Disintermediation and decentralization can sometimes be intimidating concepts for those of us accustomed to the traditional financial system and industry.
For those of us who have learned to navigate the labyrinthine incumbent and entrenched system of banks, brokers, custodians, exchanges and asset managers, our knowledge of traditional finance has often been quite lucrative. Disintermediation and decentralization mean having to learn something new.
But if we peel back the layers of these concepts, we’re likely to find tremendous opportunities for engagement, creating social good and potentially generating returns and income.
That brings us to the concept of a DAO, or a decentralized autonomous organization, a blockchain-based community whose rules and practices are contained in computer code rather than in printed bylaws.
Unlike decentralized finance (DeFi) in general, which uses blockchains to replace trusted third parties in banking, lending, investing and other financial transactions, DAOs use technology to transfer some or all decision-making power from organizations to individuals, utilizing code to set guidelines for how decisions are made and enforced.
Most DAOs are built on the Ethereum blockchain and serve varying roles. Some early entrants into the DAO area were solely built to govern a cryptocurrency. Others were created to extend blockchain technology to other areas of finance and investing, such as the Index Coop DAO, which creates decentralized index products in the cryptocurrency sector.
I recently discussed one such DAO with PlannerDAO founder Steve Larsen, the founder of PlannerDAO, a source of digital assets information and infrastructure for financial advisors, and who helped launch the Certified Digital Assets Advisor (CDAA) designation.
Unlike most advisor designations, such as CFP (Certified Financial Planner), CPWA (Certified Private Wealth Advisors) and CFA (Chartered Financial Analyst), which have centralized governing bodies deciding on qualifications and other rules regarding the use of their marks, the CDAA is governed by a DAO made up of its membership. Advisors who earn their CDAA marks are given a digital token that allows them to participate in the designation’s governance.
“We want the DAO community to decide which areas of cryptocurrencies and the technology are relevant to advisors, and then we want to open it up to other providers to come in and provide education to our professionals,” said Larsen. “So someone like the FPA [Financial Planning Association] could come in as an education provider, but our community of planners would decide on the topics and requirements. The community members and holders of our certification determine what’s relevant.”
For participating in the decentralized governance of the CDAA, advisors will receive another token that is intended to increase in value over time, said Larsen, so “advisors get compensated for the work they’re doing as members of our community – they don’t have to develop a product or service, they’re compensated by the economic structure we’re putting in place to deliver solutions.”
The CDAA’s DAO will provide its membership with tools, checklists and templates to ease the process of working with clients’ digital assets and provide advisors with a safe place to ask questions and have discussions on cryptocurrencies without having to rely on the not-always-objective expertise of asset managers, vendors or custodians. While such industry participants express zeal for educating advisors, they also have conflicts of interest, as they are trying to earn advisors’ business and accumulate assets.
Popcorn, a soon-to-launch DeFi platform with a socially responsible twist, has also gravitated towards the DAO structure for part of its governance. But while the CDAA is distinctly directed at advisors, Popcorn is aimed at all investors.
Simply put, Popcorn is a yield aggregator that allows some of its returns – up to half of them, in fact – to be directed towards charitable organizations.
Investors deploy their digital assets to Popcorn’s liquidity pools via smart contracts – contracts whose terms are governed by code, with no need for an intermediary ensuring that all parties meet their obligations. In return for their investment, investors receive a token that allows them to participate in the centralized governance of the pool, including the ability to vote to choose which beneficiaries receive the portion of the return that becomes a donation and set parameters for the smart contracts.
“The great thing is that you can just come to Popcorn if you want to use our products to generate yield. You’re not required to participate in the governance,” said Popcorn co-founder Michael Kisselgof. “If you have earned a Popcorn token, you’re incentivized to contribute because we are baking incentives into our model.”
Through Popcorn, advisors’ clients can not only create social good, but they can generate attractive income in an era of low interest rates and shrinking dividends. The company’s first product, Butter, is a stablecoin strategy capable of generating up to 15% in annual yield.
Another DAO, Augur, has been used to power sports betting markets and options. Augur allows any user to make predictions, whether it be on elections, sporting events or the value of a stock on a specific date through its platform.
Decentralization doesn’t mean that advisors and other financial intermediaries will be obsolete. In many cases, DAOs will empower advisors and investors with greater decision-making abilities.
So if DAOs catch on and are applied throughout the wealth management space, there will be less of a need to rely on influential industry organizations and custodians for guidance and governance. Instead, advisors and investors will be empowered to do these things themselves across user-friendly platforms, and will often be compensated and incentivized for their participation in them.