3/12/2023
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Imagine for a moment someone in a foreign country arriving at their place of work, hanging up their winter coat, grabbing a coffee, speaking to co-workers and making their way to their computer work station. |
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Ten minutes later this person, along with their entire team, have breached layers of security, accessing your computer and the treasure trove of financial information that it contains. This is the world we live in.
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Now imagine a different scenario: A boutique VC firm. The person pouring their coffee is the general partner (GP) for a fund in which you are invested. You are a limited partner (LP) among 99 others in a SPV (special purpose vehicle). |
This person sits down at their trading terminal and watches the management fees roll in, while leaving the position completely unhedged. There has been a liquidity event for the portfolio company, but your investment manager still has custody. You watch the price of your “liquid” investment fall 80% from its IPO value. The investment manager leaves you with a loss, yet wins big on the fees collected.
This scenario has become common in recent years. Grounds for legal proceedings or a necessary evil? Perhaps there are alternatives…
| The human element and the power of greed are likely here to stay.
This is an ancient issue. The 14th century Italian poet, Dante Alighieri, highlighted greed as one of the “seven deadly sins” in The Divine Comedy. Is there a modern solution to this ancient problem? |
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Currently, we have financial and legal systems that reward a “catch me if you can” attitude. But is there a better way for businesses to function autonomously and transparently while avoiding the cost and frustration associated with a court room detour?
The joint-stock corporation has seen little innovation over the last 400 years. In the case of investment vehicles, the opaque nature of these arrangements encourages greed on behalf of the general partners. In more complex entities, the manifestations of greed are incalculable.
What if modern technology could make the world more transparent and democratic? Could the sterile and absolute world of computer code limit the power of greed? If so, why not create corporate entities that way?
To some, this might sound utopian, but it is the essence of a new type of entity known as a Decentralized Autonomous Organization, or “DAO”. In a DAO, lines of computer code become the management, replacing bureaucracy. For governance, the smoke-filled backrooms of the board of directors are replaced by the direct will of the DAO members, making decisions at the flick of a finger.
FUTURISTIC…OR HERE NOW…?
This might sound futuristic, but the technology and regulatory support required to construct these new entities exists today. The DAO is ready to enter the mainstream, and challenge joint-stock status quo.
Wyoming, Tennessee, Vermont and Utah have passed DAO LLC laws. Many other states will follow. With the internet as a distribution platform, blockchain technology at the core, and a supportive legal regime, a DAO can now become a competitive alternative to traditional LLCs.
Before the computer, numerous agreements (contracts) were housed in filing cabinets. Management personnel and employees were responsible for carrying out the various responsibilities and tasks outlined within the agreements. Tasks within new agreements often supplanted tasks within older ones.
In the computer age, accessibility and visibility of these agreements became easier, but carrying out the tasks within the “stack” of agreements has remained the work of humans. The risks of task delay or omission are real. After all, humans make mistakes and can be driven by personal factors.
We are entering a new era. The recent creation of smart contracts, contracts written and enforced with code, is revolutionary. When housed inside of a DAO LLC, these contracts become legally enforceable. This allows tasks and functions to be performed through code (and not humans), without delay, and with complete autonomy and transparency. The DAO LLC structure allows greed to be removed from the execution of tasks, leading to better outcomes.
The DAO LLC allows a business or organization to be formed where positive virtues and benefits are enforced by code. These can include:
- Transparency
- Democratic management
- Automated task completion
- Low-cost structure
- Eliminating the need for GPs
INVESTING THROUGH A DAO LLC
In thinking about use cases for DAO LLCs, one in particular stands out. What would be the best structure in which a large community of like-minded individuals, who don’t know each other, could invest as if they were organized as one entity? If such a community was large enough, could the investment decisions of this ‘decentralized brain trust’ outperform those of a fund manager’s research team?
Beyond potential for superior analysis, there is enormous potential to enhance returns through an improved cost structure. A VC fund may charge a 2% management fee and a 20% performance fee.
A DAO has no performance fees, and the costs of creating a DAO are low. This is a massive advantage, and is why builders, creators and investors should be paying attention to this structure.
Merge Medical