Show Me The Money — Explaining How DAOs are Funded

As Decentralized Autonomous Organizations (DAOs) pick up recognition both inside and outside the crypto space, more questions surface regarding these decentralized communities. 

In the bustling world of crypto and emerging blockchain technologies, the marker for buzzwords continues moving. For some time, non-fungible tokens (NFTs) were the only thing in headlines across all media spheres, Bitcoin continually recaptures titles, and Decentralized Finance (DeFi) is all the rage. 

However, at the moment, the limelight has shifted to another facet of the metaverse. Decentralized autonomous organizations, or DAOs as regularly referenced, are on everyone’s mind. DAOs speak to the problem of legitimacy of governance – who really has control, and why? 

These decentralized organizations position themselves to be fully operational through the community of which they consist. This, of course, happens in a perfect scenario. DAOs as a concept via crypto and blockchain technology are still rather new. Therefore the kinks are still being ironed out. 

Essentially DAOs are backed by rules encoded by a transparent computer program. The community members have collective control over the program, which eliminates the need for central governance. 

Some crypto enthusiasts have reason to believe DAOs are the future of how humans will work, gather communities, and generally organize. 

Already some DAOs are making major waves in the world. Over the summer American CryptoFed became the first legally recognized DAO in the U.S. In September, a Wyoming-based DAO filed for registration with the SEC, the first move of its kind. 

Show me the money

As these decentralized autonomous organizations become more plentiful and even recognized by federal entities, more questions surface. 

Clarity over the functionality of DAOs and voting rights, for example. Moreover, when it comes to funding, questions over fund distribution come into play.

BeinCrypto spoke to Red, the community representative from Harvest Finance, about the nuts and bolts of funding a DAO. He explains that at the base of everything, funding management is all in the protocol. 

“Instead of directly selling those tokens or getting rid of them on the open market,” which is a typical source of funding for DAOs, “if there’s a protocol that exists when it launches, it may issue tokens to the DAO, or as part of the financial plan of the protocol,” he says.

DeFi lenders

He also mentions DeFi lenders, another hot topic in the crypto industry, as a means for DAO funding.

“One may leverage a lending protocol, like Aave or MakerDAO, which allow you to basically deposit tokens and borrow against them.  Most have anywhere from like a 20 to 60% collateralization rate, which may also come with a very low-interest rate for the loan,” he says.

Not forgetting NFTs

However, that’s not all. Red wrangles NFTs into the picture for innovative and one-of-a-kind funding methods.

“For instance, right now, NFTs are really hot.  Harvest Finance hosted an art sale with a commissioned artist to create some cool images themed around the ethos of Harvest Finance. Then we issued different editions of those NFTs, which then kickback to the buyers. They serve as passes into special events that we may co-hosts. So, for instance, Babylon Finance is a project we are collaborating with. They’re also fundraising via NFTs. However, as a holder of a Harvest Finance NFT, you get early access into Babylon Finance’s offerings,” he explains.

Additionally, some DAOs offer features akin to membership passes. Red mentioned one art-centric DAO which operates in such a manner. 

“Gen.Art basically sells a pass that then gets one airdrop of art from random artists who launch on their platform.  Then that’s also used for voting. Or voting rights to accept other artists, things like that,” he says.

A breakaway from traditional structures

In comparison to standard corporate structures, DAOs break the traditional hierarchical structure of governance and delegation. However, it can be tricky to see the line between a DAO and a centralized firm if said firm uses decentralized protocols. 

“If Bank of America rolls out a decentralized application, they’re still the Bank of America. If we all want to achieve what we all really think crypto should be  – getting away from the man and the government bank structures or whatever – then you can’t accept these centralized organizations deploying decentralized code,” says Red.

“Otherwise, you open the door for BoA to come and deploy these things and have pseudo DAOs. Ultimately they trick people into doing banking on the blockchain, right, which is not what this is all to do,” he explains.

Instead, with Harvest Finance as an example, Red spoke on DAO-powered multisig wallets, which acts as the nucleus of decision making for the organization. 

“It’s basically like any normal crypto wallet, though in order for a transaction to be executed or completed in that wallet, multiple people have to sign off on the transaction. Anybody can initiate a transaction,” he says.

“There is way more operational fund held at the discretion of the harvest developers, which is kind of like the treasury defined when the project was first set up. But over time, the DAO itself actually developed its own treasury, with help from the core developers kind of like feeding profits from the protocol in there to kind of seed us along the way.” 

The change that makes or breaks a DAO

This breakaway from the seed of the company, in terms of the treasury and overall,  is what truly sets DAOs apart. It’s not just the democratized voting but the community-initiated breakaway from centralized control.  

“Voting should be the tool that the people within the organization use. But you can’t say you’re a DAO  just because of a voting mechanism. Really, you need to build out your organization to break away from those five guys that launched the protocol. And fill it with community members, decentralized nobodies, to perform these roles. And then you could call yourself a DAO. Even if you’re not voting on everything left and right, you need to make sure that you’re voting on the things that are critical,” says Red.

It’s DAO or never

The existence of DAOs isn’t something new to 2020 or 2021. In fact, a major DAO story took place in 2016 after it suffered severe breaches of security and plummeted in credibility. What is it about this time in the history of the digital landscape that has DAOs on everyone’s lips? 

“Well, for one, I think just the rise of viable projects,” says Red. “As opposed to before, like in 2017 with the ICO boom. All the fundraising was based on whitepaper promises of building something with little delivery. It’s kind of hard to have a DAO when you don’t even have a product.”

However, today it is a different story. The decentralized development community is in full bloom, with projects catching major traction from mainstream investors and platforms. 

Red even tied in DeFi developments which help push forward DAOs.

“You know, you have the rise of yield farming where tokens are almost issued for free in a sense, as long as you kind of deposit liquidity with a protocol, you can farm for tokens and get them for free. Well, that inspires participation because something is given for free. Then people ask, what can this do? Can I participate?”

Moreover, more people are “internet-facing,” as Red described in light of the global pandemic.

“You see a lot of the news people refusing to return to a normal, day-to-day cubicle office life. DAO work is online, very much catering to work from home. Almost comparable to Uber in the sense that anybody can pick up and do it, right. Like if I have a car, right, all I do is connect to this app, and now I have a job. As long as I’m not like a horrible driver, right? It’s very empowering,” he says.

A place for exploration

In a time when people seek out new grooves for their digital identity, DAOs offer a place for that exploration. 

“Decentralization welcomes the nobody, which everybody is very comfortable with being a nobody. Look at the internet – keyboard courage, right? So it’s definitely very welcoming that someone can join a crypto project where people tend to be very friendly and helpful.  Anybody can work at a DAO without discrimination of you know, race, religion, creed, whatever. You’re a nobody. Right. And these nobodies can have a lot of power. Like me, I’m nobody.”

Red mentions that despite his lack of initial technical knowledge, his contributions to his DAO in other ways is something many need in order to push through this surge of DAO interest. 

“You know, so everybody, all these organizations need developers, but they also need risk managers, they need networkers, they need communicators and customer services and document writers, right. It can’t just be all developers,” he says.

“In the end, it’s actually the DAOs that are more powerful in a sense than the developers who initially deploy the product protocol. Because eventually, the code is going to be perfected, to a point where the majority of the work being done is actually done by your decentralized organization, not by the developers themselves.”

With such a community-centered spirit, the entrance of DAOs into the mainstream limelight is complimentary. The variety of DAOs in existence also continues its expansion.