Why 2019 Will Be The Year Of The DAO

6 Trends Likely To Drive Experimentation With Decentralized Organizations

We’ll be talking about this and much more at AraCon, the Aragon community’s first ever large event happening in Berlin at the end of this month.

Introduction

One story in crypto is the price story — how speculative investments in cryptoassets are performing. In 2018, that story wasn’t so positive, seeing a massive return to earth after 2017’s run up broke gravity.

Another part of the crypto story, however, is the evolution of the underlying tech stack. Still another is the broader global social context that creates a need for those decentralized, censorship-resistant technologies. In those contexts, 2018 tells a very different story.

At Aragon, we sit at an interesting vantage point, not only developing technology but getting to watch as hundreds of projects and organizations start to build on top of that technology. From where we sit, 2019 is poised to be the year of the DAO. Here’s why.

DAOs: What Are They Good For?

First, by way of set up, let’s quickly review some of the characteristics of decentralized organizations and the use cases that those characteristics suit them for.

Decentralized organizations are good at:

Coordinating resources when not all parties know one another (or don’t know each other well enough to trust one another deeply)
Aligning large numbers of stakeholder contributions towards shared goals
Running organizations in a way that is resistant to censorship
Tracking and validating participation and contribution to a project
Accommodating a variety of levels of contribution
Allowing people and entities to contribute work in a jurisdiction-agnostic fashion, regardless of the rules of the physical location where they’re contributing from
Nimble setup, especially relative to traditional organization structures

This set of characteristics lend themselves to huge numbers of possible use cases, but a few broad categories that stand out as most relevant are:

Businesses constrained by the existing system, in terms of things like complication around the nature of contributions (i.e. difficulty of fitting people in the box of employee, contractor, etc); jurisdictional issues (i.e. the challenge of operating globally in anything resembling an efficient manner); or regulatory issues — which doesn’t necessarily mean that the business is doing something nefarious, but more that regulation in its jurisdiction hasn’t caught up yet.

Social and political movements that have a mismatch between their reality — which can be highly dynamic, temporary, and built around small diverse actions from a wide variety of contributors — and the organizational forms available to them, which tend to assume long-term existence, similarity of contribution, and fixedness of purpose over time.

Networks such as online communities that start as informal but who wish to be able to coordinate more formal, tangible action.

Global Trends Incentivizing DAOs

Once we understand what DAOs are useful for and what types of organizations they tend to beget, the next question becomes what are the global macro trends that would lead people to want to build those types of organizations or have those types of use cases? A set of trends stand out.

Globalization Of Talent & Transformation Of “Work”

There are actually many dimensions of how global work is changing but two stand out as it relates to the emergence of DAOs. The first is that talent is more global than it has ever been. As businesses try to recruit that talent, they face massive jurisdictional and regulatory headaches as the current legal system was not organized to accommodate transnational workers. This creates a major financial incentive to organize global work differently.

Another dimension of the changes in work is the nature of what work itself is. In the industrial era and even so far in the information era, “work” has still largely fallen under employment or contract buckets. But what happens when units of work are micro contributions of time, data, processing power etc that don’t fit in any previous legal framework? As new decentralized digital infrastructure is being built, it is exactly these types of “work” that are coming to the fore. New types of work require new modes of organization.

Well-Resourced Stakeholder Networks Needing Coordination

The last few years saw significant financial resources flow into decentralized, open source project ecosystems. These ecosystems promise a different way of doing business to their contributors, including more transparency and even stakeholder empowerment around how those funds are used. These sort of stakeholder-driven communities already need tools for coordination, and this need is significantly increased when those communities are charged with allocating millions of dollars.

Emergence of Decentralized Finance

One of the most important growth and usage stories in crypto last year was the emergence of open, decentralized finance protocols. Today, hundreds of millions of dollars are locked up in permissionless loans and collateralized debt products that simply couldn’t have existed a few years ago. These decentralized finance tools are creating entirely new categories of business opportunity. At the same time, however, these opportunities exist in a total regulatory gray area, so many are turning to DAOs as a sandbox to experiment outside of traditional organization models.

