Issuing debt could save your DAO
Using debt financing to survive a crypto winter
DAOs and companies are not so different
Although DAOs are different than TradFi corporations, in many ways, due to their capitalistic nature, they are similar. DAOs have incomes, expenses, and business models. One of the top priorities in a DAO is to create value for their token-holders just as a company would for their share-holders. If there are similarities, then there are most definitely learnings we can take from corporations as DAO members.
One of these learnings is how crucial obtaining financing can be to the survival of an organization. Take, Amazon, one of the world’s most successful companies for example. If they had not raised capital before the dot-com bust in 2000, “Amazon” would not be a household name.
How Amazon survived the dot com crash
Read the following excerpt from Jeff Bezos’ biography, The Everything Store.
“Early in 2000, Warren Jenson, the fiscally conservative new chief financial officer from Delta and, before that, the NBC division of General Electric, decided that the company needed a stronger cash position as a hedge against the possibility that nervous suppliers might ask to be paid more quickly for the products amazon sold. Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors. This time, with the stock market fluctuating and the global economy tipping into recession, the process wasn’t as easy as the previous fund-raising had been. Amazon was forced to offer a far more generous 6.9 percent interest rate and flexible conversion terms — another sign that times were changing. The deal was completed just a month before the crash of the stock market, after which it became exceedingly difficult for any company to raise money. Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year.”
During the dot-com crash, Amazon’s stock price fell from $107 to $7, a 93% drop. Such a dramatic drop is reminiscent of many governance tokens during bear markets. If DAOs don’t raise enough resources during crypto summers, the winter may wipe them out.
Fighting for resources during winter
Crypto labor is expensive and arguably the most valuable resource a DAO has. If a DAO doesn’t have stablecoins to pay contributors during crypto winter, dramatic falls in token values will force a difficult decision. Either pay uncompetitive compensation or greatly increase the amount of governance tokens used to compensate members. In a competitive market where DAOs, startups, and VCs are fighting for talent, choosing below market compensation is a death sentence resulting in the most capable contributors getting poached. The latter option is difficult to implement.
If a DAO’s token falls 80% in price, contributor token allocation would have to increase 5x to maintain the same value of compensation. It is unlikely such a large increase in token allocation would be approved by governance. This increase in allocation is difficult for unpaid DAO members, who have also felt the 80% drop in their own tokens, to stomach. It doesn’t feel fair to many that the devs should be insulated from price declines, but if they aren’t, core contributors are not short of alternative employment options.
A quick look at Open Orgs shows that most DAO treasuries are almost completely denominated in their native tokens. Although the treasury data shown doesn’t tell the full financial story of DAOs due to “labs” entities having capital raised from VCs, those that do not have well funded labs will have a rough time competing for human capital.
How can DAOs get the stablecoins they need without selling their tokens at crypto winter prices? Debt financing.
Debt keeps your DAO warm during winter
Obtaining stablecoins through debt financing can provide DAOs the resources they need to adequately compensate contributors without giving up tokens when they are heavily marked down. The borrowed amount can then be repaid with cashflows or appreciated tokens when winter ends.
How can DAOs obtain debt financing?
At Porter, we are building the first bond protocol for DAOs. If you’re interested in obtaining debt financing for your DAO, reach out here. If you’re interested in learning more and getting involved before our launch, join our Discord community and follow us on Twitter.
