New York Magazine: Is DAO the magic that turns "group chats" into gold, or another form of a "pyramid scheme"?

Author: Max Read

a16z (Andreessen Horowitz) invested $5 million in a group chat. In September, this trend-setting venture capital firm, along with Pace Capital, Kindred Ventures, Spark Capital, and the 31-year-old "It Girl of Venture Capital" Li Jin appointed by The New York Times, invested a total of $10 million in Friends With Benefits, which describes itself as "the ultimate cultural membership provided by a community of our favorite Web 3 artists, operators, and thinkers, connected by shared values and common incentives." While it may be that way, in reality, it is primarily a chat room on the app Discord, made up of about 1,500 cryptocurrency enthusiasts, artists, NFT collectors, and various hangers-on. Of course, by venture capital standards, $10 million is not a huge amount. But so far, how much has your group chat with your friends raised?

Admittedly, Friends With Benefits, co-founded by former DJ Trevor McFedries, who created the notorious CGI influencer Lil Miquela, is not just a group chat. It is also a DAO, or "Decentralized Autonomous Organization." "Decentralized" means it has no administrative leadership; "autonomous" means self-governing; and "organization"—well, that's the "group" part of "group chat." At its simplest, a DAO is a blockchain-based cooperative with a software charter, and in recent weeks, they have transcended the fantasies of cryptocurrency futurists and fervent speculators who turned NFTs into a multi-billion dollar market under the pandemic's influence—and facilitated a cohort of eager, hopeful artists, marketers, and programmers.

For true believers, DAOs are the institutional building blocks of "Web 3," a blockchain-based decentralized utopia that a savvy group of investors, artists, futurists, and developers tout as the future of the internet. As A16z partner Chris Dixon has widely circulated on Twitter, Web 3 is "owned by builders and users, coordinated by tokens," and combines "the spirit of decentralization and community management of Web 1 with the advanced and modern functionalities of Web 2." In this vision, corporate-controlled, data-hungry social networks like Facebook could be replaced by a quasi-democratic DAO, where new features and products would be debated and voted on by user owners, with decisions and stipulations transparently executed by contracts coded on the blockchain. Unlike Facebook, user owners who want to exit can easily sell their shares in the DAO on the blockchain, pocketing any profits. (At least, that's one way to put it. But for detractors, Web 3 is at best a massive waste of energy—literally—and at worst a pyramid scheme, a vast, distributed, fully transparent scam designed to prey on the greedy and the naive with promises of wealth and transformation).

However, if you truly believe in it—if you are immersed in the extreme positivity, super utopian, and fast-rich culture of Web 3, as it thrives on Twitter and Discord—you are not just looking to change the web. Of course, the future of privacy, finance, and art are all nice. But as DAO evangelist Tracheopteryx recently told CoinDesk, "DAOs are a bet on the future of human organization itself."

But what exactly is a "Decentralized Autonomous Organization"? Enthusiastic fans describe DAOs as suggesting a kind of collective or corporate intelligence, a hive-mind distributed across the blockchain. This ambition and almost otherworldly conception of DAOs and their potential recalls Scottish sci-fi writer Charlie Stross's novel Accelerando, in which spacefaring humanity at the edge of the solar system encounters a giant abandoned computer inhabited by semi-sentient cleanup companies trying to treat newcomers as currency. Humanity escapes with the help of an alien slug, only to find it is a "pyramid scheme… trying to evade its creditors by masquerading as a living entity."

Alas, so far, no DAO has successfully instantiated itself as a slug. (Whether they are a pyramid scheme they are trying to evade remains an open question). Currently, they tend to resemble a bizarre hybrid of more familiar legal, financial, and social forms. There is a self-deprecating joke among enthusiasts that a DAO is just a group chat with a bank account—which, in terms of practical purpose, is true. But it also resembles a corporation, a bit like cryptocurrency, a gamer tribe, a message board, and a multi-level marketing scheme.

The basic structure of a DAO revolves around cryptocurrency tokens tracked on the blockchain, serving as a measure of individual stakes in the group. In most DAOs, tokens reward participation, guarantee voting rights, and importantly, can be traded—which means they can accumulate value.

