3 Crypto DAOs to buy as the sector heats up

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The rise of the DAO

You’ve heard the term before:

DAO, aka Decentralized Autonomous Organizations.

These groups have become the hottest new trend in crypto. By pooling the money of thousands of people, DAOs have enabled regular investors to buy everything from million-dollar Cryptopunk NFTs to promising DeFi startups.

There were also major flubs.

In January, Spice DAO paid $3 million for an original 1975 copy of Dunes, allegedly believing that they have granted copyright to the source material (it is not). And scams are common in this space. In December, blockchain security and analytics firm PeckShield estimated that hackers stole $115 million from BadgerDAO investors.

But DAOs also represent the next big thing in token finance. If you can’t afford a $25M Cryptopunk, you can still get involved by buying the right DAO.

I have long written that the time to invest in tokenization has already arrived. With DAOs, it is possible for investors to participate for even less money up front.

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The 3 DAOS to buy

Let’s be honest.

DAO generally are not 2x… 5x… 10x turners.

Instead, they are often aimed at supporting causes. the Komorebi Collective and HistoryDAO seek to support women in crypto while Buy the Broncos DAO (BBD) has a more simplistic goal of…well…buying the Denver Broncos.

Personally, I fully support buying into charitable DAOs with noble purposes. But there are DAOs where profit is the primary motivating factor. Rare DAO (ARRI-USD) has seen its token grow 10x in the past year, and Ethereum name service (ENS-USD) has seen its turnover increase by 20 since the start of 2021.

From this list, I have selected three DAOs with promising characteristics:

  • Underlying quality. Invested in a high-growth, high-quality asset.
  • Governance. Big enough to minimize “51% attacks”, with proven governance strength (i.e. it probably won’t run away with your money).
  • “Special sauce.” Adds unique value in its own way.

Compound Funding (COMP)

Would you like to earn passive income from your cryptocurrency?

With Compound financing (COMP-USD), you can.

The DAO’s star-studded governance board — which includes Andreessen Horowitz and Bain Capital Ventures — has helped COMP grow from a small startup to one of the world’s largest platform lenders. And because Compound Finance is a market maker (rather than a direct lender), COMP investors enjoy a degree of protection against volatility and crypto defaults.

The prices are also starting to look reasonable. Since November, COMP tokens have fallen 70% in value, down to the $100 range. Regulators have also turned their attention away from non-bank lending as they struggle to contain Bitcoins (BTC-USD) to get up.

This again makes the Compound Finance token reasonable. Although every lender runs the same risk that all banks face, COMP is the closest thing you will find to a Wells Fargo (NYSE:WFC) in the Wild West of crypto.

BitDAO (BIT)

When it comes to risky bets, there’s an old adage: there’s safety in numbers.

And when it comes to BitDAO, this idiom rings true.

The largest DAO-directed treasury in the world has become a source of level-headed decision-making while other organizations fall victim to infighting.

BitDAO was founded in August 2021 in partnership with the Founders Fund, Bybit and 30 other members. Its objective: to invest in promising DeFi projects and build the BitDAO ecosystem.

The DAO benefited from its relatively centralized control. The organization has now funded three major projects with a 100% unanimous ‘yes’ vote.

  • Block chain game. Game7 will focus on funding open source public goods, education and strategic capital.
  • Education. Edu DAO will fund university blockchain ecosystems.
  • Scaling solutions. zkSync will create a Layer2 scaling solution for the Ethereum network.

BIT prices are hovering around $1.40, not far from their all-time lows. If BitDAO succeeds in turning these open-source projects into a solid ecosystem, investors could expect a return to the $3 range it commanded last year.

Uniswap (UNI)

Finally, investors looking for some stability should consider Uniswap (UNI-USD), the largest automated market maker (AMM) governed by a DAO.

The reason to buy Uniswap is simple. Liquidity pools have positive network effects; larger pools attract more market makers, which lowers prices and entices more users to join. It’s a virtuous circle.

But the timing has always been tricky. Back in September, I called Uniswap a “traditionally high-priced crypto” and said that “investors should selectively use dips to buy.” $15 billion for an AMM was too high a price, even for such a huge organization.

Now that prices are down 70%, it’s time to start taking Uniswap seriously again. With the increase in DeFi trading, this DAO ended up in the right sector at the right time.

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CAD Dogs

Many DAOs have also fallen well short of their promises. In November, a group known as the ConstitutionDAO failed to purchase an original copy of the US constitution. And CityDAO, a group that bought 40 acres of land in Wyoming, would ultimately lose several hundred thousand dollars in a high-profile phishing scam.

It turns out that the most promising feature of the DAO, namely leaderless decentralization, can also work against it. Without a central authority, DAOs often struggle to find direction or respond to unexpected threats.

  • DAO Badger (Badger-USD). The hacked DAO struggled to agree on restitution for members who lost money in a high-profile hack. Token prices are down 90% from their all-time high.
  • super-rare (RARE-USD). The promising NFT exchange has degenerated into a wash trade paradise. Token prices fell 85% as insiders cashed in.
  • Horizon Protocol (HZN-USD). Synthetic assets are great in theory, but HZN couldn’t make their dream come true. Prices are down 97% since its 2021 ICO.

The governance problem with DAOs

On February 9, BUILD Finance DAO suffered a “hostile governance takeover” after a member hijacked the group’s governance system.

By disabling DAO’s Discord server bot (which was supposed to announce new proposals), the anonymous member could have proposed and made unbalanced changes without anyone noticing.

The results were devastating. Once the abuser took control, he would mint 1 billion new BUILD tokens for himself before withdrawing everything.

The saga focuses on a problem that Ethereum co-founder Vitalik Buterin pointed out in 2014:

“DAOs are…vulnerable to collusion attacks, where (in the best case) a majority or (in the worst case) a large percentage of a certain type of member agrees to specifically direct the [DAO’s] activity.”

In the case of BUILD Finance, the scammer managed to gain control with underhanded tactics. But such shenanigans can also happen legitimately; initial members who own 51% of a majority-controlled DAO could theoretically walk away with the remaining 49%.

Public companies have long used boards of directors to help protect the rights of minority shareholders. Maybe in time the DAOs will realize that they have to do this too.

PS Do you want to know more about cryptocurrencies? Penny stocks? Options? Drop me a note at [email protected] or connect with me on LinkedIn and let me know what you’d like to see.

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As of the date of publication, Tom Yeung had (neither directly nor indirectly) any position in the securities mentioned in this article.

Tom Yeung, CFA, is a Registered Investment Advisor on a mission to simplify the world of investing.