Opinion: Are DAOs Real Business Models Or Ponzi Schemes?

Rajeev Mudumba

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There is some debate as to whether DAOs are real business models or Ponzi schemes. Some people argue that DAOs are not sustainable, because they do not generate any revenue.

Others argue that Ponzi schemes are not sustainable, because they eventually collapse. It is still too early to say which of these arguments is correct. However, the debate is interesting for at least two reasons.

Firstly, it illuminates some fundamental questions about business models.

Secondly, it provides useful guidance for entrepreneurs who are planning to build DAOs.

There is no definitive answer to this question, as the legality and viability of DAOs as business models depend on a variety of factors. However, some experts believe that DAOs may be susceptible to Ponzi scheme-like behavior, in which early investors are paid returns using funds from later investors rather than from profits generated by the DAO itself.

First, what’s a DAO?

If you haven’t run across this term before, it stands for “ decentralized autonomous organization,” i.e., an entity that exists on the Internet and is operated by computer code, or “smart contracts”, rather than people.

In general, the code of the organization is publicly available and maintained by whoever wishes to do so. Although computer code can be written to require a human decision before taking effect, this article will use the term “that operates autonomously”, without human involvement. The organizations are typically set up with some kind of reward or incentive system in place to encourage people to participate in the running of the organization and maintain the code.

Now that we have a basic understanding of what DAOs are, let’s look at why they might be seen as Ponzi schemes. One key characteristic of Ponzi schemes is that the organizers typically promise very high returns to investors, to lure them in. Once people have invested, the organizers use their money

Richard Horvath on Unsplash
There is some debate as to whether DAOs are real business models or Ponzi schemes. Some people argue that DAOs are not sustainable, because they do not generate any revenue.
Others argue that Ponzi schemes are not sustainable, because they eventually collapse. It is still too early to say which of these arguments is correct. However, the debate is interesting for at least two reasons.
Firstly, it illuminates some fundamental questions about business models.
Secondly, it provides useful guidance for entrepreneurs who are planning to build DAOs.
There is no definitive answer to this question, as the legality and viability of DAOs as business models depend on a variety of factors. However, some experts believe that DAOs may be susceptible to Ponzi scheme-like behavior, in which early investors are paid returns using funds from later investors rather than from profits generated by the DAO itself.
First, what’s a DAO?
If you haven’t run across this term before, it stands for “ decentralized autonomous organization,” i.e., an entity that exists on the Internet and is operated by computer code, or “smart contracts”, rather than people.
In general, the code of the organization is publicly available and maintained by whoever wishes to do so. Although computer code can be written to require a human decision before taking effect, this article will use the term “that operates autonomously”, without human involvement. The organizations are typically set up with some kind of reward or incentive system in place to encourage people to participate in the running of the organization and maintain the code.
Now that we have a basic understanding of what DAOs are, let’s look at why they might be seen as Ponzi schemes. One key characteristic of Ponzi schemes is that the organizers typically promise very high returns to investors, to lure them in. Once people have invested, the organizers use their to pay off earlier investors (rather than investing it in legitimate business activities). As long as new investors continue to come in, the scheme can keep going; but when it collapses, everyone loses their money.

Some experts believe that this is what could happen with DAOs. For example, in a recent article in The Economist, blockchain specialist Emin Gun Sirer is quoted as saying that “the possibility of a Ponzi scheme is inherent in the structure of these organizations.” He points to the fact that there is no real way to prevent people from cashing out their tokens at any time, which means that the tokens’ value is likely to fluctuate wildly as investors try to cash out early.

That could leave people who join later with little or no chance of making their money back, much like what happened with Bitcoin’s original “founder”, Satoshi Nakamoto.

Another potential problem is whether it matters if token-holders are also allowed to vote on how the organization operates. According to Gun Sirer, “If you are allowed to exit with all your funds at any time, then that means there is no commitment for members of the network”. He doesn’t think it’s possible to have an organization in which some people can vote and others can cash out whenever they feel like it — and if they can vote and cash out, he says “it’s a very short step to the idea of a Ponzi scheme”.

Another issue is whether DAOs could be open to legal prosecution. Do they need some kind of official status to operate? If not, who gets to decide how their assets are used? But, even if they are recognized as legitimate, it’s not clear whether criminal charges like “fraud” would apply — or what impact that might have on the value of their tokens.

One way around some of these problems might be to hold any returns from investments in trust until investors decide to cash out, rather than distributing them automatically. That would help to ensure that investors are only paid out if the DAO is making a profit. But, it might also make it more difficult for people to get involved in the first place.

Let’s look at startups and their business models for a bit.

Many people argue that building a startup is very risky.

For example, according to one study, only 1 in 10 startups generates revenue. This is why it is important to invest in startups with sustainable business models. A startup that does not generate any revenue may turn out to be a Ponzi scheme, which is by definition unsustainable. If this happens, you will lose all of your money. A startup is a company that is in the early stages of its life cycle. It has not yet had a chance to generate revenue or become profitable.

Not all startups are Ponzi schemes. Many startups do eventually become profitable. The same is likely to be true for DAOs. Many DAOs will eventually become profitable, even if they do not generate any revenue in the early stages of their life cycle.

So, are DAOs real business models or Ponzi schemes? The jury is still out.

Whether they turn out to be the future of the business or a failed experiment, we will certainly hear about them again in the coming years.

Opinion : Attributions based on opinion.

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Rajeev Mudumba is a dynamic entrepreneur, executive, business strategist, coach, and advisor. He is also an accomplished author, speaker, and thought leader. Above all, Rajeev is a diehard optimist with a "can do" attitude. Subscribe to Plan B Success podcast on your fav platform or www.planb.live. Also, subscribe & watch on YouTube @ http://bit.ly/2YegieF. Don't forget to share & spread the word!

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