By Harmon Leon
In those early days of NFTs (we’re talking January 2021), there was deep skepticism when CryptoPunk #2890 sold for $761,889, or 605 ETH at that date. To the cynical eye, it looked like some juvenile pixelated art had just sold for a messed up amount of money. Outsiders thought this purchase was insane – or maybe part of some money laundering scheme.
But digging deeper, you will notice that CryptoPunk #2890 was not purchased by one person alone. It was purchased by a DAO—a decentralized autonomous organization—made up of about thirty people who were involved in the decision. They collectively bought CryptoPunk #2890 because it exemplified early crypto art—significant in the history of NFTs—and, as an investment, it could potentially keep rising in value.
The purchase of CryptoPunk #2890 highlights a shift in how people allocate capital. Had they not pooled their money together, some of the members of the DAO would not have been able to afford the Punk. And had they not organized themselves within a DAO, the collaborative acquisition would have been much harder to pull off.
What is a Collector DAO?
In recent months, there has been a surge in the development of NFT art collector DAOs. The unique premise: That by sharing the costs of what would otherwise be an insanely expensive asset, people can form communities that allow them to co-own digital art.
Some DAOs serve the purpose of giving high-spending investors, known as whales, the power to operate like a hedge fund. Other DAOs allow groups of more conservative investors to bond together and purchase NFTs, like an index fund. But because it occurs on the blockchain, it functions as a transparent Web3 version of investing that gives power to the DAO members, fractionalizing NFTs and distributing their value across a whole community.
Flamingo, an “NFT collective that supports and collects premium NFTs,” was the first, and is the largest, of these art collector DAOs. Flamingo has amassed pieces from influential NFT artists such as Pak, Hackatao, and XCopy. In January, Flamingo made history when its members forked over the aforementioned $761,889 to purchase the ultra-rare CryptoPunk #2890 NFT.
“We were an early investor in NFTs,” says Derek Edward Schloss – partner at the crypto-based venture fund Collab Currency and one of the founders of Flamingo. “SuperRare was one of our early investments in the NFT sector,” he says, recalling those archaic days of 2020.
With that, Schloss’ excitement spawned, bringing him down the NFT rabbit hole in terms of exploring the new medium. And things just accelerated from there.
The Evolution of the DAO
A perfect storm was needed to bring about the communal DAO investing phenomenon. Communal investing, though, is nothing new. Kickstarter translated community investing into equity. Cryptocurrency networks and the availability of unique tokens accelerated community investing in such things as ICOs (Initial Coin Offerings). But smart contracts really kicked the doors open for the formation of DAOs.
“The travesty for Internet Web 2.0 is that we just weren’t able to get trust,” Schloss told SuperRare. “Blockchains help solve that.”
A few earlier projects: “There was The DAO, the Ethereum decentralized autonomous organization back in 2016,” Schloss said. “That didn’t really work out so well.”
In 2017, Collab Currency was an early member of a DAO called The LAO. A riff occurred, and Schloss and a few other members of The LAO splintered off and formed Flamingo. Their prime focus: investing in the asset class of the NFT wrapper – a mechanism by which an NFT from one network can be “wrapped” into another contract, and thus can operate by the rules of another network or contract. Example: a wrapped Bitcoin, or wBTC, can be used on the Ethereum network.
“This is a natural extension of what we’ve seen over the last 10 years with trust minimized money,” says Schloss. “NFTs are definitely getting us closer to helping speed up the rise of these decentralized organizations.”
Schloss’ current 60 member DAO has been investing out of the Flamingo vehicle since September 2020.
“The cool thing about Flamingo is, just think about how quickly the space has moved in general,” says Schloss. “There are categories for all types of NFTs at this point.”
The current crop of DAOs use hard-coded rules to automate away the inefficiencies around things like voting or decision-making, and reduce the need for human inputs wherever they can.
“So, there are humans on the outside,” explains Schloss. “They’re kind of thinking about these decisions—but then there are these hard-coded rules in the middle of these organizations that help make and translate those decisions into actionable items without the need of a third-party intermediary.”
