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What Are Decentralized Autonomous Organizations?

By Rachel Warren, Travis Hoium, and Toby Bordelon – Dec 10, 2021 at 3:15PM

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A new type of crowdfunding has hit the scene.

Decentralized autonomous organizations (DAOs) are gaining steam, but what are they and how do they work? In this segment of Backstage Pass, recorded on Nov. 19, Fool contributors Travis Hoium and Toby Bordelon discuss a recent DAO that made global headlines, and then they break down the structure of a DAO.

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Travis Hoium: We're going to talk about DAOs a little bit. First of all, I'll share a little bit about DAOs, and this is a pretty new concept coming out of the crypto NFT world, Web 3.0, if you will.

But this decentralized autonomous organization is the concept, gives a group of people rights over an organization. Basically, a whole bunch of people voting on the organization, what the organization does. So the way that the stock market is supposed to work, maybe, and the deal that we're discussing is this ConstitutionDAO project that raised about $45 million in five days to buy a copy of the Constitution.

According to the ConstitutionDAO's Twitter, they had 17,437 donors who their average contribution was $206 to the project. Not a ton of money from each individual person, but this is what I think is interesting, is you can raise a lot of money if you pool a lot of people together. The interesting part from a structural standpoint is the people donating wouldn't actually own a piece of the Constitution, which is an important twist there, but they would own a right to vote on what to do with the Constitution.

Where is it going to be housed? For how long? It wasn't entirely clear exactly what all those voting rights were going to be for, but basically, you would have some control over the Constitution. They framed it as bringing it back to the people.

That was this project, they did not win the bid. I think they showed their hand. The winning bidder could end up seeing what they were bidding against and there was a cap on what they could end up bidding, so I think the final number was about $45 million and with Sothebys' fees and the cost of security and whatnot for the Constitution, they weren't able to beat that.

But what we wanted to at least chat for a second about is the disruption that this can potentially bring to the market. I think DAOs are an interesting concept that could allow a large group of people to pool money together to buy things that we can't necessarily buy today. Think about a sports franchise or your favorite restaurant or this is a piece of art. We don't yet know exactly what the details are going to be.

Each DAO seems to be a little bit different right now, and it's I think to be determined whether this is a great idea. For some of these things, you could see a lot of potential pitfalls, but interesting nonetheless.

Toby Bordelon: This was actually fascinating. It started out, I think probably many of our viewers were following it on Twitter a little bit. It's just a crazy nonsensical idea. [laughs] We get the next thing, they are up $45 million. I love what you said, Travis, this is the way that corporations are supposed to work.

Hoium: Exactly.

Bordelon: This isn't a new idea. The whole concept of the corporate form is precisely what DAOs do to get a whole bunch of people together raising money for a specific goal, which no one could accomplish on their own. I think the difference here is this is powered by the internet, powered by Twitter, and you can do it quickly, and you can reach a broader base of people than you might otherwise be able to do.

The other nuance there, like you mentioned, was that they weren't technically owning a piece of the Constitution because that would be a security then there would be SEC rules. By structuring a way, they said, you don't actually own anything.

What you have with this DAO token is the right to vote on certain things. They got around it, but at least they think they did. We're not testing this obviously because they didn't win, which at some point someone's going to come close enough to the edge, I think with one of these, that it will be a test case for the SEC.

Rachel Warren has no position in any of the stocks mentioned. Toby Bordelon has no position in any of the stocks mentioned. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.

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