Well 19-year old Vitalik, I’ll tell you since the age of DAOs is upon us.
No longer are jurisdiction-less digital organizations, capable of generating real economic activity merely ideas. Eight years later, we have hundreds of these digital organizations, consisting of thousands of people and billions of dollars of capital, demonstrating in real time how the future of work is being reinvented. What began as theory has now transformed into a burgeoning, multifaceted ecosystem of DAOs all operating with their own respective missions.
Pretty incredible if you ask me.
Source: Cooper Turley: DAO Landscape
While we’re seeing these grand experiments play out in front of our eyes, it’s worth noting that even though DAO’s are a new, innovative means of organizing productive work, they are by no means completely reinventing the wheel. Since the dawn of time, humans have explored numerous ways of aggregating capital, allocating that capital, coordinating tasks, compensating workers, etc. This has taken many forms but it eventually culminated in the familiar corporate structure we know today. It’s no accident that we coalesced around the firm as the main vehicle with which to drive economic activity either. It’s an effective means to coordinate large groups of people around a common goal.
Given that DAOs are essentially the next iteration of the firm, albeit in a more digitally native, decentralized fashion, there are a number of lessons to be learned from analyzing the ways in which we’ve built and grown successful businesses. There are legions of books, podcasts, online courses, MBA’s, you name it, covering this topic. But there’s one that appears highly relevant in the context of DAOs.
In their current state, despite sitting on massive warchests, DAOs are spending very conservatively. This is hampering growth and leaving them vulnerable to competition that could spend their way to scale faster and come to dominate their respective vertical.
DAOs need to take a page from the startup playbook: Blitzscaling.
Blitzscaling 101
Blitzscaling is a concept popularized by LinkedIn founder Reid Hoffman in his book bearing the name. To summarize:
Blitzscaling is a strategy and set of techniques for driving and managing extremely rapid growth that prioritize speed over efficiency in an environment of uncertainty. Put another way, it’s an accelerant that allows your company to grow at a furious pace that knocks the competition out of the water.
Rather than spending with careful, calculated precision, Blitzscaling emphasizes growth above all else even if it means sacrificing efficiency.
Why risk this tradeoff? Because the cost of moving too slowly is greater than the inefficiencies that come about as a result of rapid capital allocation. If you were to take your sweet time ensuring every dollar is put towards its most productive use, you are putting your organization at risk. A competitor could spend their way past you to a point where you can no longer compete. And by then, what good is a dollar saved if you’re out of business.
This strategy isn’t applicable to every business in any industry, however, it is in ones with high network effects where each marginal user makes the platform more valuable for the next. These industries tend to be winner-take-most after reaching escape velocity. An obvious example of this is the ride-sharing industry where as Uber was able to get more drivers it became more valuable for riders who then made it more profitable to drive and so began the virtuous cycle. For this reason, Uber now owns nearly 70% of all U.S. rideshare business as they were able to get to a certain scale. And do so quickly.
Crypto, like ridesharing, is an industry that meets this precondition of high network effects. Take Uniswap, the largest DAO by treasury size. As each additional user begins to trade, it becomes more profitable to provide liquidity so LPs bring in more capital which then makes it more attractive to trade as price execution improves and there you have your virtuous cycle. As the first AMM to reach scale competitive with centralized exchanges, Uniswap has occupied this Uber-like position… at least for now. Where the analogy breaks down is that ride-sharing has become ubiquitous across the world while DeFi still operates in its fringe corner of the financial world. This makes it far too early to call any winners.
Adding to why it’s not yet a foregone conclusion that any of this industry’s leaders will continue to lead, is that crypto is uniquely hypercompetitive due to its open-source nature. Any application is susceptible to a copy and paste, making it even more urgent for DAOs to get to scale quickly.
Continuing with this decentralized exchange example, the rise of Sushiswap makes it clear that forks can develop into ecosystems of their own and become viable threats. Even though SushiSwap remains a far second behind Uniswap, it’s evident that the omnipresent threat of forking presents a legitimate concern for any project.
