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November 21, 2022

Will DAOs survive the crypto winter?

Some are optimistic amidst the recent collapse of FTX, but others remain wary of the future of DAOs and cryptocurrencies.

By Afiq Fitri

For months, industry watchers have been warning of a crypto winter. Since late 2021, a combination of rising interest rates, weakening investor confidence in the profitability of the sector and a series of high-profile scandals have dampened optimism that Web3 might provide some kind of template for the future of the internet – and, perhaps, society itself.

As such, the value of Bitcoin now stands at approximately $16,673, a steep decline from its all-time high of nearly $70,000 last year, while Ether, despite its founders’ painstaking efforts to reduce its environmental impact, recently recorded its first deflationary month on record. The dramatic collapse of crypto exchange FTX last week has further sapped investor confidence in the future of Web3, leading the Financial Times to recently describe the current crypto winter as something more akin to a crypto ice age.

It’s left one of crypto’s most unique innovations with an uncertain future. Cited by many in the space as the future of corporate organisation, Distributed Autonomous Organisations, or DAOs, allow for the creation of what are effectively automated companies on the blockchain. Built with governance rules hard-coded into their makeup from their inception and (usually) run by a diverse membership through a voting system, DAOs have proven to be one of the few applications for blockchain capable of capturing the imagination of people outside of crypto. A recent dip in the total treasuries managed by these organisations across crypto, however, has led to questions about whether the evolution of this new form of corporate organisation will be frozen altogether in an extended crypto winter.

Diminishing DAO treasuries and crypto uncertainty

Crypto certainly seems to be cooling as an investment prospect. In the last week alone, according to Coinglass, more than $1.5bn worth of bitcoin (BTC) was withdrawn from American crypto exchanges. The Gemini exchange saw the biggest exodus of crypto, with almost 30,000 BTC leaving its coffers, closely followed by Kraken, Binance and Coinbase. Meanwhile, a crypto hardware wallet provider Trezor reportedly recorded a 300% surge in wallet sales as spooked investors scrambled to secure their crypto in the aftermath of FTX’s collapse.

The FTX contagion has also spread to DAOs, many of which function as collective investment pools. According to DeepDAO, an analytics platform, the treasuries of more than 10,000 DAOs have been drained of $692m worth of crypto in the past week. Jan Brezina, co-founder of Bankless Consulting, said this was a result of a significant number of DAOs storing their assets in Bankman-Fried’s doomed enterprise. “Many DAO projects had their treasuries stored in FTX and it’s basically gone now,” he says. The exact figure of DAO treasury losses due to FTX’s collapse is unclear, but at least one DAO community supported by Peter Thiel has demanded proof of funds after its native token held by Alameda Research recently declined by 20%.

Despite this, industry experts are remaining optimistic about the long-term future of DAOs. For Brezina, he believes that the fall of FTX represents a critical lesson for the community in the importance of transparency in corporate decision-making, not least in crypto. 

“With FTX or Celsius, nobody knew what was going on behind the scenes because there was zero transparency,” he says. “This is the point where people will finally realize that self-custody and issues of centralisation really matter, and I think we’re just starting to build the fundamentals for DAOs to take over the structuring of the crypto industry.”

Others like Eyal Eithcowich, founder and CEO of DeepDAO, argue that the DAO project is still in its nascent stages. As such, the community is waiting for more details on potential regulation on the sector as a whole host of issues surrounding the legal status of these automated corporations remain unsolved. What’s more, he adds, “the value system of DAOs right now is in a period of building,” he says.

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Macroeconomic headwinds are also adding to this general sense of cautiousness among investors. Those involved with DAOs in particular are thinking twice before making rash investments, explains Noam Hof, head of research at DeepDAO. “We’ve noticed that most people involved in DAOs are taking their time to think about the next phase of their projects and not necessarily blowing up their investments,” says Hof. “Money and funding is scarce right now.” 

That’s seemingly reflected in an upsurge in the number of governance token holders registered on DeepDAO over the past week. Confidence in DAOs themselves, though, appears to be growing. “People need to make adjustments based on current market conditions, and there will be many proposals for how DAOs can secure their treasuries if they are held in centralised exchanges,” says Brezina. The market capitalisation of particular DAOs have also surged in the last week, although this group only represents approximately 15% of the total number of active projects based on Tech Monitor’s analysis of data published by CoinMarketCap.

DAOs and the end of crypto centralisation

Crypto pioneers have long argued that blockchain technologies have the potential fully decentralise global financial markets, liberating them in turn from the endless boom and bust cycle that accompanied their domination by big banks and fiat currency. The events of last week have made it abundantly clear that this vision has yet to be realised. Even so, DAO advocates hold fast in their predictions that the transparent and democratic governance model of these institutions might still provide a bridge to a more equitable financial future.

Indeed, some industry figures have gone so far as to describe the collapse of FTX as marking the definitive end for crypto’s centralising tendencies. “The era of decentralisation is the only viable path forward,” wrote the co-founders of ‘people-powered Blockchain platform’ Ethios.io in a recent blog post. “Crypto must return to its roots and take back power from corrupt institutions that have abused their power and influence.”

Brezina agrees that the crypto industry needs to revisit its founding principles. “We need to learn from this, because we can’t go back to a state where we keep some form of centralisation,” Brezina argues. “We should go back to the core ethos of Web3 based on Satoshi’s plans for Bitcoin about true decentralisation. Bitcoin was started because we didn’t want to rely on the financial system, so let’s not recreate it again. Let’s just do it better and empower people within this new ecosystem.”

Eithcowich remains wary. In his opinion, the durability of the democratic decision-making process in DAOs remains largely untested. “The holy grail for DAOs is governance, because we know it’s never easy to reach decisions as a group,” he says. “There’s a lot of experimentation right now, and while there’s a lot of success in drawing people in so far. What keeps me up at night is whether DAOs are actually going to be successful.”

Read more: Can DAOs survive an onslaught of cybercrime?

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