Forking a DAO | Essays · Will Holley

This is a living essay; it will change overtime as my thinking clarifies, and as I re-read it and become embarrassed having written something I believed, didn’t fully understand, and mis-articulated. It is an expansion of that thoughts that I articulated in an essay addressed to CityDAO entitled Protect ourselves from legal risk by re-organizing.

Sometimes a DAO doesn’t work [most?]. Perhaps it not sufficiently decentralized and relies too heavily on a team of core contributors, either explicitly or implicitly (politically), to make decisions and get things done; it is decentralized in name alone. Other times the culture becomes an echo chamber filled with grand ideals rather than an idea lab, and progress grinds to a halt.

My personal gripe is when membership tokens are securities and nobody want to admit it or constitute a general partnership with potentially unlimited liability (always check who the members are of your Wyoming DAO LLC and whether assets “owned” by the DAO are wrapped in their own SPV’s with liability insurance). Would you stomach a 1% probability of having your bank account liquidated for a 99% probability of ....“owning” land in Wyoming that you can’t use and eventually having your membership interest considered a security?

[These don’t have to be the case. Below I outline a hypothetical model for forking a DAO – the best parts of its mission, community, and treasury – while hopefully alleviating the issues mentioned above. I have not yet tried it in practice, but am working with a few folks in the planning stages.

Forked-DAO Formula

A group of dissatisfied members of a DAO called original-DAO (oDAO) have had enough and decide to start a new DAO called forked-DAO (fDAO). They create a smart contract that issues soulbound ERC20 tokens. Let’s call them S-20. Each S-20 token entitles the holder to a governance vote according to the quadratic voting formula. For example:

1 Vote ⇒ 1 S-20
2 Votes ⇒ 4 S-20
3 Votes ⇒ 9 S-20
...
30 Votes ⇒ 900 S-20

fDAO airdrops oDAO members S-20 proportionally to the number of oDAO membership tokens they held at the time of airdrop.

Anybody can purchase S-20 tokens from the fDAO smart contract at a fixed price. It has no supply cap. Funds enter into the fDAO treasury.

Each fDAO token-holder can rage-quit by selling their S-20 back to fDAO. The fDAO smart contract will always purchase these tokens with funds from the fDAO treasury. The smart contract will always pay a price proportional to the member’s percentage ownership of outstanding S-20 tokens.

In order to illustrate I believe this system solves the above problems, allow me to elaborate:

Ensuring that each S-20 is soulbound prevents a trust-less market from forming because vote-delegation requires ongoing trust between the buyer and seller. Theoretically the seller could issue a bond to the buyer which is lost when the seller doesn’t vote in accordance with the buyer’s will, but this roundabout manner will disincentivize most. Generally S-20 are illiquid. Secondary market speculators are removed from the picture.

As such, without fDAO's mission otherwise expressing a for-profit interest, holders should not expect to earn a profit. This shifts tokens holders from holding potential securities or potentially constituting a General Partnership with unlimited liability (because LLC membership doesn’t scale up to thousands of token-holders) to a Unincorporated Nonprofit Association.

If fDAO's mission is scientific in nature, such as experimenting with the ownership of real-assets using on-chain titles, fDAO can attempt recognition as a Section 501(c)(3) organization (usually known as a “Non-Profit”). Each S-20 could be structured as a directorship on fDAO's Board of Directors. This would be insulate each token holder from personal liability and tax burdens, and our token purchases may be tax deductible [see here for more on these points].

Airdropping creates an easy on-ramp for members of oDAO who are dissatisfied with their membership to join fDAO. No upfront commitment is required and yet no upfront opportunity to profit exists (by dumping the tokens as experienced by OpenDAO). This combination incentivizes those, and only those, who are genuinely ready to contribute to fDAO, to commit their attention (which after-all is our only scarce resource). These S-20 holders will give fDAO momentum.

Allowing anyone to purchase S-20 tokens enables oDAO members to sell their oDAO membership-stakes on the open-market and re-commit their funds to fDAO. The lack of supply cap creates allocative efficiency as it allows fDAO members to contribute capital to the treasury proportional to the intensity of their commitment to fDAO. However, the ability to influence fDAO votes is constrained by quadratic voting, which prevents whale takeovers. Voting power is asymptotic of care.

Allowing rage-quitting gives members a fair way out; however, a rage-quit payout is inversely proportional to fDAO's success delta since the member’s financial capital was committed. Net-positive contributions from early members drive new members to join via S-20 token purchases, and the original members’ upside from rage-quitting diminishes. This encourages long-term thinking and endowment effects. Conversely, as founding teams deliver early wins that diminish their financial stake, their incentive to continue participating without delivering marginal contributions (rent-seeking their previous contributions) may diminish, reducing the number of founding-team-controlled DAOs we see today.

fDAO is designed for those who want to actively advance its mission and believe their contributions are maximally productive vis-à-vis the opportunity cost (i.e. there is no better way to spend their attention or capital given that, by default, neither will earn a financial profit). This creates an environment resembling an idea lab – where questions, creativity, collaboration, and doing are rewarded and everything else is a waste of time.

By default fDAO is organized as an Unincorporated Nonprofit Association. However there is nothing stopping it from earning a profit; in fact, this transition should occur if and when fDAO actually does earn a profit. This optionality is superior to the status quo; most DAOs will never earn a profit, and as such fDAOs avoid by default the costs of being for-profit (complex legal structures, ambiguity, liability, securities regulation, etc.). The costs of transitioning (members needing to KYC themselves, in some cases prove accredited investor status, regulatory filings) should be considered gross of profitability and factor into the decision whether to transition. Staying non-profit as long as possible allows the community focus on being a lab – to incubate good ideas into businesses rather than concern itself with legal issues out of the gate – alleviating another potential catalyst for politicization, factionalism, and decayed progress.

Notes

The ability to create arbitrary fDAOs over time introduces an iterative, project-based model for thinking about achieving missions. An approach where fDAO marshals resources (attention, capital), exists for a discrete interval of time in order accomplish measurable success (complimented by failure) criteria, returns leftover resources upon success or failure, and restarts for a next cycle of building, may ultimately yield greater progress and avoid long-tail disappointment and burnout from a DAO being default dead.

If your equity in the treasury appreciates in value (e.g. you put in USDC, it’s swapped into ETH after a majority vote, the ETH appreciates in value, you rage-quit), your token is likely a security.

To account for compromised wallets, soulbinding may require a degree of centralization. See here: https://forum.brightid.org/t/implementing-soulbound-nfts-with-brightid/430/8. One potential solution is enabling the arbitrary burning and re-minting of S-20 via a super-majority S-20 holder vote in favor.