By James Holbein[1], Of Counsel to Braumiller Law Group and Justin Holbein
As Decentralized Autonomous Organizations (DAOs) have exploded into public consciousness, new types of DAOs are proliferating. A novel use case for DAOs, termed “ImpactDAOs”, are defined as “any DAO that creates net positive externalities to the ecosystem around it.”[2]An ImpactDAO seeks to use web3 and crypto-economic principles to regenerate a system, increasing resources and sustainability over time. Resources don’t have to be purely financial, as tokenization enabled by smart contracts allows new types of capital to be built on and experimented with. Carbon offsets, cultural capital, and scientific research are just a few use cases ImpactDAOs are being built around. DAOs already offer great potential for us to scale and coordinate human behavior, and ImpactDAOs extend this potential to bring blockchain-powered scalability to ideas that can make a positive impact.
ImpactDAOs offer an opportunity to redefine incentives and scale human coordination around new ideas of resources and the systems they comprise. ImpactDAOs can have new combinations of cooperation, profit approaches, non-profit mechanisms, and new ideas of capital that haven’t been explored. ImpactDAOs utilize web3, smart contract, and blockchain technology to shift organization away from explicitly hierarchical organizations, into flexible, scalable, and autonomous structures, optimized from the ground up. Regulations will need to evolve along with these new organizations to ensure maximum impact in the areas that most need it. Before deep diving into ImpactDAOs, it is important to refresh our understanding of what a DAO itself is, and how ImpactDAOs differ.
Unpacking each term that comprises a Decentralized Autonomous Organization clarifies how ImpactDAOs build and expand on their potential. DAOs are blockchain-based organizations built around fulfilling a mission chosen by a community, with members able to pursue how this objective is achieved autonomously. DAOs are decentralized via blockchain technology, which allows the architecture of the organization to exist without 3rd party intermediation. Anyone can spin up a DAO using no-code, permissionless tools like DAOhaus or Aragon, and a blockchain isn’t centralized upon any separate party, effectively making organizational creation direct for a community. DAOs also inherently operate in a decentralized manner, mimicking the technology they are built on, with no centralized player controlling the organization, and members being free to form “guilds” and pursue the primary mission of the DAO as they see fit.
DAOs are autonomous in two key ways. DAOs are built via smart contracts that autonomously execute on the blockchain, akin to a programmable vending machine. What you put in will give you the same immutable result, every time. Called “immutability,” this feature is important as it prevents 3rd parties from interfering in the execution of internal DAO votes, treasury management, and other process. DAO members are also autonomous in how they pursue the goal(s) of the DAO. They are not “told” what to do but choose to do what they can to advance the DAO goals and projects.
Known as guilds, autonomous groups within a DAO mimic the autonomous guilds found in Massively Multiplayer Online Role-Playing Games (MMORPGs) like ”World of Warcraft”, or crafting organizations in the renaissance. While guilds may be aligned in value structure and in how they coordinate towards a DAOs objective, they are autonomous from any top-down hierarchy in the DAO itself. Having autonomy from top-down direction brings us naturally to the organizational part of DAOs. Often guilds have a functional role, such as managing media, coordinating investment, managing proposals for the group, etc.
The lack of top-down hierarchy presents benefits as well as challenges in how to coordinate labor and capital. When you combine decentralization with permission-less autonomy, a DAO is a closer digital approximation of the community it represents than a hierarchal firm would traditionally be. DAOs operate in practice like cooperatives, holocracies, and sociocracies. How DAOs choose to organize their members is built from the ground up, as governance through different voting mechanisms sets the tone on how the DAO operates.
The first DAOs were mostly built around different financial use cases, being governance systems for Decentralized Finance protocols like MakerDAO, NFT communities, and smart contract powered cooperatives. ImpactDAOs don’t replace earlier DAOs, in fact, they represent an important emergent use case of DAO technology towards regenerating ecosystems instead of extracting from them.
