DAO Lay Lo Mo

crypto trader digest - dao lay lo mo
(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

After spending a third of my life in Hong Kong, my Cantonese is still rubbish. I can squeak out my address with an acceptable accent, but not much else (aside from my repertoire of essential Cantonese expletive phrases, which is passable).

Walking down the street in Hong Kong, you might believe this island to be a city of malcontents due to the noise and tone of overheard conversations. If you happen to like Dim Sum, the cacophony of loud-spoken Cantonese is a key part of the experience. And if you are really a local, you will be able to swear using the correct tones. Supposedly there are nine tones in Cantonese, of which I know exactly zero. I can barely intonate Mandarin correctly, and it only features four. My tutor is always correcting me.

The most common spoken invective is Diu Lay Lo Mo (𨳒你老母) – and it’s used often and in many situations. A correctly placed Diu will get you far, even if 90% of the sentence is in English.

The linguistic features of Cantonese have almost no relevance to DAOs and the metaverse – so don’t go looking for hidden meaning in the title of this post. I just really liked the sound of it. 

With that bit of non-sequitur context out of the way, onto our regularly scheduled programming.

The Way Way Back Wind-Powered Machine

Look around you – every single object you interact with began as a figment of someone’s imagination. This idea then infected others, and subsequently convinced them to part with their physical or financial capital to create it. The more organised, viral, and well-funded an idea, the easier it becomes to actualise.

The goods and services societies enjoy are a function of how well a particular place is able to organise capital and deploy it. The ways in which various city and nation states used seafaring voyages to expand their economics perfectly illustrate the importance of organisation.

Like most American high school students my age, we spent an extensive amount of time in history class documenting the various ways European nations colonised the Americas, Africa, and parts of Asia. The new and exotic landmasses and trade routes were “discovered” by intrepid men seeking their fortune. Today’s classes likely focus more on the various unsavoury means by which countries expanded their empires (as they should) – but when I was in school two decades ago, history class wasn’t quite so woke.

During the Ming Dynasty – a century before the European age of exploration – a Chinese naval captain named Zheng He floated large, impressive vessels and landed at various points on the African coast. His ships featured water tight hulls, magnetic compasses, and fresh citrus fruit to fight the scourge of scurvy.

Unfortunately, due to the financial strain of Zhang He’s voyages and other internal economic issues, the emperor at the time unilaterally ended China’s outward naval explorations. The dockyards were mothballed and the economic engine of China entered a long period of stagnation that wasn’t broken until Deng XiaoPing’s Southern Tour in 1992.

A few centuries after Zheng He’s death, a small, cold, damp, and dark island called England became a global empire due to the strength of its navy. (It also helped that England didn’t have to constantly defend overland borders, allowing them to pick and choose their battles in order to keep the European continent divided – but I digress.)

The technology employed between various European and even Chinese seafarers wasn’t the factor that determined which nation-state floated the most impressive vessels. Rather, it was the way in which voyages were financed. What truly made the English so successful (along with the Dutch) was their pioneering of the limited liability joint-stock company.

A company is an imaginary concept that allows strangers to agree on a codified set of principles under which they can pool their capital and limit their risk. The legal systems underpinning company charters ensure that everyone buys into the illusion by legalising sometimes violent state retribution when a party violates the spirit of the agreement. The advent of companies allowed for a wide variety of individuals – both rich and not so rich – to participate in the global expansion of trade. Citizens of the various European powers collectively agreed that slips of paper, also known as “stonks”, could be used to represent partial ownership of these imaginary entities, thus giving rise to the first stonk markets and enabling investors to speculate on the future success of a given company.

A system that includes as many individuals as possible in the pursuit of a dream is more likely to succeed because it can raise a larger amount of capital. The other method – at least, as it pertained to voyaging at the time, in which the Crown Monarch (e.g. Spain) or Emperor (e.g. China) unilaterally dictated which voyages occurred and kept a majority of the profit – simply could not compete as effectively. In the wake of the renaissance shepherded by our Lord Satoshi, we do not consider a corporate entity decentralised – but half a millennia ago, a company funded by a diverse set of individuals was the original decentralised organisation. As we know, decentralised, inclusive systems succeed at many tasks better than centralised exclusive ones.

The takeaway is that a fictitious thing called a company allowed a group of people to properly exploit a risky opportunity, and created extreme wealth for shareholders and the home nation-state. This new framework for organising people and capital allowed for the full exploitation of globalised trade by sea.

What, then, will be the new shared fiction uniting billions of individuals to create and grow the various Metaverses that will exist in the near future? It is the Decentralised Autonomous Organisation, or the “DAO”.

