DAOs and Media: Revolution or Rich Man's Toy?

The Rise of Decentralized Autonomous Organizations (DAOs)

In recent weeks, a digitally-driven collective known as the ConstitutionDAO, comprised of thousands of cryptocurrency enthusiasts, collectively raised nearly $45 million with the intention of purchasing a copy of the U.S. Constitution. Despite ultimately losing the auction, the group had already developed a line of merchandise, including sweatshirts featuring emojis, facilitated by the newsletter company MorningBrew.

DAOs: A New Venture Capital Trend

This experiment, which rapidly spread across social media platforms through countless memes and recruitment appeals, exemplifies the growing popularity of decentralized autonomous organizations (DAOs) within venture capital circles. Similar to open-source initiatives like Bitcoin Core, DAO projects involve both dedicated volunteer contributors and passive participants, often guided by compensated core team members.

Funding Models Vary

The methods by which these projects secure funding for their contributors differ significantly, contingent upon the specific project’s structure and goals.

Notable DAO Projects and Their Assets

Several DAOs, including Friends with Benefits (FWB), backed by Andreessen Horowitz, currently manage assets exceeding $600 million. Alex Zhang, the lead organizer of FWB and a former DJ and events coordinator, assumed leadership of the DAO in May 2021.

FWB Fellowship Program

Zhang states that the organization now operates a fellowship program, admitting up to 40 scholarship recipients each quarter, funded for a period of up to three years. Full membership otherwise requires an investment of approximately $8,000.

Spontaneous Formation and Networking Opportunities

DAOs frequently emerge organically, testing the waters to gauge interest and fundraising potential. Individuals join DAOs for diverse networking opportunities, including more engaging avenues to explore cryptocurrency technologies.

DAOs as Crypto-Fueled Media Companies

Many of these DAOs function essentially as media companies powered by cryptocurrency. There is substantial overlap between DAOs and subscription-based organizations like The Information, with the primary distinction being that FWB organizes social events rather than journalistic conferences.

Friends with Benefits: A Case Study

FWB originated as a group of investors who pooled resources in September 2020, extending invitations to any Ethereum enthusiast interested in acquiring tokens and joining their exclusive club. They subsequently hosted exclusive gatherings for token holders in cities such as Miami, Paris, New York, and Los Angeles.

Expanding Content Creation

According to Zhang, FWB currently comprises 2,000 full members, alongside a smaller group of fans with limited or city-specific memberships. The organization is actively expanding its content creation efforts.

“We have a dedicated editorial and content team producing multimedia assets like zines and are venturing into other content formats. We are planning to launch a radio station, featuring bookings from various DJs,” Zhang explained. “We are transitioning away from a purely subscription-based model and focusing on asset accumulation.”

Prominent DAOs in the Ecosystem

Other well-known DAOs include Dirt, a newsletter DAO founded by journalists Daisy Alioto and Kyle Chayka, exchange DAOs for users of platforms like Uniswap, and social clubs like FWB and PleasrDAO. Art-focused DAOs, such as PleasrDAO, amass and allocate millions of dollars to acquire art collections encompassing JPEGs and rare albums.

PleasrDAO's Approach

“We are developing the blueprint as we proceed,” stated Jamis Johnson, a co-founder of PleasrDAO, who participated in the initial Ethereum token sale in 2014. “Total membership stands at 74 individuals; as with any DAO, there is constant fluctuation. We now have full-time employees and dedicated operators, approximately five in total. Our primary communication channel is Telegram.”

Reliance on Ethereum Ecosystem Tools

Currently, most DAO participants across various organizations rely on companies within the portfolio of Ethereum co-founder Joe Lubin, including MetaMask, Gitcoin, Gnosis, and Infura. MetaMask now reports serving 10 million monthly active users, and the Gitcoin DAO is estimated to hold a treasury exceeding $643 million.

DAO Participation and Demographics

A Gitcoin-sponsored study conducted in 2021 revealed that 33% of 422 surveyed DAO participants earned between $1,000 and $3,000 per month from DAOs like FWB. Respondents were predominantly young men already deeply involved in Ethereum projects prior to 2020.

Broader Goals Beyond Wealthy Participants

Despite the current demographic, the movement’s overarching objective extends beyond attracting affluent cryptocurrency enthusiasts.

DAOs as an On-Ramp to Crypto

According to Li Jin, an investor at The New York Times dubbed the “It Girl” of the creator economy, the aim is for DAOs to serve as “the primary entry point for many newcomers to the world of cryptocurrency.”

Institutional Engagement with DAOs

Several institutions are already engaging with DAOs through business transactions. The ConstitutionDAO submitted a bid through Sotheby’s, while PleasrDAO directly purchased a rare Wu-Tang Clan album from the United States Department of Justice.

Wyoming's Legal Recognition

Wyoming became the first state to legally recognize DAOs as a distinct legal structure earlier this year, although the application process remains complex and potentially restrictive.

Charitable Contributions and EcoDAO

David Phelps, a DAO Masters member and founder of the environmentally focused EcoDAO, noted that the DAO movement is encouraging charitable donations. The space is replete with scholarship programs and substantial contributions to various charitable organizations.

EcoDAO's Fundraising Efforts

“If we release an $ECO token, we anticipate adequate compensation,” Phelps stated, referencing his own DAO experiment, which has raised over $37,000 for Indigenous land reform and rainforest reforestation initiatives. “However, our current focus is on establishing a sustainable economy for artists, enabling them to support each other and potentially earn lifelong income.”

He added that the DAO movement, despite its costs and complexities, has already fostered positive values by “linking status to generosity, incentivizing contributions to events, and redistributing funds to meaningful causes.”