The ImpactDAO ecosystem has several unique characteristics. ImpactDAOs are Symbiotic, utilizing the permission-less nature of smart contract technology to interlink and compound efforts between DAOs and enable efficient movement of talent, energy and resources. ImpactDAOs are Composable just like other DAOs through the permission-less nature of smart contracts, allowing the organization itself to be a building block in a bigger entity. Incentives are critical in ImpactDAOs, and they are inherently a collaborative enterprise, where members cooperate in the service of higher goals, and the community benefits cooperatively based on their contribution. The smart contract-based architecture of ImpactDAOs also lends transparency to the endeavor, granting members full knowledge of fund status, treasury management and voting.[3]
In the summer of 2022, ImpactDAOs are primarily being used for verifiable, on-chain impact and regenerative climate projects. Still an emerging phenomenon, ImpactDAOs are meant to build on one another like organizational legos, eventually creating super-structures much more powerful than the individual parts that comprise them. Interlocking systems of incentives allow business and revenue models to be built around non-strictly financial use cases. Creating regenerative ecosystems unlocks new web3 building blocks that can be further iterated on, allowing new emergent organizations to be built. To understand the ImpactDAO phenomenon in practice, let’s examine some real-world use cases.
Regen Network is an ImpactDAO building ecological assets for the Regenerative Finance (ReFi) economy. Exploring how to tie in the value of ecological health to economic value, Regen Network is creating an open source, community driven carbon and ecological asset registry.[4] Creating a community of scientists, researchers, and project developers, Regen network has a system of tokenized carbon credits that create new markets around taking positive climate action. The transparency around blockchain technology improves how carbon credits can be sourced, and communities involved in the ImpactDAO can choose what type of methodologies they want to implement within the Regen Network. “Working alongside land stewards, biologists, data scientists, and others, Regen has developed over 40+ methodologies with 12 million hectares of ecological regeneration in the pipeline.”[5] Implementing quadratic funding, Regen network has plans of allocating open source funding towards ecological causes, researchers, and institutions, creating a positive feedback loop where the new economies enabled create further funding for better quality technology and impact ability.
Orca Protocol is creating tools around “DAO governance that put people at the center of design.”[6] Orca allows DAO contributors to coordinate within cross-DAO pods. Pods are small working groups organized around one’s expertise and ability to contribute. Pods allow mini-DAOs to operate within larger DAO frameworks, letting the needs of the ecosystem dictate how they can integrate and contribute. Orca aims to eventually enable a composable metagovernance framework that could act as a “connective tissue of multi-DAO governance councils.[7]
For our final case study, Bloom Network is an ImpactDAO that emphasizes the building block type nature of these organizations. Bloom Network creates an international community of people and projects working to build regenerative cultures. The network can rapidly share resources and intellectual capital with one another to rapidly upskill each community. Right now, there are “30,000 people on the ground across 16 local chapters in 11 countries establishing local economies focused on food sovereignty, transformative justice, arts gathering, and regional autonomy.”[8] The purpose of the ImpactDAO will be to help integrate communities that are already organizing and operating for years on the ground and incorporating web3 technology in how these communities build and scale their activities.
How to Think About Operating an Impact DAO
First and foremost, a DAO is an enterprise among a group of individuals, whether people, organizations, governments, non-profits, etc. DAOs must be established with a set of rules governing operations, like an LLC or other type of business concern. We would like to explore some of the possible operating approaches that may work well for DAOs. Some can be set up as cooperative associations, such as agricultural cooperatives.
A farm coop has members focused on a common activity, such as growing, harvesting, marketing and storing a specific crop, such as blueberries (Michigan Blueberry Growers Association), dairy products (Land of Lakes), or many other crops. They are incorporated as cooperatives under state law and must have articles or organization and often an operating agreement to govern operations. Members must sign up and are bound by agreements to cooperate with the Association’s procedures and financial system. The Association acts like a DAO as the central coordinating body for the members. The Association sets up the warehouses, arranges for the products to be delivered by the farmers to the cooperative’s warehouses for quality assessment and weight to be credited to each farmer’s account. The Association stores and markets the crops and has a paid staff to conduct that business. It arranges all transportation for the products to end users. Accounts are reconciled on some agreed schedule and each member is paid based on the amount and quality of their deliveries. The Association can also arrange for education of members, financial assistance to purchase additional cropland or pastures, testing programs and advanced horticultural programs including genetic and related research.
