Will DAOs revolutionize media or just create playgrounds for the rich?

So far, this crypto trend offers a bit of both

Over the past few weeks a virtual flash mob called the ConstitutionDAO, with thousands of cryptocurrency fans, crowdfunded almost $45 million to buy a copy of the U.S. Constitution. Although they lost the auction, they had already spun up a line of sweatshirts, emblazoned with emojis, distributed by the newsletter company MorningBrew.

This experiment, which flooded social media with countless memes and calls to join the crowdfund, is just one example of the type of decentralized autonomous organizations (DAOs) that are now all the rage in venture capital circles. Much like open source projects like Bitcoin Core, DAO projects involve both volunteer participants and passive followers, often shepherded by paid core contributors. How the project collects money to pay those contributors varies drastically, depending on the project.

Several other DAO projects, including the Andreessen Horowitz-backed Friends with Benefits (FWB) DAO, manage more than $600 million in assets. FWB lead organizer Alex Zhang, a former DJ and events coordinator, took the reins of the lucrative DAO in May 2021 and says the club now has a fellowship program that admits up to 40 scholarship members a quarter. The program is funded for up to three years. (It otherwise costs roughly $8,000 to become a full member.)

People often start DAOs spontaneously, to see if the idea quickly attracts fundraising or fizzles out, and join DAOs for a variety of networking opportunities, including more social ways to experiment with cryptocurrency. Stepping back: Many of these DAOs are essentially crypto-fueled media companies. There’s a ton of overlap between DAOs and (fiat) subscription-funded organizations like The Information, with the main difference being FWB throws parties instead of journalistic events.

In short, FWB is a group of investor friends who pooled funds in September 2020 and invited any Ethereum fan who wanted into their club to buy some tokens. Then they threw exclusive parties for token holders in Miami, Paris, New York and Los Angeles. FWB now includes 2,000 full members, according to Zhang, in addition to a small fleet of fans with cheaper read-only or local-city-only memberships.

“We have a whole editorial and content team that creates multimedia assets like zines and are definitely moving into other forms of content. We’re launching a radio station soon where we’ll book different DJs,” Zhang said. “We’re shifting away from the subscription-fee model and moving into asset holding.”

The most famous DAOs include the newsletter DAO project Dirt, founded by journalists Daisy Alioto and Kyle Chayka, crypto exchange DAOs for the users of tools like Uniswap, plus crypto social clubs like FWB and PleasrDAO. Art-focused DAOs like PleasrDAO collect and allocate millions of dollars for amassing art collections that include everything from JPEGs to rare albums.

“We’re writing the playbook as we go,” said PleasrDAO co-founder Jamis Johnson, who participated in the original Ethereum token sale in 2014. “Total membership is 74 people; as with any DAO, there’s perpetual ebb and flow. We have full-time employees now, dedicated operators. I’d say around five full time. Our primary form of communication is Telegram.”

So far most DAO participants, across different DAOs, rely on companies from Ethereum co-founder Joe Lubin’s portfolio, including MetaMask, Gitcoin, Gnosis and Infura. MetaMask, in particular, now claims to serve 10 million monthly active users. And the Gitcoin DAO is estimated to have a treasury worth more than $643 million.

As of 2021, a Gitcoin-sponsored study showed 33% of 422 surveyed DAO participants are earning $1,000-$3,000 a month from DAOs like FWB. Respondents were predominantly young men who were already heavily involved in Ethereum projects before 2020. Even if most DAO participants today appear to be wealthy cryptocurrency fans, that isn’t the movement’s broader goal.

According to FWB investor Li Jin, who The New York Times called the “It Girl” investor behind creator economy companies like Substack, Patreon and crypto blogging platform Mirror, the goal is for DAOs to become “the front door for many new folks coming into crypto.”

Meanwhile, some institutions are already embracing DAOs by doing business with them. The ConstitutionDAO is placing a bid with Sotheby’s, while PleasrDAO purchased its rare Wu-Tang Clan album directly from the United States Department of Justice. Wyoming became the first state to recognize DAOs as a unique legal structure earlier this year, although the application process is still difficult and potentially limiting.

So far, DAO Masters and FWB member David Phelps, founder of the environmentally focused EcoDAO, said that at least the DAO movement is getting people to donate to charitable causes. The space is indeed full of scholarship programs and multimillion-dollar donations to various charitable causes.

“If we release an $ECO token, then I’m sure we’ll all be paid out just fine,” Phelps said, referencing his own DAO experiment, which raised more than $37,000 for Indigenous land reform and rainforest reforestation charities so far. “But for the moment, the goal is to create a sustainable economy for artists to support each other and potentially earn lifelong income.”

He added that the DAO movement, as expensive and difficult as it may be to join, has already promoted uplifting values by “tying status to giving, getting people to pay for parties, then redistributing money to causes that are meaningful.”

But the elephant in this gilded room is that nobody, not even Ethereum veterans, knows how members of these multimillion-dollar crypto clubs will pay taxes. Many middle-class participants involved in the DAO movement don’t realize they are amassing thousands of dollars in tax liabilities.

