December 7, 2022
Our exploration into decentralized autonomous organizations, on-chain organizations, and the tooling that powers them
Web3 has given us a lot to talk about over the past couple of years. One of the hottest topics to occupy media and popular mindshare was Decentralized Autonomous Organizations or DAOs, as they’re commonly referred to. These types of organizations have been present in Web3 for years, but most individuals started to see their potential in November 2021 after a group of internet enthusiasts set up a DAO, raised more than $40M in a week and almost bought one of the 13 original copies of the US constitution (read more about the story of ConstitutionDAO here).
DAOs have proliferated exponentially over the past five years and are starting to occupy a central role in Web3 activity despite having started off on the wrong foot (read more here about The DAO, which raised $150M and got hacked 2 months after its inception). The exact number of active DAOs isn’t clear, but current estimates go as high as 5,000 organizations. It is safe to say there are at least 1000 active DAOs, up from <10 in 2017.
As of September 2022, these DAOs held a total of over $10B in assets under management (AUM), a number which has increased more than twenty-fold since January 2021. And there are over 3.8 million unique wallets holding DAO governance tokens (tokens to vote on the organizations’ plans — loosely similar to traditional shares).
Note: if you’re a pro on DAOs and just want to learn our critical views on DAOs and tooling opportunities, skip the next two sections.
In short, DAOs are organizations composed of participants who discuss and vote online — often with tokens — to decide on the best course of action for their organization. Now, for some extra context:
The truth is that DAOs have proliferated across Web3 in multiple sectors, and it’s hard to keep up with new ones popping up day by day. We found Variant’s cataloging of the most important DAOs in April 2022 to be a worthy resource (check out the full publication here).
DAOs have been lauded by many in the crypto/Web3 community as the next stage in the evolutionary phase of organizations. Here at Alpaca, we think this is an overstatement. However, given DAOs’ ease of setup, focus on the democratic processes, and bottom-up incentive alignments, we believe DAO structures can have great potential to:
With these benefits, it’s not that hard to imagine setting up a DAO to handle community-first, consensus-driven affairs, where operational efficacy is not the main priority. We wouldn’t be surprised to see DAOs in realms of our lives such as:
Have you come up with scenarios where DAOs will thrive? Share them with us!
Amid this discussion, there is one important realization we keep coming back to: things are usually centralized for a reason. Through our conversation with experts in the space, active involvement in several DAOs, and studying general organizational theory, we have identified several limitations for these types of organizations.
We think these limitations are material and can fall into one of two groups:
We can call the first set contextual limitations, as they are linked to the general incipiency of the movement along with the nascent Web3 environment.
We can think of the second set of limitations as innate — or fixed — limitations, as they are linked to what defines DAOs vis-a-vis companies.
Below is a brief descriptive analysis of both groups.
Loss of operational efficiencies: Although sometimes the payoff outweighs the costs, decentralizing is in many cases costly from an operational perspective. Let’s consider some operational implications for DAOs:
In a sense, by highlighting DAOs’ innate limitations, we recognize that DAOs are not companies, and are not superior to companies in most scenarios.
Although companies have limitations, their managerial structures evolved over hundreds of years to their current form, perfecting structures decade by decade, and will be extremely difficult to overtake. We do, however, believe there are interesting applications in other domains, with investable opportunities in companies that solve some of the contextual limitations these types of organizations are facing.
This is a term we borrowed from Graham Novak because we think it sheds light on a common misunderstanding when defining and analyzing DAOs: Confusing any crypto organization with a DAO. Additionally, it provides a key framework to understand the target market of DAO tools.
This distinction implies two things:
DAOs are a subset of on-chain organizations. They might become the new standard for all organizations operating on-chain, but it seems highly unlikely based on our research. If we believe the premise that DAOs will only occupy a fraction of on-chain activity, then tools aimed at providing services and solving hurdles towards all on-chain organizations will have a larger addressable market to serve.
There are opportunities to bring traditional organizations on-chain without having to drastically modify the paradigm in which they operate. There is no need to tokenize the company’s equity nor subject its decision-making processes through on-chain voting, but companies will need to operate in the new internet ecosystem through digital asset transfers and more if blockchain adoption takes off. There’ll be plenty of opportunities to serve their needs. Companies will need to manage their on-chain treasuries, engage their clients through NFT drops and sophisticated marketing analytics, easily transfer digital assets to their providers and employees, and ensure all their operations are safe.
Thus far this has mainly been a theoretical article, and we certainly hope not to have lost you yet, but when deciding to investigate actual tools and companies, we realized we needed to become organizational experts to better judge the direction in which the space is most likely to evolve.
Now onto the next section.
We define tools as software products built on top of existing infrastructure to facilitate operational processes or create operational opportunities for on-chain organizations.
Tools will service DAOs, on-chain companies, or both. For the purpose of this Field Study, we spent a lot of time analyzing tools focused on servicing DAOs, but inevitably came across wider latent needs.
