TL; DR
- NFT DAO is the natural progression of the intervening circle of value and influence
- Breakdown of NFT DAO helps us understand the new force as a social movement
- Legal concerns with NFT and DAO call for meticulous navigation to be compliant, as the SEC provides more guidelines to clarify the definition
- Conclusion? High composability = innovation². It’s real. It’s going to shift the world
What’s going on?
The NFT boom is pushing the non-fungible tokens especially highly valued collectible NFTs to an institutional trading asset class. The conversation about NFT shifted from “Is NFT real?” to “what is the next high value NFT?”. From randomized generated words, Loot NFTs, to randomized generated numbers, namely the n-project, where N#1 was sold for $111 ETH, almost $4M (although the floor price is as low as 0.36 ETH). The NFT market calls for strong domain knowledge. But what makes an NFT so valuable? The answer has to do with the participants.
The cross-section of NFT x DAO
Decentralized Autonomous Organizations is a brilliant vehicle that democratizes ownership, governance, and wealth redistribution. In other words, a DAO is a tokenized community. The latest trend popularized using DAO to organize fan and collector communities among the creative industry.
Here is a quick guide of how to build a fan community as a DAO: first do an NFT drop or mint to the community make sure to give out some to high-profile influencers/investors. Then launch a token gated Discord followed by an ERC20 governance and utility token drop to the NFT wallets, empowering the community to do more, create more (i.e., games and more NFTs), and become the real autonomous vehicle of a prospering ecosystem. The same play has been deployed again and again from kitties, punks to apes, women, and all sorts of generative/high value/pop/meme art. In the grand scheme of things, any NFT has the tech infrastructure for it to operate as a DAO, and that is exactly what’s going on.
NFT DAO Categorization
NFT DAO is an over-generalization of many different universes. It is very helpful to logically breakdown the term into the following categories:
Collection Specific NFT DAO
Any NFT collectibles project falls into this category. The Loot exemplifies the power of community and DAO in its statement that “Loot is unique — the first project of its kind. With no company, art, team, or attributes, Loot makes it impossible to gate-keep any creative decisions (h/t @john_c_palmer). Loot is the unfiltered, uncensorable building block for stories, experiences, games, and more, in the hands of the community, at no cost. Loot pursues complete decentralization from day one.” What’s it saying? The role of the NFT is to unlock possibilities that are possible to unlock more possibilities.
Another example that comes with a slight twist of flavor is the Nouns, which mints and auctions only one new NFT character per day, a.k.a. “One Noun, every day, forever.” Nouns DAO is a fork of Compound Governance. The DAO treasury receives 100% ETH proceeds from the daily auction (as of the article date the treasury owns $20M or ~6K ETH). Each noun is entitled to one vote in the governance. >5% NOUN holding of total supply is required to submit a proposal, with the latest proposal to change that threshold to 1%. Below is a snapshot of the DAO proposals:
Starting from the first proposal of charity donation, and the most recent proposal aimed at stimulating broader community engagement, the tone set by the Nouns project is long-term value creation by the community and for the community.
NFT Collector DAO
Collector DAOs democratized the game for whales-only to be accessible to communities. PleasrDAO is a unique one of this kind. First created to bid on plpleasr‘s Uniswap auction (x*y=k piece sold for 310 ETH ~ $525K), PleasrDAO started from a retweet of pplpleasr saying the proceeds from the auction would be donated to support the underrepresented artist and social community. PleasrDAO stands for community, freedom, and decentralization. It gradually transitioned to be an influential platform for fractionalized community ownership, DeFi, and digital art that mark historically and culturally significant moments such as the internet history, iconic Doge NFT $DOG fractionalized to billions of pieces. It started a movement that converted many to believe that art DAO is the future.
Collector DAOs emerge rapidly such as JennyDAO, Flamingo DAO, FingerprintsDAO, MUSE0DAO, etc. Collector or Creator DAOs are two sides of the same coin. Like how things work in traditional art and creator economy, curators are the intermediary agent that facilitates and self-regulate the value scale. The DAO structure blurs the boundaries between creators, collectors, and curators/moderators by optimizing the community interest which is shared among members.
NFT Investment DAO
a.k.a Venture DAO. There is a great overlap between collector DAO and Investment DAO, so here highlighted are the key differentiators of the investment DAOs. NFT investment DAO can simply be seen as investment DAO with a specific industry focus on NFT. Examples are BanklessDAO Tokenized / on-chain ownership allows secure ownership representation and governance execution. A minted ERC-20 or other equivalent token represents a share in the original ERC-721 NFT collection, and rights to vote and access to gated activities.
NIFTEX is one of the first NFT “crowd-investment” platforms that allows sharding of the entire NFT into fungible ownership. In a sense, Niftex is more of an investment platform than a DAO. But the mechanism is almost identical, providing a foundation of the way investment DAO operates. NIFTEX locks the NFT in a smart contract with a specified number of fragments and price set by the owner with buyout automatically executed when conditions are met.
Unicly is another example of this kind — its protocol enables community collective and fractional ownership of NFTs and gave birth to Jenny Metaverse DAO, an NFT investment DAO built on the Unicoly Protocol. Jenny has its native token uJENNY utilized for accessing closed Telegram and Discord, to gain insight from the NFT market, market news and updates, and, controlling JennyDAO treasury usage and NFT collections to be included.
Yield Guild Games (YGG) is undoubtedly the most famous and biggest, with a particular focus on the gaming space. While gaming NFT makes up the largest market cap and liquidity with greater utility and transaction volume than artworks. YGG’s income is generated from the DAO-owned NFT assets that are owned or rented by guild members to win in-game rewards. YGG empowers the game ecosystem, which is ultimately reflected in the growing users, money that flows into the game such as the Axies Infinity, resulting in a higher price of the NFT such as lands, player cards, or any digital assets in the play-2-earn economy. YGG currently has a market cap of $56M and a fully diluted valuation of $6B. The bull case for YGG to become even bigger is that the play-2-earn segment of the gaming industry is only going to become bigger and bigger. But for the same reason, more DAOs and guilds are flowing into the space to capture that growing market. China-based MAODAO (inspired by the Bored Yacht Ape Club) is another similar region-focused Axie sponsor guild and extended to other aspects of Asian NFT communities leveraging its deep root in the Asian crypto community. The DAO uses Ready Player Cats as both a collectible and a governance token, with 5000 NFT cat tokens that were minted on August 22nd for 0.08 ETH.
The Catch?
Are NFT securities? The short answer is that not all NFTs are the same. NFTs are on-chain digital representations of the underlying assets. The economic reality of that asset determines the asset class under the federal securities laws (the Howey test). The “Framework for ‘Investment Contract’ Analysis of Digital Assets” published by FinHub provided some basic guidelines.
What are some concerns with DAO? Does SEC now have an identifiable entity or individuals that encapsulate network development and governance structure? Is there a clear determination of entities or individuals that are “active participants” (again the Howey test). In 2017, The SEC issued an investigative report concluding DAO Tokens were Securities. In 2019 Wyoming’s state Bill 38 provides a legal framework for Decentralized Autonomous Organizations (DAO).
Creating a legally compliant DAO, as in the most practical case organizing a DAO in the form of LLC-DAO, is becoming more common in more jurisdictions. By leveraging the interoperability of blockchain smart contracts to execute legal wrappers, DAOs are the new tool to organize decentralized responsibility, tiered management, and ownership of autonomous ventures.
Conclusion
Being a crypto native unlocks a whole world of possibilities. NFT DAOs are the new composite of crypto Legos in the distributed tech social ecosystem that shift the power dynamic.
