How Investment DAOs Work
This is a portrait of the first DAO.
Around 1600, the Netherlands became one of the most prosperous financial hubs in Europe. With its prime seaside location, rich Dutch merchants began investing in sailing expeditions to Asia, supremely lucrative voyages that brought back exotic silks and spices to be resold at huge profits.
These were risky expeditions, always with the threat of shipwreck, disease, or pirates. To protect themselves against the loss of a single voyage, these merchants began pooling their money together in investment collectives. They were called “shareholders,” because if the enterprise made money, they “shared” in the profits.
The frenzy around investing in these sailing expeditions — like the frenzy around crypto investing today — led to risky behavior and dangerous competition, including several ill-fated voyages around the Cape of Norway. (The shareholders also shared in the losses.)
Eventually the government stepped in. A dozen of these early companies were rolled into one big one, the Dutch East India Company. For investors, this was an even sweeter deal: a company with a virtual monopoly on trading, with the blessing of the government. Dank u wel!
Then things got really crazy.
It didn’t seem fair that only the rich could invest in this new trading collective, so the Dutch East India Company began offering shares to the public. This was a major milestone in money: now anyone could invest, and invest they did.
The Dutch East India Company raised so much money that it ventured into much more than trading. Today we’d call it a vertically-integrated supply chain, a massive conglomerate that not only traded goods, but milled, distilled, and refined them. The company didn’t just sail ships, it made them. Some say it was the largest corporation in history.
All this money flowing into the company cemented the Netherlands as a global financial hub, with profound effects — both good and bad. As Wikipedia states:
At the dawn of modern capitalism, wherever Dutch capital went, urban features were developed, economic activities expanded, new industries established, new jobs created, trading companies operated, swamps drained, mines opened, forests exploited, canals constructed, mills turned, and ships were built.
This courtyard is where it all happened: the Amsterdam stock exchange (today it’s part of the University of Amsterdam). This was the forerunner of the New York Stock Exchange, with buyers and sellers trading “shares,” which were nothing more than slips of paper, just like today we trade nothing more than digital tokens.
As the modern corporation evolved, we developed a structure for running them. A centralized team (usually the CEO and executives, supported by workers) did the actual work; the shareholders could perhaps vote on important company decisions. While not perfect, this structure has served us pretty well.
This history lesson helps us understand what’s going on in blockchain investment DAOs — because the Dutch East India Company, in a sense, was the first DAO.
How Do You DAO?
The DAO, or Decentralized Autonomous Organization, is like the Dutch East India Company on steroids. Think of it as a company run on code.
In an investment DAO, a collective of investors pool their money together for some shared purpose. That could be investing in startups, managing grant money, or buying expensive NFTs. Like the early Dutch merchants, the purpose is something bigger than anyone could accomplish on their own.
“If you want to go fast, go alone. If you want to go far, go together.”
- Common DAO mantra
Usually, investors buy digital tokens (like buying shares in a public company) that give them an ownership stake and voting rights. Sometimes these tokens can be earned, such as by contributing work to the project.
The centralized team does the work. The decentralized investors vote on decisions. The code handles the rest.
As much as the DAO evangelists preach that everything should be completely decentralized, our long experience in blockchain suggests otherwise. Even if ownership is decentralized, you still need a core team — like the executive team and employees of a public company — to do the freaking work.
How do we build a DAO around a high-performing team, while still supporting a team of outside investors? One good example is MetaCartel Ventures, and it gives us a glimpse into the future of teamwork.
MetaCartel: Teamwork Redefined
MetaCartel is a DAO made up of people who want to invest in new projects built on the Ethereum blockchain. Rather than investing individually, they want to pool their money, knowledge, and connections together to make bigger and better investment decisions.
Like a traditional VC firm, the members of this DAO can find promising new projects, put them through rigorous analysis, then vote on whether to invest the group’s funds.
- Because members are well-connected in the Ethereum community, they get more deal flow.
- Because they’re smart about Ethereum, they can ask better questions.
- Because there are so many members, the projects can get better analyzed.
At least, that’s the theory.
MetaCartel boasts an impressive list of early investment decisions, including now-legendary projects like Zapper Finance, PoolTogether, and Rarible. The members of the DAO have incentive to promote those projects more heavily, since they have skin in the game. It becomes a kind of “crypto club.”
There are three levels of membership in MetaCartel:
- Mages, who are like managers or General Partners of a traditional company. They are required to put in actual work, and can be removed from their posts if necessary.
- Goblins, like Limited Partners of a traditional company. They can put in money to the DAO but don’t have to be involved in the day-to-day operations.
- Summoners, who are like contractors or employees that are brought in to do legal, clerical, or administrative work, and paid accordingly.
By creating this three-tiered membership structure, MetaCartel is trying to balance the best of both worlds: centralized teams and decentralized teams. To simplify our understanding:
- They have a centralized group of “managers” (Mages)
- supported by specialized “employees” (Summoners)
- fueled by a pool of decentralized “investors” (Goblins)
There’s one more huge innovation, which is that MetaCartel is set up both as a smart contract and as a legal contract.
In other words, it is governed both by code, and by law.
Code-wise, MetaCartel is based on the Moloch smart contract (named after an ancient demon, hence the silly Magickal names). Legally, MetaCartel is set up as a Delaware LLC, which means members have a legally binding agreement with each other, while also having “limited liability,” so they won’t be sued if the demon is accidentally unleashed.
Unlike traditional VC firms which may have long lock-up periods, or your 401(k) which has early-withdrawal penalties, members can “RageQuit” MetaCartel at any time, redeeming their tokens for the current value of the fund.
It’s too early to say how much MetaCartel will return for its members, but perhaps that’s beside the point. Being a part of the community — the in-crowd that’s making things happen — is part of the fun. (They do look like they’re having fun.)
Teamwork Makes the Dream Work
Over the past few weeks, we’ve been releasing new Investor Mindset MP3s (think of them like guided meditations for investors). These tools, which take less than 15 minutes a day, are helping our paid members build the critical mental skills needed to build wealth.
In crypto investing, one of the most important skills to learn is teamwork. Most crypto natives will tell you the importance of community around a project — generally, the more users of a blockchain platform, the higher the token price.
Another name for “community” is “teams.”
The takeaway from today’s lesson on DAOs is that successful blockchain projects have a mix of both centralized and decentralized teams. Just like companies have both managers and investors. Just like governments have both elected officials and citizens.
It’s this mix of high-performing internal teams (the project leaders), with cohesive outside teams (the community) that will power our most successful blockchain investments in the future.
This week’s Investor’s Mindset episode will help you build your belief in teamwork. Paid subscribers can get the entire series here, including our new Episode 8, focused on teamwork.
When we share in the work, we share in the harvest. That was true of the Dutch 400 years ago, and it’s true with DAOs today. Teamwork makes the dream work.
John Hargrave is the author of Blockchain for Everyone: How I Learned the Secrets of the New Millionaire Class, the bible of blockchain investing.