With the number of identified tools for DAOs alone (excluding the ones exclusive to on-chain companies) stretching to more than 400*, there are naturally many different ways to categorize them. We divided the tools we oversaw into 10 categories corresponding to either tools servicing DAOs or broader tools for on-chain organizations, and investigated the potential of each category.
In this post, we’ll only cover the ones that interested us the most and that we spent the most time on:
These are the tools offering DAO formation and operating solutions. They are the first step to transforming an informal organization into a DAO, and they deploy the smart contracts into a blockchain, easily giving birth to the on-chain organization. The most popular frameworks are either open-sourced projects catered for developers and crypto natives, or projects catered towards smaller-scale DAOs or non-crypto native communities. Frameworks are essential to DAO formation since they remove the excessively complicated technical processes and allow to easily create DAOs with implemented best practices.
We explored over 20 frameworks/OS and below share a list of the ones we found more relevant/interesting (disclaimer: we are active investors in Upstream).
Opportunities we see for this segment
Challenges to consider
These are the companies, tools, and protocols working on allowing on-chain companies to manage, deploy and diversify their treasuries in the best way for the organizational objectives.
When analyzing this segment, we decided to investigate both DAO-focused tools and broad-based ones. We explored over 30 treasury management-related solutions and below share a list of the ones we found more relevant/interesting. We believe the most interesting opportunities lie in either:
Company-oriented blockchain finance hubs (for which brokers/exchanges seem like a natural complementary business model)
Highly secure open-source fundamental plug-ins that become basic block pieces (resembling pretty much what gnosis.safe achieved). We are skeptical about the market size and strategic positioning of treasury management tools exclusively focusing on DAOs.
Opportunities we see for this segment
Challenges to consider
Learn more about the basics of Treasury Management by reviewing our summarized slide deck.
We think this vertical is extremely interesting beyond DAO tools (read until the end to see our wider views on the possibilities of the space). However, for the purposes of this post, we’ve focused on tools that allow on-chain organizations to streamline on-chain and off-chain payments for employees, contributors, service providers, and partnerships.
In short, these tools provide DAOs and companies with more efficient ways to handle their increasing crypto payment transaction volume and complexity. To date, most on-chain payments rely on self-composed spreadsheets coupled with simple transactions from many self-created and administered wallets.
When analyzing this segment, we reviewed more than 20 payment and compensation tools, and below have shared a list of the ones we found most relevant/interesting. We found a significant overlap or potential synergies from tools offering payment services to those offering treasury management ones, and believe that there are significant strategic advantages for companies offering both. Again, similar to our conclusion for the treasury management section, we see considerably more value in non-DAO-specific approaches, although we decided to include some interesting DAO-focused profiles.
Opportunities we see for this segment
Challenges to consider
We see that crypto has a real and current use case in easily enabling cross-border payments for many industries, bypassing the prohibitive fees the payment processing industry has set. We see some strong short-term use cases for crypto gateways in mass-based global consumer industries such as gaming or digital asset purchase (NFTs, fashion items). Furthermore, we believe this movement could potentially disrupt the global payment industries and to us, it’s no surprise that Moonpay managed to raise $555m at a more than $3.4b valuation, that Circle is one of Coinbase’s best-performing bets, or that late-stage VCs are pouring billions in remittance-based crypto businesses (Chipper, Kushki, Omise).
We still believe there is a lot of whitespace for firms assembling the crypto payment infrastructure, particularly to those that will offer businesses products such as fraud prevention, KYC, credit gateways, or blockchain payment routing with automatic currency conversions. We think firms building in the space should be extremely cognizant and have built strategies around:
The natural advantages crypto exchanges and brokers might find when moving into the space
The implications of the potential advent of the Stripes of this world into web3 payments
DAOs were on virtually no one’s radar a few years ago and, in an instant, became one of the hottest topics in Web3. After spending several months investigating the DAO space, we explored the use cases in which DAOs might thrive, exposed several structural and contextual limitations they face, and discovered software tools that would be critical for their proliferation.
We conclude that it is still too early for most DAO-focused tooling spaces since there are still major challenges to be resolved before an abundance of profitable business models can arise. We are, however, very interested in SaaS tools that are flexible enough to target DAOs and on-chain organizations, given that if crypto becomes a new financial paradigm for businesses, companies will need a lot of help in navigating these waters.
If you’re building in any of these spaces, reach out to us! We’re definitely interested in meeting exciting projects and are actively investing in star founders.
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Alpaca VC Investment Management LLC is a U.S. Securities and Exchange Commission-registered investment adviser. Alpaca VC Investment Management LLC is committed to diversity and inclusion in the workplace. We prohibit discrimination and harassment of any kind based on race, color, sex, religion, sexual orientation, national origin, disability, genetic information, pregnancy, or any other protected characteristic as outlined by federal, state, or local laws.