The DAO will not be DOA, but that doesn’t make it a good investment

Reply to @dan's post "Is The DAO going to be DOA?"

Edit: link to original article

In a thoughtful and informed post yesterday, @dan argues his reasons for being skeptical about the viability of the DAO. He provides four compelling arguments for why The DAO may quickly fail. I intend to rebut the first two, which I believe are the most damning. I will instead argue that The DAO may succeed in the short-term but still not be worth investing in.

The first argument @dan makes has been mentioned a few times in other places and is simply a strong anti-The DAO point. It summarizes as: better-than-average return investments require research and expert knowledge which voting members of The DAO will not likely have. Thus, The DAO will most likely invest it’s money poorly and fail.

My experience with VC tells me that this is that this is almost certainly true, but it has one major caveat. The DAO’s investments are likely to be in one niche space, blockchain technologies, particularly on the Ethereum blockchain. It’s possible that this particular space as a whole is poised for such growth that a bad investment strategy can still yield better-than-average returns. This would be analog to being a VC focusing on internet technologies in 1990. You didn’t have to be good at your job to make money. Additionally, it’s possible that because of the high profile of The DAO, it will have access to investments that it’s members wouldn’t if they invested alone. In this scenario, the value of The DAO has very little to do with it’s decision making process, which @dan suggests is the main benefit, and has much more to do with it’s potential deal-flow.

The second point that @dan makes is more novel and shook my understanding of The DAO economics. He argues that members of The DAO accept financial risk by voting. The action of voting provides questionable (or no) economic benefit but prevents a member from withdrawing funds, thus making it unlikely for the 20% quorum to ever be reached. However, he provides an important caveat: “Unless the majority of DAO stake is held in a few active hands, this will be very hard to achieve.” Well, it turns out, this is true. See this graph of The DAO members by ownership %: https://etherscan.io/token/thedao-token-chart?range=100 As it stands, the top 10 stake-holders own around 20% of The DAO Tokens. Assuming these members are actually interested in voting, quorum will be possible. But, assuming @dan’s estimate that 90% of DAO members do not vote, the decision making of The DAO will be much more centralized than people assume.

Finally, I’d like to explain the reason that I’m not investing in The DAO. It simply holds too much ETH. Returns from The DAO are distributed in ETH and investments are made in ETH, so the maximum possible returns (in ETH) that a member of The DAO can see is 1 / (proportion of ETH the DAO holds). Currently, The DAO holds around 13.5% of all ETH, putting this number is around 6. To make matters worse, most of the remaining ETH is being hodled and is not in circulation (I can assure you it’s not getting my ETH). This makes The DAO one of the few crypto investments with a capped upside. It’s possible to get beyond a 600% maximum return but it’d mean one of three things. 1) The DAO can pay dividends in something other than ETH (I’m not sure if this is possible), 2) The DAO splits into something much smaller which eventually, through good investments, acquires the balances of it’s siblings. 3) The market capitalization of ETH rises. Out of these three possibilities, it seems like everyone is counting on #3. The implication of this is that much of the potential upside of the The DAO can be had by simply holding ETH and not taking on additional risk!

I'm very bullish on blockchain tech and I think The DAO may work simply because it's in the right place at the right time. It's almost certainly not the best place to invest your ETH but that doesn't make it doomed to failure.

These are just some thoughts on the matter, I’m very interested in hearing what other people think.

Cheers,
@nattagart