ImpactDAOs are designed to be collaborative, symbiotic, composable, transparent, and emergent[9]. They must be established through a legal system if they are to have legal identity within existing laws. This means they must have some set of rules to describe the common business of the DAO and its members, such as Articles of Organization, and process descriptions of operations, such as an Operating Agreement. We would suggest that legislatures consider granting DAOs legal status as cooperative associations if they agree to operate in that manner. DAOs have voluntary and open membership, with motivations and rewards for members, just as coops do.
DAO governance is emerging through many different experiments. Coops have democratic control by the members, all of whom have a common interest in the financial success of the coop. Most DAOs have some element of that quality and the bringing of proposals for votes among members is a similar democratic process to coops. Members of coops participate in the economic activity of the coop, just as DAO members participate through smart contracts in the work of the DAO. DAOs are autonomous and independent, just as coops. Coops engage in marketing. publicity, training, education, and transmission of information to the public and authorities, just as DAOs generally do. Both are concerned about the welfare of the members and the interaction of the enterprise with the community at large. All of the salient hallmarks of cooperative associations exist for most ImpactDAOs.
How might a DAO cooperative association work in practice? Assume a group wishes to engage in a cooperative climate change project, of which there are numerous examples. The DAO is set up much like a cooperative association, in that it has a transparent purpose that is communicated to potential members. It has a set of rules governing the process of submission and voting on proposals for investment funding as well as a set of criteria for how investments will be used. Those rules and criteria are effectuated through smart contracts. Financial splits should be spelled out in an Operating Agreement, just as in a cooperative association. The DAO may be administered by a management or coordination guild, much like an Association management team. Proposals from members or research teams are vetted through the DAO administrative group for compliance with rules, clarity, and then circulated to the membership. The DAO administration is neutral on specific projects but acts to manage the voting process. It also acts as the coordinator for project performance, unless done directly between the group proposing a project and an individual funder. Data is shared as the members agree and the intellectual property that may result is owned, licensed, or otherwise managed under the rules of the DAO, as stated explicitly in the Articles of Organization or Operating Agreement.
Bloom Network is an example of a cooperative association type of DAO governance. “Bloom DAO is a Federated Cooperative, It is a set of independent local DAOs that cooperate with each other for mutual benefit.”[10] There are two forms of membership, individuals who join Bloom International, the umbrella DAO, and Local Bloom DAOs. Individual members can vote in the annual voting process, while local Blooms act autonomously and administer their own treasuries for local regenerative work. There is a “member kick” policy to remove members that violate the code of conduct. The website and intellectual property are owned and managed by Bloom International. Financial splits are defined, and support is available for spinning up a new local Bloom. There are defined processes for spending and governance proposals to be submitted, reviewed, circulated to members and voted on. There is a Board of Directors because Colorado law requires it to form the Limited Cooperative Association entity in the state. There is also a Wisdom Council with some veto authority to help maintain cohesion within the organization. Funding is still pretty small, according to the Bloom DAO Roadmap.[11]
OUTLINE OF A SECRETARIAT FORM FOR A DAO
Another approach to governance for a DAO could be to think of the DAO itself as a small administrative and facilitating unit, like a Secretariat for an international organization or large institution. The DAO would be composed of teams or guilds organized to perform functional roles, all operating autonomously and cooperatively. The DAO, as a Secretariat, would have a small treasury to administer, for salaries, IP protection, and to provide bounties for work done on an ongoing basis. Governance would be exercised by the guilds comprising the DAO, for their functional purposes, and by the DAO membership at large for voting on proposals that are cross-functional or impact the whole enterprise. The guilds would act to develop and administer rules of conduct for the participants to ensure cooperation and compliance with existing antitrust and other laws. Another important role for the DAO Secretariat would be to publicize the DAO and its work, market its products, and generally attract participation using Web3 tools.
