What Can’t DAOs Do?
DAOs have been a massive focus of the Web3 community for some time and have quickly formed to do everything from non-profit work to buying the US Constitution. Discussion of how DAOs are an entirely new way of coordinating both people and capital to nearly unlimited application has excited many. That said, almost anyone who has been actively engaged with a DAO knows that there are trade-offs. The purpose of this article is not to unpack the many areas that are being experimented and improved upon (such as communication, governance, voting, engagement etc.) but rather to focus on the legal realities that currently constrain how DAOs can participate in a centralized world.
One of the most exciting areas DAOs have focused on is investments. ConstitutionDAO gained notoriety when the community raised $47M to buy one of the original copies of the US Constitution. But let’s unpack this a little: The media attention raised by this coordinated capital raise greatly increased the publicity of the auction. Another huge issue is that the other bidders knew exactly how much would need to be allocated to outbid the DAO. While ConstitutionDAO could raise capital and participate in the auction, the public structure of their raise and bidding limit was not ideal and the auction was, unfortunately, lost.
Public auctions, while not ideal, at least offer a clear path for DAO participation. However, we are still left with the problem that the vast majority of traditional capital allocation — and that which arguably offers the most potential for upside — is toward private investments. While there are many shapes and sizes for raising capital, all of them are bound by certain legal requirements. One of the primary constraints of private fundraising (and the most problematic for DAOs) is that a private company cannot engage in public solicitation of funds during the raise. BitDAO has been presented with dozens of opportunities to invest in private fundraises but has thus far been unable to figure out a compliant framework to participate in them. Token swaps and engagements with companies that are not bound by the same legal requirements are still possible, but these are by far a minority of investment opportunities and greatly limit BitDAO’s exposure to some of the most promising private investments. The PleasrDAO proposal is the culmination of months of effort and conversations. For some context, a brief roadmap of options pursued, and their shortcomings, is presented below.
1) Direct Proposal: This was the initial suggestion when having conversations with companies, but after reviewing with PleasrDAO’s legal team, we were informed that the terms of the investment could not be posted to a public forum, which rendered this approach unworkable. In fact, it is very rare in private deals that the investment terms such as market cap are ever publicized, even after the deal has completed. Therefore, without someone to review the private commercial terms, and lacking the ability to circulate them to the community in preparation for a vote, we had to pursue another avenue.
2) BitDAO VC Entity with an Investment Committee (IC): This was another approach that was pursued but required some challenging tradeoffs. The general idea was to create a proposal for a Venture Autonomous Entity (AE). It would have been capitalized with $X of funds, and led by a group of well known VC’s in the space who would have had the ability to make decisions on behalf of BitDAO. There were several problems here. The first, was that it was the most opaque: it did not allow for any transparency into what was being invested in and required absolute trust in the IC. The second issue was that many funds have constraints that limit their ability to serve in any IC capacity for other funds. This vastly reduced the number of individuals and funds that could participate in this framework. Based on these two issues, we decided to pursue another approach.
3) Assessment group review, then vote: The general idea for this was to have well known funds constitute an assessment group which would review all commercial terms of the deal and then engage in an anonymous vote either for, against, or neutral, based on the deal terms. The output of this vote would be revealed to the BitDAO community, along with some general information about the company, and then be voted on by BIT holders. Again, one of the main issues was that many funds were not sure if they could participate in this capacity, which led to a lack of diversity in a potential assessment group. This, combined with the fact that again little to no terms could be communicated to the BitDAO community made this a bit of a challenge but likely the best approach given the constraints of private investment. This lead us to the current proposal.
Windranger, Mirana, and Alameda are three of the largest supporters and holders of BIT in the community. They have all put significant time and effort into supporting the BitDAO ecosystem and developing projects and communities that support it. These three organizations helped to provide an assessment of the PleasrDAO investment and externalized their support of the proposal. Significant time and effort was spent with the PleasrDAO team to discuss terms, develop the proposal, and figure out exactly what could and could not be put into the proposal. Whereas many previous investment opportunities were uncomfortable circulating diligence such as financials, PleasrDAO was willing to provide this information for community review.
While not ideal, this proposal represents the cutting edge of how DAOs can engage with a world optimized for centralized companies and VC’s. The bottom line is that there’s a fine line between public marketing and sufficient disclosure, especially in the context of DAO-to-DAO and more generalized private investments. While this proposal represents a fantastic opportunity for two of the world’s premier DAOs to work together, it is also the culmination of months of effort to find the boundaries of DAOs’ legal constraints.
Because of its experimental nature, BitDAO is continually finding answers to the question of “What can’t DAOs do?”, and I assure you there are many. But, if we as a community work together to find creative ways to overcome these challenges I believe the future is bright. Blockchain was an elegant technical solution to the social problem of trust, but in building DAOs on top of this architecture, we have reintroduced problems that were once resolved and must find where trust anchors can be used and where they should not. Trust within DAOs must be built and social coordination will, unfortunately, not be controlled by complex cryptography anytime soon. If we, the Web3 community, truly aim to dominate the current world run by centralized companies and VC’s, these are the challenges we face, but ones that I am confident we will overcome.