Legally Wrapped DAOs — the Ultimate Investment Vehicles
ID Theory is a hybrid crypto fund that has been early investors and are active participants in legally wrapped DAOs. Our broad and unique DAO exposure is complemented by a portfolio that comprises early-stage equity investments, NFTs and a liquid crypto asset portfolio.
Disclosure: ID Theory invested in Tribute Labs and has significant exposure to the Tribute network of legally wrapped DAOs.
Overview
Humans have always organised themselves in relatively small-sized groups to achieve their collective goals. When synergy is achieved in a group (derived from the Greek synergos meaning “working together”), it tends to lead to more effective decision-making that generates better outcomes than individuals acting solo — if given sufficient time.
The nation-state and the corporations charted by them represented the desire of many people to coordinate to accomplish more ambitious enterprises. These organizations created pathways and tools for groups of people to raise capital, limit their risk of engaging in private enterprise, and share in any potential financial or societal upside.
Despite these advances, there have been issues with existing organisations. Even the most advanced corporations can’t escape issues like the principal-agent problem, rent-seeking behaviour or conflicts of interest. Moreover, nation states often fail to provide essential public services, getting tied up in bureaucracy or creating inadequate incentive structures that encourage monopolies.
Decentralised autonomous organisations (DAOs) offer a potential solution to organise people and societies.
However, the wisdom of the crowd mentality and smart contract autonomy is far from infallible. Most DAOs are slow to act, have little to no legal grounding, maintain unclear security measures and lack effective governance or incentive structures. Tribute Labs changed the nature of investment DAOs by providing legally wrapped structures, effective organisational support and curated memberships that target specific verticals. Whilst other structures may be optimal for DAOs building protocols and ecosystems, legally wrapped DAOs have properties that make them better suited to investment.
ID Theory are DAO veterans that believe these DAOs present optimum investment structures within the wider crypto ecosystem. Our exposure to these DAOs provides the Fund, and their investors, with unique broad exposure in many verticals that would be impossible to achieve without them.
This three-part series explains why the Fund has concentrated significant capital and effort into these innovative entities and their infrastructure and tooling. These articles aim to help the reader navigate the complicated DAO frontier, and each is further outlined below.
Article 1: A Primer on DAOs
To understand why DAOs offer considerable advantages as investment vehicles, it is first necessary to understand what DAOs are and the various intricacies of the ecosystem they inhabit:
- Powered by blockchain technology, they facilitate human cooperation and coordination to address a cause and achieve shared goals.
- They allow a group of individuals in an ideally flat non-hierarchical structure to recognise an opportunity, pool capital and vote on decisions devoid of central actors and intermediaries.
- The landscape is vast, from social and service DAOs, through grant and protocol DAOs, to investment and collector DAOs.
- Beyond the advantages of blockchain, such as efficiency and scalability, their decentralisation gives them their most important characteristics; permissionless, censorship resistance and self-sovereign.
- However, there are many disadvantages to address, such as smart contract and governance risk, unproven incentive structures and low participation.
- Most importantly, DAOs are legally ambiguous at best and unlimited liability partnership at worst, creating risks for participants and members that reside in a multitude of different jurisdictions, with overlapping and competing legal regimes. This complexity makes it hard for them to interact with broader businesses and entities.
Article 2: The Evolution of DAOs
From the first proto-DAO, Bitcoin, to the first cohort of legally wrapped DAOs, like the LAO, the space has progressed significantly over the last several years due to the maturation of DAO tooling:
- Modular frameworks and token gating have improved the usability and accessibility of DAOs. They are much more customisable in both functionality and membership.
- Many projects have emerged to address incentivisation and compensation, and DAOs can now manage payroll and benefits packages effectively.
- Internal coordination comes with challenges, often addressed by engaging external service providers, which have proved pivotal for investment DAOs.
- Finding the balance between low and high participation to ensure the DAO is performant whilst not being too noisy can be achieved with the appropriate activity and reputation primitives.
- The purpose of the DAO informs its structure; those governing ecosystems and communities will have very different constituents from those that are investing/collecting.
- Legal wrapping allows DAOs to interact with and invest in real-world entities and assets, with both benefits and limitations. Importantly it protects the members from liability.
- There is a range of different jurisdictions where DAOs can legally wrap, but they leverage legacy structures and are limited in many respects.
Article 3: A Journey Towards DAO Utopia
At ID Theory, we have invested in many DAOs, both entity-less and legally wrapped. This has given us domain expertise and insight into what does and doesn’t work. We believe that the best investable opportunities in this space are legally wrapped DAOs. Consequently, we have concentrated our capital, time and efforts on them. Therefore, rather than being a compendium to cover all DAOs, in this article, we focus specifically on investment and collector DAOs:
- Legally wrapped DAOs are performant; the 99-member cap (despite being antithetical to the notion of decentralisation) results in a highly curated membership, drastically reducing noise and streamlining decision-making processes.
- Regarding curation, careful outreach to sector experts, project founders, and angels/funds is more likely to result in a stronger group of decision makers, creating what can be analogized to a “hive mind.” A cerebral structure that transcends any one individual and can predict markets.
- Being early to a vertical is important; DAOs can become thought leaders and pioneers within their relevant ecosystem and cement strong reputations. Reputation = deal flow = high participation.
- Everyone doesn’t have to participate all the time. When optimising for this outcome, a very noisy DAO emerges. Even members that contribute extremely infrequently are still valuable.
- Rewarding participation and contribution are complex. Paradoxically, we have found that compensation of individual members leads to a decline in participation, leading to poorer outcomes.
- Having a group responsible for the administration of the DAO is essential. Employing specialist service providers to coordinate DAO running allows them to draw on experience across multiple DAOs and establish best practices.
There are a number of benefits that joining certain legally wrapped DAOs give us as a fund:
- Reach far beyond our numbers
- Powerful reputational signals
- A unique and value generative network
- Direct exposure to investments in high conviction areas
- Indirect broad exposure to investments in every vertical
- An exciting future for legally wrapped DAOs exists: NFT sets, public markets, tokenisation, and revenue streams.
We hope you find value in these three articles!
ID Theory may hold positions in some of the assets discussed in this post. This post is strictly for informational and educational purposes only. It does not in any way constitute an offer or solicitation of an offer to buy or sell any investment or cryptoassets discussed herein. Always perform your own research and conduct independent due diligence prior to making any investment decisions.
Interested in partnering with ID Theory or building something special? Get in touch through our website or at info@idtheory.io.