Normalization Of Participation In Governance

People’s expectations are shaped by what is normal and familiar to them. In line with the growth in resources for open source stakeholder communities, there is also a growing belief that stakeholders should have a hand in guiding the decision making of those communities. As governance experiments both on-chain and off-chain become commonplace, the net aggregate impact is the normalization of participation. In other words, the more people are invited to participate in decision making around the communities they belong to, the more they come to expect that right. This creates motivation for organizations to have systems to incorporate the voices and perspectives of their stakeholders in a more direct and routine way.

Deplatforming Grows As An Issue

For much of the young history of Web3, questions of censorship of centralized social platforms were more theoretical than real. We understood, increasingly, that we had lost control of our data, with its own set of consequences, but there wasn’t yet much evidence of platforms asserting editorial control over who could and couldn’t participate. Early in 2019, however, deplatforming has emerged as a more significant issue, with numerous theoretically uncensorable alternatives to social media and fundraising platforms emerging. Whether this is a real issue or a political football and feigned controversy remains to be seen. However, what’s for sure is that a number of prominent voices are using their bully pulpits to put it in the spotlight.

Upswing In Political/Social Organization

The last few years have seen a decided upswing in global social and political action. Importantly, this is not just a phenomena of the developing world, but is sweeping the Global West as well. From Brexit in the UK to the election of Donald Trump in the US to the #MeToo movement to the Yellow Vests in France, the world is heaving. As discontent rises, people are looking for ways to channel that frustration into action. It seems likely that as better coordination tools become available, they’ll find a ready audience with those who want to transform the world around them, and don’t have time to wait for bureaucratic organizations to catch up.

Putting it all together

If these trends are driving interest in and need for DAOs, the next question is who is creating the technology infrastructure to actually experiment with new forms of organization?

While it is still very early days, 2019 is kicking off with significant energy in this direction, including dedicated DAO platforms, applications built for those ecosystems, and even protocols experimenting with decentralized governance.

When it comes to new forms of work and organizations, in many ways the entire blockchain space is an experiment, as mining, validating, staking etc all represent new forms of work that are absolutely vital but quite new. The large and growing conversation around “generalized mining” is reshaping how we think about organizing businesses around these types of work.

Other examples of projects playing in the sandbox of new forms of working include Gitcoin, which allows the open source community to incentivize and monetize their work; Espresso, a decentralized datastore that integrates with aragonOS to let DAO teams share files without relying on Dropbox or Google Drive; and Planning Suite, another Aragon app offering a collaborative planning model enabling multiple different groups of stakeholders within an open source or decentralized organization to coordinate the use of shared resources. Finally, one of the most interesting projects in this space is Pando, which actually transforms creative projects that have multiple collaborators — from books to music to video games — into DAOs.

With regard to stakeholder networks needing coordination, there are a number of projects at varying levels of development. Giveth, for example, is creating an architecture for Decentralized Altruistic Communities, an alternative to traditional nonprofits that allow people to organize around causes and collaborate to allocate resources. Another buzzy-but-not-yet-launched project in the space is Moloch, an open source approach to allow communities to fund shared infrastructure, with more information purportedly coming at ETHDenver in February.

Examples in the Decentralized Finance space are incredibly numerous. MakerDAO is an increasingly important piece of the puzzle, with more than 1.75% of ETH locked as collateral in Collateralized Debt Positions of CDPs. Compound Finance allows token holders to earn interest on their tokens. Dharma is building a protocol for credit on blockchains that can support numerous types of lending products. In short, DeFi is one of the most exciting areas pushing the boundaries of how you can reimagine organizational structures even in key market activities.

In the realm of governance, 2019 is posed to see a Cambrian explosion of experimental governance models move from theory to practice. 0x is in the midst of a transition to community governance. At the end of last year Melon unveiled more about its proposed governance approach. These represent just some of the approaches that will allow us to learn and see how decentralized governance works in practice this year.

