Imagine in the future, instead of taking out debt to invest in an illiquid asset, you have a portfolio of tokens from DAOs representing real estate across the world. Maybe part of your portfolio is in condos in Singapore, another part is in farmland in Wisconsin, and another part is high rises in Mexico City.
Imagine it’s easy to pick and choose DAO tokens representing these different investments on an online platform where you can look at historical returns and build risk-balanced portfolios. These tokens are easy to buy, and easy to sell, and there are no costly overhead fees or commissions to pay to brokers.
When DAOs rule real estate, why would you ever go into debt to buy a house only to be over-invested in a local market with a property you can’t easily sell? Let’s face it: the future is collective property ownership. Today you might say “I only just learned about DAOs”. In 5 years, you might say, “I’ve invested in 8”.
The potential here is also to democratize wealth. Right now, to have access to the long-term growth of a real estate market you have to have enough money to buy a house. A lot of people without access to large amounts of capital are unable to participate in the gains.
If, on the other hand, anyone can buy DAO tokens at any price point then benefiting from access to the real estate market can be spread to everyone.
So what do real estate DAOs have to do with conservation? In its essence, a conservation-focused foundation is performing the same function as a real-estate company: it’s managing properties. When real estate markets transform, there’s no reason to think that conservation won’t transform with it.
As I mentioned in the aforementioned post, the battle to save biodiversity is not a fair fight. The industries that produce environmental destruction, such as mining, oil & gas, etc. are subsidized by not having to pay for the negative costs of environmental and health impact of their work. Degraded rivers and sick people assume that cost.
In addition, the forces of environmental destruction have access to unlimited capital because their resources are dependent upon discounted cash flow (DCF) (if you’re not familiar with the term, DCF is the methodology investors use to project a return on investment). The forces of conservation are limited to the cash people are willing to part with without any expectation of return. It’s not a fair fight.
Conservation-focused DAOs can help rebalance the battle between destruction and conservation of biodiversity because they can quickly gather capital, acquire a resource (in this case land) and produce cash flow. But how would that work?
How will conservation-based DAOs work?
Let’s imagine that I am passionate about protecting a threatened area of the Ecuadorian Amazon that is not claimed as part of an indigenous nation. I form a DAO, find like-minded individuals to buy tokens to capitalize the DAO, and then the DAO buys the land. The land now belongs to the DAO.
The DAO is really a vehicle for investment, which means it does not have the institutional knowledge or capacity to manage land. As such, the DAO leases the land to organizations focused on three types of activities: sustainable agriculture, sustainable forestry, and carbon sequestration/biodiversity credit development. The monies earned from the leasing then replenish the DAO’s treasury, thus creating cash flow and enabling it to buy more land and attract more demand for its tokens.
Why does the conserved land need to have utility?
The truth is that in Latin America at least, any land that is purchased but abandoned is vulnerable to land invasions. This idea requires a longer blog post, but my premise is that land that is used sustainably is able to provide more value to the planet than land that is entirely abandoned.
The sub-contracted organizations pay the DAO for the use of the land, and the only requirement is that they operate using sustainable practices (in all likelihood the DAO may have to hire someone to audit and ensure the sub-contracted company is keeping its promise) and ensure the land is safe from invasive third parties.
Some of these sub-contracted organizations will operate with a profit motive, and some will not.
For example, micro-lot shade-grown coffee can fetch a high price on the international market, and it’s the type of product that thrives in a multi-crop environment. The same goes for products like cacao or certain types of trees like teak.
Carbon markets have a lot of problems, and one of them is that they are currently supply constrained (meaning there is more demand for carbon sequestration than there is supply).
If we’re able to provide a carbon project developer with land that has a high potential for additionality (meaning we can show that through reforestation we’re adding carbon sequestration capacity to the planet), the non-exploitative value of the land use can be quite high.
Finally, there is no reason why sustainable agriculture, forestry, and carbon sequestration cannot overlap. To get to a place where you have multiple companies bidding to sustainably use land, we will have to accelerate the growth of a competitive ecosystem of providers.
