Blockchain

Philanthropic DAOs: Creating Social Responsibility in Web3

By Zach Bronstein, Endaoment's COO

DAOs (Decentralized Autonomous Organizations) are the highest form of organizational decentralization of which we can currently conceive. They provide the infrastructure to create user-driven applications and ecosystems that represent the future of technology and interpersonal connectivity. During this early phase of DAO development, it is critical that the blockchain space use their exploding market capitalizations and token valuations to make a positive impact - galvanizing a culture of social responsibility inside these new organizations. Leaders in cryptocurrency have already shown the immense potential of crypto-giving. It’s time to double down on this idea and explore what this new kind of decentralized philanthropy might look like.

Table Setting: Definitions and Opportunities

DAOs are considered decentralized because their open-source, member-created bylaws are coded into a blockchain, enabling them to function without a central governing entity. A DAO is autonomous insofar as it can perform certain actions automatically without outside input. More simply put, a DAO is similar to a vending machine that accepts money, disperses candy, re-orders stock when low, pays rent monthly, and transfers profit to the owners - all automatically.

Through virtue of their structure, DAOs lead to a number of favorable scenarios. Members of a DAO are put in charge of the decision-making process, as the community plays the main role in all governance actions and decisions. Lacking a central authority or board, members are able to make collective decisions in their own best interests as votes cannot be swayed by the outsized influence of an “in” crowd. All members are able to see the entire set of code/rules that govern the DAO, thus avoiding information asymmetry and helping to foster equality amongst members.

However, DAOs can accomplish even more than what is outlined above by embracing what corporations have only recently made a priority: social responsibility and impact investing. With the members serving as the key stakeholders and decision makers at each DAO, these communities are already primed not just to give back to causes they care about, but also to subsequently create a positive feedback loop.

“DAOSR”: DAO Social Responsibility

What should DAOs give? The answer might be obvious; DAOs should be able to give using their native cryptocurrency, if they have one. While this arguably lowers the barrier to entry, as many DAOs have some stockpile of their native tokens in something akin to a treasury, some would naturally be concerned about an immediate sell off by the receiving party, which would likely increase selling pressure and reduce token price. Recently, recipients of a grant from Uniswap immediately liquidated ~$10M (50%) of the UNI tokens, frustrating UNI holders and backers of crypto-philanthropy alike. How do we address this particular issue? Through the use of existing financial vehicles created to solve this and similar problems: Donor-Advised Funds.

Donor-Advised Funds (DAFs) are old hat in the traditional fiat world; DAFs have existed in the U.S. for over fifty years and have served as the most efficient tax vehicle for owners of stocks, bonds, property, and other assets by facilitating direct donations to charity without capital gains taxes. Normally, if you have an asset you’d like to donate, you need to liquidate it, pay tax on your capital gains, and donate what remains. In the DAF model, you instead donate your asset directly to a charity (the DAF provider). The charity then liquidates the asset and no taxes are owed as it’s a tax-exempt entity. Using a DAF, the recipient organization receives the full value of the asset, and the donor, in some cases, is able to get a tax write-off for the full value of their donation.

Using the DAF model, the aforementioned Uniswap grant could have looked a bit different. Uniswap could have donated the same $20M worth of UNI into the Uniswap DAF and set up a disbursement schedule in USDC or US dollars to avoid rapid sell-off. Here, DAFs provide additional flexibility and control for account holders and can assist in enforcing the donor’s plans for the gift. As such, they represent the best and most efficient means for making charitable tax-deductible contributions to nonprofit entities. 

Crypto-Education: Mainstream Acceptance

How do we get to a place where DAOs take on the challenge of social responsibility and are rewarded in kind by the community for their commitment? In one word the answer is education. If we are to realize the true power of DAOs for good, we must start by educating the larger crypto industry on different philanthropic models that can benefit community-centered projects, and help the nonprofit community to understand why they should be excited about playing in this new space.

The DAO structure lends itself to being a value add for philanthropic organizations. Philanthropies, like DAOs, are hyper-focused on being transparent and incorruptible, not just for tax related purposes, but because they know these are values that their donors hold as well. Alongside these similarities, blockchain technology brings value, security, and innovation to philanthropy, further enhancing the benefits of a DAO and a nonprofit.

Currently, there simply is not enough of an emphasis on social impact causes and investing targeted at the DeFi and larger crypto space. The greater blockchain community must create awareness and foster education that will eventually lead to broader mainstream adoption; both adoption of philanthropic ideals in the crypto space as well as acknowledgement of the importance of this new asset class amongst folks in the non-profit sector.

Blockchain: Philanthropy of the Future

While blockchain technologies are still relatively young and not yet fully mainstream, there is ample opportunity to prioritize education as the key to breaking down the stigma surrounding blockchain by teaching crypto folks about the tools they can employ for social impact. Education leads to adoption, and through this education we can bring these philanthropy and blockchain technology closer together in a way that benefits all parties. 

The crypto community would benefit greatly from a better understanding of tax-advantageous tools to use its assets for good, a case made even stronger when you consider that donating in this way could offset taxable income. The philanthropic community would also benefit from this linkage, as they’d be opening themselves up to donations from holders of a new asset class that has exploded in terms of market capitalization over the past few years, and doesn’t show any signs of slowing.

We can do better than the traditional, fiat-based companies have in the past that have often procrastinated on implementing philanthropic giving programs. If we start thinking about social responsibility now, we won’t need to integrate it as an afterthought. In this way, the crypto community will be well-placed to use their assets for philanthropic purposes. The community will then be able to grow in a more sustainable and healthy manner, reaching new heights while sticking to first principles: ensuring that the immense potential of cryptocurrency is put to work in the non-profit philanthropic space just as it has been in DeFi. I look forward to seeing the ways that blockchain technology (DAOs and beyond) is able to disrupt this space, creating new use cases for cryptocurrency while benefiting philanthropic entities all the while. By putting together the philanthropic and blockchain spaces, we will be able to accomplish something truly spectacular - we will be able to leverage the Web3 technology of the future for good.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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