Deplatforming is also in an interesting trend as it relates to real action. There are, of course, some prominent alternatives to incumbent social networks — such as Gab and Mastodon both trying to create alternatives to Twitter. More recently, there have been some announcements about projects that seek to replace Patreon and Kickstarter. And just in the last week or two, 0xchan was announced, which includes developers who worked on POWH3D. In short, it should be an interesting year for decentralized alternatives to social media and funding platforms.

Finally, when it comes to political and social organizations, the use of DAOs remains to be seen. There are some projects working on infrastructure, like Giveth mentioned above. The exciting thing to see, however, will be whether emergent political and social organizations in the numerous relevant contexts around the world, from Rojava in Syria to the 2020 US election cycle to the Venezuelan crypto community, will turn to tools like Aragon and the apps in its ecosystem as they come online.

In short, when you look at both the trends pointing in their direction and the infrastructure around DAOs that is quickly coming online, it’s hard not to be excited about the possibilities for the year(s) to come.

If you’re interested in these topics, we encourage you to check out AraCon, the Aragon community’s first ever large event happening in Berlin at the end of this month.

Thanks to John Light, Nathaniel Whittemore, Luis Cuende, Lucija Matic for the many inputs.

We need more public due diligence for ICOs

It’s a new world out there.

As investors, we’ve been used to a private fundraising framework that is being completely turned upside down by the public token sale mechanism.

As a venture investor, evaluating investment opportunities is often your full-time job and decisions impact your career as well as your wallet.

As a venture investor you’re also always given access to a lot of detailed confidential material and the access to the team, in order for you to ask questions. And even if in Silicon Valley deals close in record time, and at the seed stage you have to move fast, for Series A+ you have basically as much time as you want to make an investment decision.

Often, as a venture investor you’re also given information rights and sometimes board seats (even thought we’ve recently seen in many companies that in terms of preventing bad behavior these are fairly useless).

In the ICO world, that’s not the case.

Companies, teams or organizations that lunch public token sales, most often never interact with the final token buyer, and the average token buyer has no way to contact the team other than Twitter or their community tool of choice.

On top of that, ICOs are often on extremely tight deadlines, and are surrounded by a lot of hype.

It’s also usually more technically complicated to due diligence such efforts as code is law, and to fully appreciate what’s going on you need to read and understand the smart contracts behind an offering or the code behind a new protocol.

Given that the fundraising efforts are public plus there is little info and little time, I do believe the diligence efforts should be public as well.

When venture investors see deals they don’t like for some reason, or terms that are not fair, they just pass on the deal, and that’s it.

Because other investors will still be full-time investors that will go through the same process of analysis and diligence, and someone might like the deal. (Oftentimes VCs also interact offline about specific deals to get feedback and ask for things they might have missed, especially in advanced diligence).

In a public fundraising deal, even if reserved for accredited investors in the first phase (the token will reach exchanges sometime), investors aren’t usually full-time professional token investors.

Not everyone has time to dig into whitepapers (let alone understand them) and token sale economics to make a very informed judgment.

Yesterday, I did such an effort given no one would write about it. I wrote my sentiment on the token sale economics of Filecoin.

View at Medium.com

What has surprised me the most, is that aside from a few notes of dissent and criticism, there has been an overwhelming and amazing reaction online.

This post seems to have changed the perception of the token sale for people, which must mean that they did not know the facts presented in the post. This in interesting because those facts were just hiding in plain sight on the token sale documents. In turn, this means that people are very prone to the hype machine but not many have the time to actually go read and ponder about specific token sales.

This is wrong. But to me it should hardly be surprising: I certainly participated in a few token sales where I did not have much information or insight!

I would surely have loved if someone reported on what they found in the docs (and even more importantly the code) for other projects.

I would have loved if Emin Gün Sirer had started the public conversation with The Bancor Protocol before their token sale had started and I’m sure many others would have as well.

View at Medium.com

Please,

If you do spend your time looking at projects in the distributed ledger space, please write up your conclusions on projects you understand.