The good news is that there is a wide variety of organizations focused on these fields, but they’re often unable to scale due to lack of capital, especially in places like Latin America where interest rates are high and banks tend to only work with organizations able to front a significant amount of collateral. An emergence of DAOs looking for sustainable land management can help kickstart the growth of an industry we require if we’re going to avoid the worst effects of climate change.
Now that we’ve looked at the supply side of how DAOs can become vehicles of sustainability, what about the demand side, meaning who will buy these tokens?
How can we drive demand for Tokens from conservation DAOs?
First, for conservation-minded individuals, the idea that one can earn a return on money invested in conservation is eye-opening. Indeed, if conservation DAOs are able to demonstrate growth over time, they’ll attract capital from agnostic sources of funding that are backing conservation not out of environmental conviction but rather in hope of a financial return.
These sources of capital may be a mixed blessing: speculative capital that creates volatility in DAO tokens’ value can do more damage than good by creating the impression that conservation-focused DAOS are highly volatile. Conservation DAOs will do best with patient capital.
Aside from environmentally-minded individuals, how else might we fund conservation DAOs?
Imagine your bank offers you a green credit card, and instead of giving you miles or cash back for purchases, a portion of every transaction you make goes to a crypto wallet. A smart contract then automatically executes the purchase of a conservation DAO’s token.
The crypto wallet is yours, so at any point in time, you can access it and exchange your tokens for local currency. You can also choose to allow your funds to accrue and they then form the basis of an education fund for your children. In effect, your credit card has set you up with a daily-cost averaging investment strategy, which is a way to invest in which you buy a little bit every day and reduce risk by buying across multiple price points.
Demand for DAO tokens might also come from the development of sophisticated financial tools in the crypto/DAO space. For example, we can imagine the creation of index funds that allow people to purchase a token representing ownership in dozens of different types of real estate tokens from around the world.
Maybe Conservation DAO tokens are considered high risk and therefore have a more attractive yield. When included alongside more conservative DAO tokens, they can help balance a portfolio. There are innumerable ways in which we can direct monies towards DAOs once they’re backed by cash-flow models.
What I mean to show with this example is that we don’t have to think of funding Conservation DAOs as a zero-sum game in which we attract capital currently funding conservation efforts. The sources of funding for conservation DAOs can be multiple and can represent a win-win for companies and the environment.
So why will DAOs replace foundations?
Before anyone points it out to me, I am aware that a lot of conservation-based foundations do a lot more than just hold land.
Many foundations do important research and invest in technologies as well as land management methodologies.
I am not anti-foundation.
Rather, as a climate realist, I’m convinced that the only way we get to net-zero is by switching tactics in order that the forestry frontier can fight back against the encroachment of the agricultural frontier. Realistically the world needs cheap food, so in an ideal world, both would coexist in harmony.
So are there risks and defects in the DAO-based model? Of course, there are!
DAO governance, for example, is still discovering best practices; the DAO industry has had a few years to try to catch up with 200 years of corporate governance learnings.
The nascent nature of crypto can lead to frustrating bad-faith exchanges. Sometimes the conversation around crypto and carbon markets takes the form of someone from today reviewing Henry Ford’s first prototype of the car. What about air conditioning? Where are ABS breaks? Yes, there is a lot to do, but there’s a difference between a speed bump and a stop sign.
Maybe the first and primary risk to the model is a DAO’s ability to enforce and protect its property rights.
DAOs can be registered as legal entities in the state of Wyoming and therefore can hold property in the US and around the world.
Nonetheless, operating in countries like Ecuador property rights are not always guaranteed. Hence, if a conservation DAO buys land that is later plummeted, the value of its token could easily drop below the value of its assets. It’s worth pointing out that foundations face the same risk regarding their property rights. The major difference is that donors can pull their funding from an NGO quietly, whereas a mass sell-off of a DAO token would affect all the token holders.
So will DAOs replace conservation-focused foundations? The question is meant to raise eyebrows and provoke. The truth of the matter is that right now we need all the tools we can find in our toolkit. As you hear more and more about real estate DAOs buying up properties, be sure to consider what the same model can achieve when focused on conservation.
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