Some DAOs offer the option to fractionalize the NFT, adding an agreement to a smart contract where the DAO mints fungible tokens that represent shares in this NFT. These systems also have creation and redemption mechanisms. One can buy out the NFT or kick off an auction, and all the shareholders can get paid out proportionately, based on how much money each shareholder put in and how much the buyer bought it out for.
Every DAO Has its Own Personality
Depending on the structure and rules employed, all DAOs are going to be different. Tom Schmidt is a member of PleasrDAO, “a collective of DeFi leaders, early NFT collectors and digital artists who have built a formidable yet benevolent reputation for acquiring culturally significant pieces with a charitable twist.”
Pleasr rocketed into the DAO stratosphere when it purchased its genesis piece, pplpleasr’s Uniswap V3 NFT, for $520,000 (310 ETH). Schmidt, who is based in Taipei, Taiwan, confesses he just stumbled into joining Pleasr after he started working for Dragonfly Capital a year a half ago.
His motivation: “I wanted to go and do cool shit with my friends. And I was interested in NFTs and obviously pplpleasr is a great artist and getting well-known in the NFT space.”
Taking a nod from the gaming community, there’s a social dynamic to DAOs that differentiates them from other types of investing. “Instead of this being a solo activity where it’s just individual whales accumulating assets the same way they would in normal crypto markets, they do this as a collaborative activity that can produce a greater sum,” says Schmidt. “This thing is community driven. The amount you pay goes into a treasury – and then it’s collectively managed by NFT holders.”
Schmidt states that the ethos of Pleasr also differentiates it from other DAOs because the point is “to collect digital art that represents and funds important ideas, movements, and causes that have been memorialized on-chain as NFTs. It’s not just flipping JPEGs, but it’s sending a message with the money and also trying to advance the space. We’re not out here buying CryptoPunks or Loops or Nouns. That’s part of what we’re about,” he says. “And just kind of having fun with it along the way. I think for the most part, we don’t take ourselves too seriously.”
Becoming a DAO Member
“There was this open membership for a very long time; last year when nobody was really that interested in this stuff. Now, it’s changed,” notes Schloss, stating that Flamingo is currently not accepting new members due an abundance of applicants. “We have a cap limit by virtue of the regulatory structure. And so now there’s a voting process that happens where potential members apply, and the DAO itself votes on whether to admit new members or not.”
In happier times, what Flamingo looked for in new members was: Is this person really passionate about NFTs? Do they spend time writing about NFTs on Medium or Twitter? Are NFTs something that they’ve actually collected themselves? Is the person someone who would add tremendous amounts of value in terms of conversation and thoughts on the space evolving?
Flamingo has this criterion because, as Schloss puts it, “Those are frankly the members that exist today – and that’s what’s been part of the secret sauce.”
And the secret sauce for being a productive Flamingo member is to constantly be running NFT investing opportunities through the hive mind.
“Within Flamingo, there’s 60 of us, and we all have different lenses by which we view the world and by which we view opportunities,” Schloss says. “The act of voicing your opinion and how you see the world is incredibly instructive to figuring out if something is a worthwhile investment or not,” he adds. “We work through it. We internalize it. We debate it. We try and tease out the merits. And then we try and come to a conclusion.”
Schloss explains the collective DAO mindset: “We’ve had this thesis that the more people that get their eyes on stuff, the more conversations are shaped around it, the better results that you’ll end up having. It’s like really carving a masterpiece out of something that’s kind of an amorphous opportunity. [But] I wish there was like a method to the madness, but really it’s just madness. And through that madness, you come out with something beautiful.”
For Pleasr, Schmidt has a different ethos when it comes to members.
“The idea is not ‘Hey, we’re going to buy things that we think are going to go up in price,’” he says. “The idea is that a DAO’s collective narrative could give value to NFTs.”
“No one would have given a shit about the Dojo NFT before Pleasr came in and created this great narrative around it, and the fractionalization around this brand,” says Schmidt. “We can create our own brand around this thing. We can manifest this narrative out of thin air.”
Pleasr built this model around it and popularized it to a large extent. Schmidt’s summation of the Pleasr member experience: “You can collaboratively build something beyond just sort of buying NFTs.”