The analysis Filecoin doesn’t want you to read

Digging into the dynamics of Filecoin’s token sale and economy

Filecoin could be a game changer for the crypto space. It’s one of the few projects that are extremely well thought out, built by an amazing team, and actually needed.

Add to that the fact that they created a new proof mechanism and have a legitimate need for a blockchain.

In other words, it’s probably the best that the crypto community has seen recently. It was certainly one of the few ones I was looking forward to.

But then, two things happened:

Man, I wouldn’t have expected something like this from a solid team. The response felt particularly disingenuous.

I’m now incredibly disappointed, and probably will not participate in the sale.

I’ll also probably lose a good number of friends that are investors in the company and/or pre-sale, but in this new era of completely public fundraising, I think the public deserves to hear it from all sides.

The flaws in Filecoin’s token sale

Filecoin gave an amazing deal to their buddies, just a few weeks ago
Filecoin is being insanely greedy, going out for a $700M+ raise
Early clickers are incentivized, price unknown, network congestion update, see below
Protocol Labs and Filecoin foundation are keeping 2x the coins that investors will get

Problem #1: Filecoin gave an amazing deal to their buddies

There’s nothing that can stop them here, but many people got very mad about this and rightly so.

Filecoin raised $52M in an advisor sale very recently, till July 24th. This sale was reserved for people close to the company and in the industry. Many extremely high profile people participated, total cheques were 150.

These investors paid a maximum of $0.75 per coin. They could also have chosen discounts based on the amount of time the coin would vest, from 0% to 30%.

These investors did not take any more risk than the investors who are going to participate in the public token sale. Actually, one could argue that they even took less risk because they knew what the price would be all the time (which is not going to be the case for public investors)

Their explanation:

All of these people and organizations (a) have been working hard with us for years to make IPFS and Filecoin successful

This is absolutely untrue. Quite a few people just got introduced to the team recently and got into the sale just a week ago and paid the $0.75 price.

(b) have fully committed themselves to work hard with us and for the Filecoin Network for many years to come,

Sure, but you, dear reader, would commit too, wouldn’t you?

c) offer tremendously valuable advice, hands-on help, knowledge, skills, resources, connections, and more.

This is the real reason that they will pay 2x-20x less than you. You be the judge. Usually vested equity is subject to good behavior, but here anyone could promise great advice and help and then disappear, but still get coins.

Problem #2: Filecoin is being insanely greedy

After having raised $52M in a pre-sale for a pre-product offering, they want to go out and raise an amount that is effectively uncapped.

Their response:

Our token sale IS NOT uncapped. It is capped in terms of the amount of Filecoin sold: 200M FIL.

Over the last few years, Protocol Labs has proved to the world that we know how to deploy capital to create valuable projects, valuable technology, and valuable software. To date, all of the work you see — IPFS, libp2p, IPLD, Multiformats, Filecoin, CoinList, and all our research — all our work has been funded by under $3.5M. We know how to deploy capital effectively.

It seems like I’m reading a Trump statement. Basically saying: “I have eaten 10 ice creams in the past years, so I’m great at eating ice creams and can easily eat 1000 in the next few years. Gimme ice creams.”

But aside from the absurdity of trusting someone that deployed $3.5M with $500M+, let’s analyze the USD cap of their token sale.

Some numbers

$52M raised in presale
Minimum 69M, Maximum 99M Filecoins sold in ICO
Advisor max price $0.75
131M-101M Filecoins left for the public
Starting ICO price: $1.3 ($52M/40M), almost 2x advisor price.
Price at $100M raised = $2.5
Price at $200M raised = $5
Unfortunately, their price function is not clear. It doesn’t state if a transaction amount impacts the total raised before calculation of price or after. In any case, assuming normal average investments, eg. $100k, this doesn’t change much.
The USD cap will change based on the average purchase amount and the average discount chosen by the buyers.

Let’s calculate the Filecoin ICO USD cap

I wrote a small piece of code to calculate the USD raised with different assumptions.