As a concrete example, take Friends With Benefits and its token $FWB. There are 1 million FWB tokens on the blockchain, a portion of which is always circulating on the open market. To join Friends With Benefits, you can purchase FWB tokens with ETH (or any other cryptocurrency of your choice). Like any other cryptocurrency, these tokens can ultimately be sold to any willing buyer. Currently, about one-third of the 1 million FWB tokens are held in the community treasury, to be distributed according to the DAO's wishes, with a certain number of tokens awarded to members every few months based on contributions like providing liquidity or serving on committees. Those who hold at least 75 FWB tokens can propose resolutions in binding elections, with each token equating to one vote. The $10 million venture capital investment in FWB—converting tokens from the treasury into USDC—was passed through such a process with a 98.07% vote.

In theory, the significance of this structure lies in encouraging members to work for the organization and promote its growth without the need for executives or administrators—even without needing to know who your collaborators are. Because each token represents a financial stake in the DAO, all members are incentivized to increase their token holdings by doing beneficial work for the organization and driving up the value of what they hold.

Well, wait a minute—a voice chimes in—this is all well and good, but what kind of "organization" are we talking about? What should a DAO do? True believers will tell you: anything. The most direct and obvious use is as a mechanism to pool capital for investment. The most famous DAO might still be "The DAO," a collective investment tool launched in the spring of 2016, which described itself as "a new type of human organization… generated by immutable, unstoppable, and unarguable computer code." The DAO raised over $150 million in ETH from 11,000 investors—14% of all circulating tokens. TechCrunch called it "a paradigm shift in the concept of economic organization." Six weeks after its launch, an attacker managed to exploit The DAO's code to transfer $60 million worth of Ethereum to an independent personal account. (The Ethereum community decided that "unarguable computer code" actually meant "somewhat arguable computer code," and controversially voted to reset its blockchain to before the attack, effectively nullifying the transaction).

Recent DAOs are more secure and, to some extent, less ambitious. For example, PleasrDAO and Flamingo were created to pool funds to speculate on NFTs, while VentureDAO is an attempt to establish a venture capital investment group within the DAO structure. Some DAOs are dedicated to helping other DAOs solve technical issues. You can imagine (and many have) a news DAO where writers or subscribers are token holders who can vote on magazine covers or assignments. The crypto publication DeCrypt did just that in a June experiment, where an article titled "What Are Flash Loans? The DeFi Lending Phenomenon Explained" was voted on.

So what about Friends With Benefits? What does it do? Well, it hosts events (notable DJ Diplo attended its party during the Bitcoin conference in Miami in June) and publishes a newsletter, but now, more than anything else, it resembles a group chat in a Discord room. You can only join the chat if you hold 75 FWB tokens; if you hold fewer tokens, you can still access other services like the newsletter (for those holding at least one FWB token) or the community-written "Hidden Gems" guide for Miami (for members holding 10 tokens). The "token-gated" party that Diplo attended required attendees to hold "a certain number" of tokens. Whether this sounds worthwhile to you, it is evidently very valuable to someone. The FWB token—listed only on the decentralized cryptocurrency exchange Uniswap—is currently trading at about $116, down from nearly $200 in early September, giving the DAO a market cap of $116 million. (This money will be put to use through a decentralized decision-making process led by a volunteer committee tasked with answering questions like "If FWB is building the ultimate cultural membership, what is the suite of digital and physical products that powers this ecosystem?")

While I have no doubt they will find answers, it can be said that the genius of Friends With Benefits lies in its recognition that, at least for now, a DAO doesn't actually need to do much at all. If it is cool and exclusive, demand for the tokens will rise. From one perspective, it is a bit like Soho House if its structure resembled a frequent flyer program and operated like an anarchist co-op. From another perspective, it is a queer clubhouse reimagined as a multi-level marketing scheme. After all, pyramid schemes can also adjust incentive mechanisms quite well.

The true utopian hope of DAOs may not necessarily lie in what they do, but in their promise: ownership. The 20-year era of Web 2.0 has helped connect most people around the globe, but almost entirely on private platforms, where users have little say. In some cases, you give your data to companies, which in turn sell it without any compensation; if you are a creator or a business, you might showcase on a platform that has no stake in your interests.

And the token structure is designed to change that. You can imagine a DAO where tokens are distributed based on contributions to the company or platform—creating content, even usable data. What if every post you made on Twitter gave you a say in the company's decisions? Perhaps more importantly, what if resigning meant you could be compensated for all your contributions to the platform?

