Explained: How NFTs and DAOs coexist
NFTs are selling for billions of dollars. Digital cats, tweets, and music are being tokenized through non fungible tokens. But can NFTs be monetized and governed in a better way through DAOs? In this blog, we breakdown what NFTs and DAOs are, how they differ, and how they can help each other.
What are NFTs?
NFTs stand for non-fungible tokens. Let’s deal with the two words that stand out – fungible and tokens. Something is fungible if it can be replaced with something else. My $1 note can be replaced with another $1 note. It wouldn’t make a difference. A bitcoin can be replaced with another bitcoin. There would be no change in the value, only the ownership. If an asset is fungible it is replaceable. So, a non-fungible asset is one that is irreplaceable, or unique.
Now onto tokens. Tokens are assets represented on a blockchain. Bitcoin is a token, so are Ethereum, Dogecoin, and other cryptocurrencies. They are all assets on a blockchain. What’s the point of putting them on the blockchain? Putting assets (or tokens) on a blockchain increases security and transparency. Beyond crypto, tokenizing assets can also be used to create financial identity, solving the problem of the unbanked, and in trade financing.
Bitcoin is a token and so are NFTs. But they are not the same. Like I said earlier, one bitcoin can be replaced with another bitcoin. But NFTs cannot be replaced. They are unique. One only person can own them. But this one person can sell the NFT to another person. Think of the NFT like a collectible. Like a grand old painting hanging in the Louvre, or a bottle of wine from Cote de Nuits, or a Flamandia digital cat from CryptoKitties, NFTs are collectibles.
Every token has a value for a reason. NFTs are unique. Since there’s only one NFT of its kind, there’s only one holder of that NFT. All kinds of artists, from digital artists to rappers have created and sold NFTs. These tokens are also slowly being integrated into DeFi or decentralized finance. This is where DAOs come in.
What are DAOs?
Now, we move to DAOs. A DAO is a decentralized autonomous organization that works toward a specific function. DAOs were created to be autonomous organisations providing governance. These were originally created on open-source code or computer programs. Eventually, DAOs evolved where both the members and the code provide governance. A DAO is created on a blockchain network, like the Ethereum blockchain.
DAOs have no hierarchy. There is no executive board with presidents and vice presidents. Decision-making is not top-down but based on a bottom-up community. This consensus is achieved through voting. Similar to voting at a company level, voting in DAOs is based on ownership of assets. In DAOs, the assets are tokens. This is where digital assets come in.
Cryptocurrencies or digital assets are used to maintain a DAO’s decentralized nature and governance. Every major decision in the DAO is taken through a vote. Members vote based on the tokens they hold. Tokens are distributed through a treasury.
During the DAO’s early days, the founding members are given newly mined tokens. Since the DAO is new, these tokens have no market value. As the DAO becomes useful and its governance becomes essential, the value of tokens rises. This is because new members want to join the DAO to make decisions, and they can’t do this without the DAO’s tokens.
Since the DAO is free of bureaucracy and is based on code, it can be created easily. If members within the DAO are not convinced of its working, they can leave and create their own DAO. Further, this exit can also split or “fork” the DAO. This means that the blockchain will be hard forked into two separate blockchains, with different cryptocurrencies.
In summary, DAOs are decentralized communities. They work toward a specific goal with no hierarchy and token-based decision-making.
NFTs and DAO in the ownership economy
NFTs are assets and DAOs are ways to govern organizations. So, how can they work together? The common thread between them is ownership. Both NFTs and DAOs underline ownership. NFTs provide ownership for creators, and DAOs provide governance. A creator can put a piece of art, music, or content on the blockchain. This ensures verifiability and security of the asset to the creator and unique ownership to the buyer.
Where DAOs help NFTs is in the decentralized community governance of it all. The coming together of DAOs and NFTs creates a new form of decentralized media and investment available on the internet. This will be one that is owned by NFT creators and operated by DAO token holders. According to Patrick Rivera, a programmer with mirror.xyz, a decentralized publishing platform this “new media structure” will work as,
“It will be a product of both the public and its producers and will not limit participants to a single company. These media companies can be looked at as collectives, with their own identities, where creators and consumers are encouraged to flow interdependently throughout various collectives. All of which results in everyone investing in both the development of each collective and sharing in the value of the collective’s upside.”