Many ImpactDAOs will attract capital from several types of funders. In a climate change DAO, private equity from hedge funds or investment banking could fund scientific research. It would be wonderful if government would support this type of research by concerned citizens, perhaps under the direction of university researchers, to expand the scope of innovative science more broadly. Some groups of citizens or charitable organizations that seek research on specific goals could use the investor guild to leverage their capabilities to get a research team to work with them. Philanthropic organizations could fund research to address the specific problems that those organizations are organized to address. Each group would be able to review project proposals vetted by the Secretariat and arrange for comments or analysis for the DAO. The DAO Secretariat could then circulate this work to the members and arrange the votes to set DAO priorities. If multiple investors provided funds, then their interests in the project would be proportionate to the funds provided, or as otherwise voted upon by the members eligible to vote on specific funding proposals.
By spreading research funding more broadly and using it more efficiently, the DAO can work globally rather than just in one nation. The results can be posted on the blockchain to bring more transparency to researchers, but the intellectual property generated by the process and license fees or royalties would be shared among the researchers, funders, and a small share for the operation of the DAO. This adaptation of an existing centralized organization management body to decentralized work that has at least some kinship with the way we all work already would help people to adapt and transition to more open, egalitarian work methods in the DAO.
Impact DAOs could be a new way to fund companies, cooperatives, and new types of organizations building the tools to help research and solve climate change. A cooperative organization composed of universities, researchers, sensor manufacturers, citizen scientists, philanthropic organizations supporting climate change mitigation could be arranged through a DAO organization. If it has legal status, then governance could be arranged through voting by the participant organizations. Philanthropists can fund research that is enabled through development of advanced, low cost and resilient sensors that can provide data such as measuring humidity in the soil and air, temperature of soil and air, 360° camera, GPS positioning, and data delivery by satellite, for example. The requirements for the sensors can be set by the researchers, who can be located anywhere in the world. Sensor companies can become members as well to help in the design of the type of sensors, as well as to identify cost-effective means to obtain data, based on the project parameters. Researchers can work with local citizen scientists to establish the optimum sensor distribution in various regions and then reach out to the citizen scientist DAO to provide a bounty for placement of the sensors. The citizen scientists can then volunteer to place sensors based on instructions from the research consortium. Sensors are sent to them, and they can place them and record the placement GPS location, time, date and a video of the sensor in place, all on their smartphone. Once that video and related information is uploaded to the blockchain, then the crypto bounty is paid under a smart contract. This type of cooperation can be accomplished with great effort under current mechanisms, but it is much simpler using a DAO and web3 systems that are already decentralized and allow for such independent action leading to collaborative results.
We look forward to participating in the growth of ImpactDAOs in the years to come, especially once governments understand the technology and regulate in a manner that enhances the ability of individuals to cooperate to achieve cooperative, collaborative and regenerative goals.
[1] James R. Holbein is Counsel to the Braumiller Law Group PLLC. He practices in the area of international trade and customs law and has written several articles exploring the potential for new digital technologies to reshape supply chains and improve access to financial services.
Justin Holbein has been active in the blockchain space in many capacities since 2014. He is certified in data analytics, Python programming and is actively building smart contracts and Web3 Dapps. He is an active participant is several Ethereum-based decentralized autonomous organizations (DAOs). He contributes analysis and uses smart contracts to develop solutions to coordination problems in the DeFi and DAO space.
[2] Kevin Owocki. 2022. ImpactDAOs, 6
[3] Ibid, 13-16
[4] Ibid, 34
[5] Ibid, 35
[6] Ibid, 76.
[7] Ibid, 76.
[8] Ibid, 53.
[9] Ibid, 13-16.
[10] Bloom Network Governance Whitepaper, Part 2 DAO Governance, p. 2, found at: https://bloomnetwork.org/bloomdao-governancewhitepaper/.
[11] Ibid. p. 5.