You can see why the DAO structure has attracted the attention of web artists and other members of the "creator class." "Ownership" is a powerful concept for those who contribute significant value to internet properties but see little in return—this includes not only professional creators but almost anyone who posts on social media. A Vine owned by creators and users, rather than by a capricious parent company like Twitter, might survive and thrive.

However, creating a fairer ownership structure does not necessarily translate into more democratic control or better end products. In most DAOs, tokens still function like stocks, so whoever owns the majority has the most power. On YouTube, Jake Paul and Charlie Bit My Finger jointly own a significant portion of the platform's users, which is certainly better for Jake Paul. But will it be better for others on YouTube or for those watching YouTube?

In theory, the tradability of tokens is a check against oligarchy. If you don't like the direction Jake and Charlie are taking DAOTube, you can sell your tokens and buy into a different video-sharing DAO. This sounds fair—but it also sounds unstable. Large platforms are most useful and effective in reliable and broad circumstances. Those platforms that rise and fall based on token market fluctuations are not. For those for whom the global giant platforms of the Web 2.0 landscape represent stable, sometimes stifling communication and professional infrastructure, the constantly fluctuating DAO market may not seem like an improvement, no matter how much it promises ownership and democracy. On the other hand, for financial speculators, volatility is an opportunity rather than a drawback.

Of course, it should be noted that this is all extremely theoretical. For all the philosophical and technical claims about the unique status of DAOs, there is little legal or regulatory work to clarify what they actually are in the eyes of the government. (Wyoming has passed a law allowing DAOs to operate as limited liability companies.) However, the law clearly states that any token that gives someone legal, old-fashioned ownership in an organization is a security—and thus subject to regulation by the U.S. Securities and Exchange Commission. Current SEC Commissioner Gary Gensler has expressed a willingness (if not eagerness) to legislate for the crypto world—which means that, for now, DAO token holders represent a social commitment to a kind of ownership. If you want your rights to be enforceable by the U.S. government, you need to accept its regulation.

The current enthusiasm for DAOs stems from the colorful bubble surrounding NFTs, a tradable digital asset whose market has exploded over the past year from bored young gamers, sneakerheads, day traders, and other easily gambling individuals. The new generation of potential crypto millionaires, looking for new bets or places to park their swollen Ethereum wallets, are naturally drawn to DAOs, whose uniqueness and early adopter premium can offer social prestige akin to the ubiquitous, expensive NFT Twitter avatars (known as pfp). DAOs also provide a next step for those who discovered the Web 3 scene through NFT speculation: a way to further immerse themselves in the ideology, culture, and especially the community of the blockchain. (Dapper Labs, a major player in the NFT world, recently acquired FWB founder McFedries' startup Brud; McFedries will lead a team focused on DAOs).

The first generation of cryptocurrency believers was often made up of privacy-obsessed, anti-social misfits attracted by the technology's "trustlessness." The scene around Web 3 and DAOs certainly claims to have a set of political commitments—sovereignty, ownership, and decentralization—but replacing constitutional distrust and skepticism is a social atmosphere filled with bubbles, sincerity, and extreme enthusiasm. NFT traders, DAO members, and other Web 3 enthusiasts gather in Discord chat rooms and on Twitter, exchanging "gm" (good morning) and assuring their peers "wagmi" (we're all gonna make it).

If you are a young person (the DAO world skews young, for obvious reasons), tired of the stalemate of culture wars and alienated by mainstream social platforms online, wouldn't you be attracted to a community filled with endless optimism, promising you immense wealth and positive change? Especially if that community could offer you some form of exclusive membership with social value? (This might be why the potential high environmental costs of a cryptocurrency-based economy receive little attention from Web 3 believers). I mean, I get it: hanging out with cool people, changing the world for the better, and becoming a millionaire are three of my most interesting aspects. But for all the promises of social revolution, the basic rhetoric of the DAO movement is very familiar: it is a merger of Silicon Valley's technological optimism, the prosperity gospel of televangelists, and your high school classmates' posts about Herbalife on Facebook. Notable figures, such as Cooper Turley, co-founder of Friends With Benefits and a 25-year-old self-proclaimed crypto millionaire, have turned their Twitter accounts into LinkedIn-style motivational seminars:

If Turley and many other seemingly serious boastful figures in the Web 3 scene can drive up the value of their tokens, NFTs, and other cryptocurrencies with their gospel tweets, they will reap quite a profit. But if it is difficult to separate genuinely committed token holders to the Web 3 political and social vision from their own calculations—what's the point?