Tax Implications and Challenges

A significant concern is the lack of clarity regarding tax obligations for DAO members, particularly those involved in multimillion-dollar crypto clubs. Many participants may be unaware of the substantial tax liabilities they are accumulating.

Tax Reporting Requirements

“We are encountering numerous contractors and developers working for DAOs who are unaware of the tax reporting requirements,” explained tax attorney Andrew Gordon of Gordon Law. “Typically, a business must issue a 1099. How can this be done without a Social Security number? There are penalties for failing to issue 1099s.”

Token-Based Compensation and NFTs

Gordon further noted that many DAOs compensate contributors and operators in their own membership tokens rather than in traditional currencies. This places the “burden on the taxpayer to determine the fair market value” of the tokens. The issuance of non-fungible tokens (NFTs) to members may also raise tax-related questions.

If the value of these digital assets declines during tax season in 2022, some contributors may face tax liabilities exceeding their ability to pay.

“We frequently receive inquiries from individuals who were unaware that the cryptocurrency they received is taxable based on its fair market value at the time of receipt,” Gordon said. “The valuation of NFTs adds another layer of complexity… is the value determined by the floor price or the average market price?”

Emerging DAOs and Accessibility

Many young individuals are unable to afford membership in established DAOs and are launching their own experiments. Shannon Li is one such example.

WECrypto DAO: A Service-for-Service Approach

After graduating college in 2018 and leaving a dissatisfying job during the pandemic, Li pursued coding bootcamps. Unable to afford membership in popular DAOs and receiving no response to free opportunities, she decided to create her own DAO, mitigating legal risks by initially operating without tokens.

“The primary concern for DAOs is legality and legal fees,” Li explained, noting that some DAO tokens may be classified as securities. “This is why I want to create a DAO based on service-for-service, rather than service-for-token-that-can-be-sold-on-the-secondary-market.”

Li founded WECrypto DAO, a Discord server with 80 members focused on cryptocurrency education for women. Her long-term plan includes token-gated chat groups and NFT event tickets. Currently, in the bootstrapping phase, she is focused on “learning more about cryptocurrency, sharing that knowledge with others, and fostering relationships through a shared learning experience.”

The Future of the DAO Ecosystem

The future of the DAO ecosystem remains uncertain as the movement expands beyond the companies supported by Ethereum founders like Lubin and Buterin. However, there are ongoing efforts to enhance diversity within the movement, spearheaded by DAOs like FWB and the Index Coop. (Some are even exploring the implementation of DAO concepts on blockchains like Bitcoin and Solana.)

FWB's Fellowship Program

“Our community launched a fellowship program with 18,000 tokens to reward artists, creatives, and others who couldn’t afford to join but can apply based on merit,” Zhang said of FWB. “We’re offering universal basic asset ownership. If you’re creating something in this world, you should be able to hold some of that value.”

Ongoing Challenges and Experimental Tools

Even today, the tools used by DAOs are still considered experimental. Julia Lipton, founder of Awesome People Ventures and a member of multiple DAOs including PartyDAO, stated that storing millions of dollars worth of digital assets in widely used Gnosis Safe wallets still “feels risky.” She also noted that completing the technical aspects of DAO experiments often requires a “significant amount of time.” Additionally, transaction fees can be prohibitively expensive for middle-class users.

DAO Masters: Education and Skill Development

“We have a long way to go. The range of unknowns is vast, not only regarding taxes and regulations but also concerning DAOs in general. Every aspect of this concept of community ownership is still being refined. We have numerous projects A/B testing and experimenting publicly,” Lipton said.

This led Lipton to co-found DAO Masters, raising hundreds of thousands of dollars worth of ether to help newcomers learn about the opportunities, skills, and risks associated with DAOs.

Value Creation and Equitable Systems

“One of my primary passions is connecting value creation with value attribution and distribution,” Lipton said. “How do we create a more fair and equitable system?”

The Value of Belonging in the Metaverse

Ultimately, the core insight of the DAO movement may be the extent to which people are willing to pay for a sense of belonging in the often-esoteric metaverse. DAO members form a tribe, not a passive audience, and are therefore willing to invest (in money or labor) in media and experiences where they feel represented.

The Appeal of Networking and Investment

As with any crypto trend, this sense of belonging is amplified by the hope of financial gain. Several DAO participants, speaking on background, emphasized their participation as a means of networking with investors who may eventually invest in their own startups or DAOs.

DAOs as Modern Fraternities

Joining these crypto clubs is, in some ways, comparable to joining Ivy League fraternities, particularly given the connections to networks like Andreessen Horowitz. Jin, an alumna of the firm, has been friends with FWB founder Trevor McFedries for years. Zhang also had a pre-existing personal relationship with McFedries before joining FWB. DAO members frequently invite their friends to lucrative employment and investment opportunities.

Beyond Exclusive Clubs: UBI and Decentralized Media

However, FWB investor Jin has advocated for universal basic income (UBI) opportunities with more direct ownership for creators. Other DAO experiments, such as the newsletter Dirt and the Forefront writers’ program, offer a glimpse into the potential of DAOs beyond exclusive networks.

Forefront's Writer Compensation Model

Forefront’s ability to pay writers almost $400 per article, thanks to a growing community with hundreds of paying token holders, is a significant achievement. Even considering tax concerns and Ethereum transaction fees, this rate is comparable to what some mainstream media outlets pay writers. DAO advocates believe they are working towards a more equitable and decentralized media ecosystem.

As compliance models evolve, the distribution of risk and responsibility within these networks remains to be seen.

“DAOs potentially unlock new ways that the labor market can function and new economic incentives,” Lipton said. “The long-term fate of community tokens is uncertain, but the concept of community ownership is here to stay.”

Disclosure note: The author is a founding member of two DAOs, the Komorebi Collective and the Des Femmes DAO project.