DAOs make it possible for NFT creators to come together. NFT creators can be broadly categorized into two types – individual, or collective. Popular artists like The Kings of Leon or Grimes can mint, mine, and sell their NFTs because they already have a following. But up-and-coming artists require a collective unit. This collective helps in crowdfunding, investment, support, marketing, and eventually paying out the token holders of the collective. This collective can be governed through a DAO.
How does a collective NFT – DAO work?
As mentioned earlier, NFTs are digital unique assets and DAOs are governing communities. In the collective NFT – DAO, creators create NFTs and DAOs operate their life cycle.
Since it is a collective, the NFT once created by the artist will be sold to the DAO. The DAO will mine its currency (from the treasury) and exchange it for the NFT. These NFTs will be used to back (as a form of collateral) the tokens issued. If the NFTs have value, so will the token. Hence, in the case of a liquidity event, the DAO can sell the NFTs to pay stakeholders. This system ensures the tokens have value over time.
The NFT gives the token value, and the token gives the DAO a say in governance. The tokens issued in the DAO not only have utility but also monetary value. The utility comes from the standalone link to the DAO. Token holders can use the tokens to vote and make decisions. This is the utility of the DAO tokens. However, since the tokens are backed by the NFT (which have real-world value), they have value as well.
Just like a shareholder of a company owns a part of the company, similarly, a token holder of such a DAO owns a part of the DAO. This allows for, as Rivera says, “universal share in the ownership [of the creator’s NFT].”
NFT – DAO : An example
Let’s look at the example of making NFT videos into NFTs. We at Interaxis have made over 130 YouTube videos on Bitcoin, DeFi, blockchain, and cryptocurrencies. Making these videos NFTs would mean removing it from YouTube. This is because an NFT can’t have duplicates floating around on the internet. This is what happened with the “Charlie Bit My Finger” video, which sold for $750,000 as an NFT. Once the NFTs are taken off YouTube, they’re valuable because of scarcity. After the sale, only the NFT owner can view the video.
In order to govern Interaxis, a DAO is created. Let’s call it InterDAO. This DAO is in charge of the governance of Interaxis and determines the use of the NFTs. And the DAO issues the INX governance token, backed by video NFTs. The DAO holds the NFTs and issues the tokens. If the videos have a market value, so do the INX tokens. Each INX token holder owns part of Interaxis’ videos and has value.
Tokens can be issued to founding members and employees. It can be used to pay clients. External people can buy it off the open market. Interested people can earn it by participating in Interaxis events, engaging with the financial advisory community, or more. The holders will have a say in the governance of Interaxis, including what can be done with the video NFTs. The NFT assets will have to be periodically audited to ensure their value sustains over time.
The Interaxis DAO and video NFTs are just examples. Some DAOs with NFT-backed tokens are Whale, JennyNFT, and Mintable. On a side note, we are working on a DAO for financial advisors which promotes crypto education. More on that soon. You can learn more here.
The Future of DeFi
DeFi is paving the way for a more decentralized future. In terms of content creation, ownership, and governance. Two key pillars for this are – NFTs and DAOs. This post is just an introduction to what NFTs and DAOs are and how they can work together. There’s so much more to learn from the world of decentralized finance and cryptocurrencies. We’re excited to be helping so many NFT projects make digital assets accessible and understandable to several people.
If you want to know more about DeFi, NFTs or DAOs check out these videos:
- What is a DAO? | Decentralized Autonomous Organization Explained
- How is DeFi unlocking value?
- How can NFTs help content creators?
We’re helping hundreds of financial advisors every month talk crypto with their clients. If you’re unfamiliar with crypto, digital assets, and decentralized finance, and want a financial advisor to take you through emerging financial technology, check out our Certified Digital Asset Advisor course.