This is not to say there aren’t moats preventing incumbents from being immediately usurped. There’s brand, community, and integrations, just to name a few. As a DAO scales each of these up, they become increasingly protective. Therefore, the faster a protocol grows, the less likely it is to be prone to competition.
The DAO Spending Problem
We’ve established that DAOs need to grow quickly in order to capitalize on the network effects inherent in crypto and to avoid competition reaching scale first. So what are they doing to achieve this?
Over the past year, the 3 largest DAOs have established grant programs to begin funding value add activities. This has provided ~$3 million to numerous different people and organizations that are helping to build better tools, integrate with more protocols, provide more data and research, host events, and more.
Each respective grant program has produced a number of great outcomes allocating the funds they’ve received. We’ve had initiatives directly bring in hundreds of users, treasury dashboards to provide better insight into project finances, and even Esports sponsorships increasing brand awareness! This is all well and good, but could DAOs be doing more in an effort to further bolster growth?
The answer is a resounding yes.
The current allotted funds for grant programs don’t even make a drop in the bucket. It’s a fraction of a fraction of a drop. Now this is somewhat of a myopic view as grant programs don’t encapsulate the entirety of a DAOs spending. Treasuries are separately being used to fund core contributors, incentivize liquidity, and even establish legal activist funds. But the point remains. The vast majority of DAOs are sitting idly on large treasury balances that could otherwise be used for growth. Which as you recall, is necessary in this type of industry, otherwise, another more eager project could come along and spend their way to scale achieving an insurmountable lead thanks to inherent network effects.
DAO Shall Blitzscale or Die Trying
It’s evident DAOs can (and should) be doing more to spend. Even if they remain conservative and begin allocating low single digit percent of their treasury towards grant programs, it would go a long way in terms of what they could accomplish by way of more users, value locked, revenue generated, all culminating in a more valuable organization.
If DAOs spent 0.5% to 1% of their treasury they’d be able to scale the number and scale of the initiatives they fund by an order of magnitude. This means more and better capitalized organizations building, researching, marketing, and doing all sorts of value-add services to help DAOs grow.
Taking it to a more aggressive and yet still reasonable level of 10% of the treasury, and now you have a force to be reckoned with. Furthermore, this still gives a DAO 10 years to spend their entire treasury. That’s at least a few centuries in crypto time.
Given the exponential growth of the industry, it certainly feels like we are at a major turning point and there could only be a relatively small window in which projects have the chance to make a name for themselves. By spending 9 figures, DAOs would put themselves in a position to do some serious damage when it comes to bringing them to the forefront of not just crypto but the entire world.
But what could a project possibly spend $100 million, if not more, on? With a blitzscaling mentality there is no shortage of possible value add services to fund…
For starters, any reasonably competent team looking to build useful tooling could be funded. The ones that stand out as exceptional? Overfund them to ensure they have the resources necessary to build the most useful, user-friendly tools to enable your 90 year old grandma to become a proper degen.
And to make sure she doesn’t get rugged, projects already pay for one of those ever so expensive smart contract auditors. But in fact, they could even pay for two. Hell why not make it three. DAOs should want to get as many eyes as possible on the inner workings of what could become the future plumbing of the global financial system. This would ensure the probability of a hack is as close to 0% as humanly possible to avoid something that could prevent the old world from ever taking you seriously enough to trust you with their money.
Rather than attracting mindshare from negative press like hacks, DAOs can focus on penetrating mainstream consciousness in more deliberate ways. Like putting their name on shit people pay attention to. Look at FTX. They are spending on everything from basketball stadiums to umpire uniforms to League of Legends teams. Sure they’re an $18 billion organization so they can afford to spend hundreds of millions on each of these deals but there are plenty of billion dollar DAOs that can cough up enough to sponsor a sports team. Or at the very least a Super Bowl commercial. Eyeballs are worth something and if you get a fanbase practically the size of the entirety of crypto looking at your name, you’ll start drawing in more people to at least check out what you’re doing.