You can see it here:

https://gist.github.com/stefanobernardi/d6eda1fb299d0832c3dad71a5a4fcd20

And you can run it here on the amazing Repl.it (Mission and Market portfolio company plug! Oh BTW, I deployed $3M with my first fund, maybe I should raise a $1B second fund.)

Assumptions:

Total Filecoin sold in the advisor pre-sale: 85M (The minimum sold is 69M, if everyone paid $0.75, and the max is 99M, if everyone chose a 30% discount, so I chose something in between)
Average investment = $100,000.00
Average discount chosen by investors: 10% (discounts are 0%, 7.5% for 1y vesting, 15% for 2y vesting, 20% for 3y vesting — I’m assuming many will choose 0 and a few will choose the rest, so 10% sounds about ok.)

The results

Final price is $15.54075
Raised $690,800,000.0
Total filecoins sold: 199999826.3440984

So effectively the cap of Filecoin’s ICO is ~$700M.

For fun, let’s assume no one chooses discounts:

Final price is $34.34
Raised $1,373,700,000.0
Total filecoins sold: 199997793.51623443

The real cap is $1.37B.

And, everyone max discount:

Final price is $7.83
Raised $391,600,000.0
Total filecoins sold: 199991567.59900582

Highly unlikely, but this is the minimum possible cap.

Call me old fashioned, but wanting to raise half a billion dollars for a pre-product endeavor is absolutely fucking insane.

Let’s remember that the tokens will also come out when the network is launched, which Protocol Labs is estimating at 1 year out. Vesting will only start then.

Problem #3: Early clickers are incentivized, price unknown

Given the price grows as more money is invested, early clickers are incentivized to get in as fast as possible — this has the obvious intention of raising as much money as possible.

Users paying in BTC and ETH will also have to wait for their transactions to confirm before knowing how much they paid. Given a very likely clogging of the network, this has the potential for disaster.

I suggest reading their explanation in the response. It is a mix of funny and scary.

Update: rules have changed. Price will be averaged in the first hour and max price in the first hour is $6.

This means that no one will pay the $1.31 min price and buyers in the first hour won’t know how much they’ll pay in the $1.31-$6 bracket.

When the first hour is over, that’s when people will want to fast click because they’ll have information about the price and total raise.

This update just makes it so that there won’t be any price difference for first hour clickers, which is good, but not great. Price is still unknown (and crazy high compared to advisors).

Problem #4: Protocol Labs and Filecoin foundation are keeping 2x the coins that investors will get

This is absolutely mind-boggling to me.

To compare, the ETH genesis sale gave 10% of ETH minted to early contributors and 10% to the Ethereum foundation. 80% was for investors.

In Filecoin’s case, Protocol Labs will receive all the cash PLUS 50% more coins than investors, so 1.5x. A foundation will receive 50% of the amount of coins “minted” by investors. Total: 66.6% to them, 33.3% to you.

Assuming a “small” $250M total raise, Protocol Labs and a foundation would receive, $250M cash, plus $250M-$300M (remember, the discounts?) in tokens.

Also, 70% of the tokens that will ever exist will be mined. This means that the investors are only getting access to 10% of the total supply ever.

As a comparison, Ethereum sold 60,108,506.26 ether at genesis, and today there are 93,775,666.

Place your bets accordingly.

…

Quick and dirty utility value calculation

Edit: I’m removing this as apparently it was way off. I’ll try to spend more time, but with token sale in just a few days not sure I’ll be able to, so prefer to just take it off.
All other points I still stand by.

Conclusion

Filecoin is why we can’t have nice things.

A real game changing project, that has always touted they care about the community and would do this for free, is going out trying to raise $700M and keeping double that in coins.

I think this could be one that will be remembered and written in history books about how insane this all was, and how a major innovation like the cryptographic token was taken advantage by people wanting to raise stupid sums of money, before it was really used to the best of its potential.

Thanks to redacted, redacted, redacted, redacted, and redacted for providing feedback on this draft, the ideas behind it, the code and the assumptions for the utility value.

https://upscri.be/e4c831/