“We’ve seen a lot of contractors or developers, people who work for DAOs, that are unaware of the tax reporting requirements,” said tax attorney Andrew Gordon of Gordon Law. “Typically, the business needs to issue a 1099. How do you do that without their Social Security number? There are penalties for not issuing 1099s.”

Plus, Gordon added, dozens of these DAOs pay freelance contributors and operators in their own membership tokens rather than in dollars or ether. Gordon said this means the “onus is on the taxpayer to determine the fair market value” of the tokens. In cases where DAOs automatically gift non-fungible tokens (NFTs) to their members, this may also raise questions about tax liabilities. When tax season rolls around in 2022, if the price of these digital assets plummets, some DAO contributors may be liable for more taxes than they can afford to pay.

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“We get calls all the time from people who didn’t know the crypto they’ve received is taxable based on the fair market value at the time they received it,” Gordon said. “Where it becomes more complex with NFTs is again, the question of valuation … is the value the floor price or the average market price?”

There are already many young people who can’t afford to join the above-mentioned DAOs mimicking these experiments and launching their own. Such is the case with Shannon Li.

She graduated from college in 2018, left a job she hated early on in the pandemic and has been taking coding bootcamps online ever since. She’s now creating her own DAO because she couldn’t afford the membership fees for more popular DAOs, and the free opportunities she applied to never responded. So she is cleverly reducing legal risks by starting without tokens.

“The biggest concern for DAOs is actually legality and lawyer fees,” Li said, saying some DAO tokens may be regulated as securities. “That’s a big reason why I want to create a DAO that is service-for-service, instead of service for token-you-can-sell-on-secondary-market.”

Li created WECrypto DAO, an 80-person Discord server focused on crypto educational content for women. Eventually, her plan is for the DAO to include token-gated group chats and NFT event tickets. For now, in the bootstrapping phase, she’s focused on “learning more about crypto, publishing it for others to find use in, too, and hopefully building relationships over a shared learning journey.”

It remains to be seen what the DAO ecosystem will look like as the movement grows beyond the companies nurtured and supported by Ethereum founders like Lubin and Vitalik Buterin. (Some people are already starting to implement the same DAO concepts while using blockchains like Bitcoin and Solana.) On the bright side, there are already many efforts to improve the movement’s diversity by DAOs like FWB and the Index Coop.

“Our community launched a fellowship program with 18,000 tokens to reward artists and creatives and other people that 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.”

Even today, the tools these DAOs use are still widely considered experimental. Awesome People Ventures founder Julia Lipton, a member of multiple DAOs including PartyDAO, said holding millions of dollars worth of digital assets in the widely used Gnosis Safe wallets still “feels risky” and it often takes a “stupid amount of time” to complete the technical side of DAO experiments. In addition to technical difficulties, she said transaction fees can sometimes be prohibitively expensive for middle-class users.

“We have really far to go. The bucket of unknowns is huge, not only for taxes and regulations but in terms of DAOs in general. Everything about that concept of community ownership is still being figured out. We’ve got all these projects A/B testing, experimenting in public,” Lipton said.

That’s why Lipton helped found DAO Masters, crowdfunding hundreds of thousands of dollars worth of ether to help newcomers learn about the opportunities, skills and risks involved with DAOs.

“One of the things I’m most passionate about is value creation being attached to value attribution and distribution.” Lipton said. “How do we create a more fair and equitable system?”

In the end, the alpha insight of this DAO movement may be how much people are willing to pay for a feeling of belonging in the otherwise esoteric metaverse. DAO members are a tribe not a passive audience. And as such, they are willing to pay (in either money or labor) for media and experiences where they feel represented.

As with any crypto trend, this feeling of belonging gets amplified by the hope of getting rich. Several DAO participants, who would only comment on background, emphasized that they were participating in DAOs hoping to network with investors who may someday invest in the participants’ own startup or DAO.

That’s part of the appeal of belonging to a DAO full of the Andreessen Horowitz investor network. Jin is herself an alum of the colossal firm and said she’s been “friends with [FWB founder] Trevor McFedries for years.” Zhang also said he was a personal friend of McFedries’ long before being invited to join FWB. DAO members routinely invite their friends to join lucrative employment and investment opportunities. Joining these crypto clubs is, in some ways, comparable to Ivy League fraternities.

On the other hand, FWB investor Jin has been outspoken on Twitter and her podcast about aspirations to see universal basic income (UBI) opportunities with more direct ownership by creators. Other DAO experiments like the newsletter Dirt and the Forefront writers’ program offer a glittering peek at the future potential of DAOs, which reaches beyond rich friends investing in each other’s venture-backed group chats.

Forefront’s ability to pay writers almost $400 per piece, thanks to a growing community with hundreds of paying token holders, is nothing to shake a stick at. Even with tax concerns and Ethereum transaction fees taken into account, that price is still comparable to what some mainstream, traditional outlets pay writers these days. It’s clear that DAO advocates believe they are working toward a more equitable and decentralized media ecosystem. Only time will tell, as compliance models emerge, how risk and responsibility will be distributed across those networks.

“DAOs potentially unlock new ways that the labor market can work and new economic incentives,” Lipton said. “The jury is out on what will happen to community tokens long term, 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.