From Movies to Fast Food, DAOs Are Bringing Decentralization to Investing

Most people first heard of decentralized autonomous organizations (DAOs) when one raised nearly $50 million to try to buy a copy of the U.S. Constitution.

While that effort failed, it publicized a type of blockchain-based collective governance that has been growing like wildfire in the last year or so, infiltrating everything from charitable fundraising and political lobbying to sports investing and art collecting.

More recently, the days-old UkraineDAO has raised more than $3.3 million for the Ukrainian war effort by auctioning a non-fungible token (NFT) of the country’s flag. Which is just a fraction of the $53 million AssangeDAO raised over the past month to support legal efforts to free Wikileaks founder Julian Assange from a U.K. prison. And organizations like Big Green DAO — a food-and-nutrition-focused nonprofit run by Elon Musk’s brother — are decentralizing how donations are spent.

Meanwhile, PleasrDAO, an art investment group, recently spent $4 million to buy the sole copy of hip-hop giant Wu-Tang Clan’s album “Once Upon a Time in Shaolin.” FriesDAO just attracted a former Domino’s Pizza executive to its effort to create a community-run fast-food franchise empire. More ambitiously, BuyTheBroncos DAO launched last week, hoping to buy the NFL’s Denver Broncos — an endeavor that would require about $4 billion, to say nothing of the league’s approval.

DAO sits at the center of the decentralized finance (DeFi) boom.

Nearly all DeFi projects either are or intend to be run by DAOs. The basics of a DAO are fairly simple: Sell cryptocurrency tokens that come with a vote in how the organization controlling the funds raised are spent. Voting is controlled by self-executing smart contracts, so there is no central management to direct the enterprise.

Read more: PYMNTS DeFi Series: Unpacking DeFi and DAO

Beyond DeFi

The pitch, according to supporters, is that DAOs are a form of purely democratic capitalism or nonprofit control of something — ConstitutionDAO was founded in days and was very vague on what it intended to do with its rare copy of the U.S.’s founding document — or in a growing number of cases, a purely democratic form of charitable giving.

HollywoodDAO’s goal is to raise funds to support movies with budgets in the $2 million to $5 million range that have largely been abandoned by the Hollywood studio system its founder told Decrypt earlier this month. Its DAO token holders will vote on projects to fund.

That said, it’s worth noting many investment DAOs are closed investment organizations.

PleasrDAO is a collective of several dozen “DeFi leaders, early NFT collectors and digital artists” that is raising funds from investors. The collective will vote on acquisitions and see the profits. It spent $4 million on an NFT of the image that became Dogecoin’s logo and began selling NFTs representing fractional ownership of the Dogecoin NFT for less than a dollar in September.

“A DAO is an internet community with a shared bank account,” investor Cooper Turley told CNBC. “Basically, a small group of people come together to form a chat group, and then they decide to pull capital together.”

Looming Questions

What makes investment DAOs interesting, aside from the decentralized and non-human-controlled governance, is that the funds raised by selling the tokens that fund a DAO’s treasury not only entitle the owner to some share of the profits — or at least how those profits are invested — they can be also bought and sold like a share of stock.

That could lead to a number of problems, ranging from jurisdictional oversight and tax issues to securities law, according to Jeremy Coffey, a nonprofit specialist at the Perlman + Perlman law firm.

“It wouldn’t be surprising to see the Securities and Exchange Commission (SEC) bring an enforcement action against a DAO, given that it has already notified the Decentralized Finance (DeFi) community that it considers many DeFi products analogous to products regulated by the Commission,” he wrote in January.