What Makes a Good Investment?
“You can imagine a scenario where some of the earliest crypto art, from some of the most influential artists, continues to create significant value as these things start to get displayed more on these metaverse worlds,” explains Schloss.
“You look out five years and what kind of world do you envision?” he says. “I envision a world where we’re spending more of our time in these members’ worlds.”
In Schloss’ view, our digital footprints are increasing the way that we relate to others online. And this is shaping our online identity, through the way we converse in channels, in the groups we form, things we own, how we interact with the metaverse, and more. The identity that we pour into these environments makes us feel part of a community, and thus has greater value.
So, when Schloss throws NFT investment opportunities to the Flamingo group, that’s the lens he’s seeing it through. “You’ve got 59 other people that may see the world differently,” Schloss says. “They’re taking their thesis of how this world role evolved and running it through the gauntlet of Flamingo. It’s kind of a melting pot in that way.”
Once the members reach a soft consensus on the investment opportunity, they start to look for actionable items and start taking positions. Flamingo did that approach over the course of several months in 2020 – when they started buying hundreds of CryptoPunks.
“We were doing research on some of the more culturally significant projects that have launched on Ethereum,” says Schloss. “We were just buying it off of the open market. We were voting on ones we liked, and we were just buying them from sellers who wanted to sell them.”
Flamingo’s consensus was that in five years, people will look at CryptoPunks as being a fairly strong indicator of some of the earliest collecting activity on Ethereum. “There’s 10,000 of these things. Why were people interested in them? Why were people collecting them? Do we see there being an upside given there’s only a finite supply of these things and it being a culturally significant project?”
The Flamingo member hive mind was interested in the different traits of the CryptoPunks because different traits create significant value. “Do we think something interesting is happening with identity around these profile pictures and these avatars themselves? Yes. Do we like the community that’s built around this project? We do. Okay, this matches our thesis,” says Schloss.
Thirty Flamingo members were involved with the $761,889 CryptoPunk 2890 sale. It was not an overnight decision; it took months to move forward.
Ideally, Schmidt would like to see more bottom up stuff around NFTs, as well as more innovation around the actual model itself. “These sorts of things are more interesting in my mind than a lot of the stuff you see in the NFT space these days like celebrity NFTs or whatever.”
Start Your Own DAO
“You need to have a good purpose or idea for why you want the DAO to exist,” says Schmidt. “You should have a good reason as to why you want to pool money with people who should be part of the DAO.”
“You start a DAO with the goal to acquire a very rare NFT – that’s an important place to start.” But other factors Schmidt feels one should consider when starting a DAO include: How will it be managed? Who else is in the DAO? Are members serious about this as an investment versus something that is an interesting and fun pastime?
“Start small, do something with your friends, or start something with the purpose of maybe buying one entity and doing something with it – and see where it goes from there,” Schmidt says.
Crypto can be as big or as small as you want it to be: “If your friends want to put a few hundred dollars together and go acquire something that you think is cool, and then you each have a share in it – that’s great,” Schmidt adds. “You should feel comfortable sizing appropriately like that.”
Also, a number of tools are coming out that are being pieced together to kind of act as the backbone for the DAO movement.
Tools to keep an eye out for are: TributeDAO – designed to make DAOs easy to assemble “like Lego blocks.” Snapshot – a decentralized voting system that provides flexibility on how voting power is calculated. Gnosis – which uses its products to transparently guide decisions on development, support, and governance of its token ecosystem without control of one single person. Open Law has an infrastructure in place to allow soft consensus to turn into hard consensus and thus to turn into acquisition fairly quickly.
“I would say get your hands dirty,” shares Schloss. “I would say get started. Start jumping into DAOs that exist. Start a new DAO with your own friends. Start figuring out how to make this stuff work,” he says. “Because it’s clear that this is happening – and you just kind of want to start drinking from the firehouse.”
Schloss believes as DAOs continue to evolve; they will become the organizational form of the Internet: “There’s no question that Internet value deserves an Internet organization and DAOs are the way that we’re going to be able to meet that need.”