Credit where its due, $25 million is a lot of money that will go a long way towards combatting senile politicians in DC standing in the way of crypto gaining widespread adoption. But that’s just one project. Do you know what would be better? An industry wide $100 million. Or even $1 billion dollars. This may not directly benefit a DAO to get ahead of its direct competition but it’d stave off a far nastier form of competition. If enough projects join the ranks of Uniswap, and more recently projects like Yearn, Curve and Sushi, to fund more aggressive legal activism, we can make sure those in power know full well crypto is a force for good in making the world a more transparent, equitable world and that they’d be damned if they tried to regulate it out of existence.
Speaking of transparency, 10k’s and 10q’s are a thing of the past. We now have real-time balance sheets and P&L’s to view the financial state of a protocol at any moment in time. However, we haven’t yet scratched the surface of what is possible. DAOs could be funding more SQL wizards so that they get every possible datapoint an interested party would want to know in a variety of clean, filterable dashboards. This wouldn’t just be transparent. This would be crystal clear, translucency into an organization that’s never been seen before. DAOs that fail to keep up will die out as the ecosystem will come to demand the gold standard of project reporting
And furthermore, while these numbers are important, they are meaningless digits without proper context. Thankfully, there’s an army of analysts out there capable of taking these numbers and using them to tell a story about what they are and why they matter. With adequate research, DAOs can have not only their key decision makers well-informed, but they can keep the broader crypto community up to speed on all the material developments to attract more developers, investors, and users now armed with the right knowledge.
I could go on but you get the point. There are many problems to solve but finding ways to spend money on useful things is not one. If a DAO wants to blitzscale it can.
A few points to consider
With great power comes great responsibility. And handing tens if not hundreds of millions of dollars to a grant committee certainly bestows quite a bit of power. In their current form, grant committees would not be equipped to handle this kind of responsibility. With this spending power, the DAO services economy would be thriving with all sorts of companies vying for grants which means the number of applications would skyrocket. Therefore, either the size of the committees would need to scale or you need to have more goal-specific programs (i.e. separate grants programs for product, marketing, research, etc). As the operations become increasingly complex, they’d need to develop into their own mini corporations in and of themselves which presents a whole host of additional problems to be solved.
Another issue to consider is that token holders may be averse to funding this type of spending program as it is funded in native tokens, yet recipients likely want stablecoins. This could make numbers go down if every grant gets market dumped. However, DAOs could implement vesting schedules where it makes sense or even get creative with more exotic means such as KPI options to prevent insta dumping. This would create a more distributed set of stakeholders all with a vested interest in the success of the DAO as a whole.
There are also “no net spend” ways to fund programs as we saw with Flipside’s latest proposal to essentially borrow $25 million in UNI to earn yield to fund data analytics. This would provide DAOs with a way to put their treasury to use without actually spending anything as they can always recall the grant in its entirety. This specific proposal failed as many stakeholders were seemingly blindsided and brought up valid concerns around its oversight. Regardless, this type of yield generating structure is a net benefit to all parties as service providers and the broader community can get paid for value-add services while DAOs simply put unproductive assets to work without having to deplete their balance sheet.
This report focused only on the outflow of money from a DAO but ignored potential inflows. Going back to thinking of DAOs as companies, the goal is not to burn money on the balance sheet but to generate revenue to fund ongoing expenses. Many of these projects are generating millions of dollars in revenue per year, and if they’re not now, they have the ability to flip the switch to turn on the revenue machine. With this kind of offsetting cash flow, the case for blitzscaling becomes even stronger as the burn rate for treasury funds decreases.
Concluding thoughts
Blitzscaling has become common parlance in Silicon Valley. Startups have come to learn that when there are strong network effects at play you are in a race against the clock. The largest companies today that pervade our everyday life: Amazon, Facebook, Uber, AirBnb, all understood that if they wanted to get to where they are now they would need to grow at an uncomfortable pace, defying the old tried and true old business logic.
We are witnessing a similar phenomenon in crypto play out where the conditions appear to favor protocols that are able to achieve scale quickly. So far, DAOs have grown faster than the early proponents could have imagined. But they are still far from reaching their full potential. In the same way the advent of the firm allowed us to more efficiently organize resources to advance human progress, DAOs can unlock the next level of growth. Along the way, they’ll face fierce competition to the top, but the winners will be the ones that embrace Blitzscaling.