The point of this essay is to illustrate the various ways that a DAO can usher in new, independent financial markets that exist only inside their respective Metaverses. The end-to-end usage of cryptographic currencies transferred across a public blockchain will unlock amazing financial products that will help allocate risk and capital effectively within a Metaverse. The result will be a robust civilisation that exists solely on silicon-powered thinking machines.

Let us pray.

DAO Triple-Entry Accounting

In my junior year of University, I foolishly applied to take an upper-level accounting course. Like at many universities, students were allowed to sample many courses during the first two weeks. Only after the first two weeks of the semester were you required to decide on your final course load. 

The professor began describing the sorts of skills we would learn in order to spot inconsistencies and fraud embedded in accounting statements. After a semester abroad partying, forensic accounting did not sound appealing. I dropped that class tout suite.

The reason why forensic accounting is a thing is because of a fatal flaw in double-entry bookkeeping. The fatal flaw is that by looking at a set of management accounts, we implicitly believe that all payments went to the correct party and the company in question actually owns the assets at the value recorded on the books. In order to truly verify the information presented, we must ask a third party if certain payments were made (a bank), or if a company has title to a certain asset (a government’s title office).

A DAO, by definition, exists in only a digital format on a public blockchain. That means its assets, liabilities, and shareholders’ equity (issued governance tokens) are all completely transparent and publicly verifiable by anyone with an internet connection. As an added kicker, the flow of funds between the DAO and any of its counterparties are also recorded publicly via the blockchain.

Imagine a Metaverse, called PalmByte, and a commercial landlord called TrumpDAO. TrumpDAO builds the biggest and most badass virtual buildings and dwellings, and rents them out to avatars inside PalmByte, all in the colour gold.

To get off the ground, TrumpDAO issued TRUMP tokens in exchange for ETH. Let’s assume TrumpDAO raised 1,000 ETH and issued 1,000 TRUMP tokens. The reporting currency for TrumpDAO is ETH.

Balance Sheet

Assets:

1,000 ETH

Liabilities + Shareholder’s Equity:

1,000 TRUMP worth 1,000 ETH

In order to construct the dankest structures in PalmByte, TrumpDAO contracted Tado Ando as the digital architect. Who knew TrumpDAO had such good taste… Tado Ando charges 100 ETH. The remaining 900 ETH are spent purchasing land within PalmByte. The output of this spend is 100 virtual buildings.

Balance Sheet

Assets:

(minus) 1,000 ETH [Tado Ando fee + virtual land purchases]

(plus) 100 Buildings

Liabilities + Shareholder’s Equity:

1,000 TRUMP worth 1,000 ETH

TrumpDAO is able to rent out all 100 properties at an annual rent of 1 ETH per unit.

Income Statement Year 1

Revenue:

100 ETH of rental income (100 units * 1 ETH per unit rent)

Operating Expenses:

100 ETH fee to Tado Ando

Net Income:

0 ETH

Every single TrumpDAO data input used to create this balance sheet and income statement is publicly verifiable on the Ethereum blockchain. This is super important, because now TrumpDAO needs financing to expand.

The TRUMP token holders have a decision to make on how to raise additional funds to acquire more land, which is then used to increase rental income. They can either dilute themselves by issuing more TRUMP tokens in exchange for ETH, or they can attempt to tap the Metaverse fixed-income markets.

The cost of funds for a landlord like TRUMP is currently 5% per annum. The token holders decide to issue a bond in hopes that other avatars in PalmByte might invest. The face value of the bond is 1,000 ETH.

Imagine you are an ETH-rich PalmByte avatar who would like to earn yield in ETH. Obviously, you want to lend to DAOs whose business will allow them to pay you back. As an astute metaverse investor, you examine the books of TrumpDAO. Some clever dev team developed a handy tool that quickly verifies accuracy of any DAO’s accounting statements by comparing the accounting statements written to the blockchain by the DAO, and the records of all the inputs. The service is almost superfluous because you can’t lie with triple-entry bookkeeping. In order to entice avatars to pay for the service, this accounting dAPP also does simple financial ratio analysis. 

The output is the debt servicing capacity of TrumpDAO. You learn that they earn 10% return on capital, vs. the 5% bond coupon offered. The dAPP also checks ZillowDAO for the current market value of the units owned by TrumpDAO. You want to evaluate the recovery risk, should TrumpDAO default. The PalmByte property market is LIT – all those New Dorkers are moving across the wafer to get better tax treatment and pushing up prices.

You have done well on the DOGEBONK pump, and decide to take down the entire TrumpDAO bond offering.

New Balance Sheet

Assets:

1,000 ETH (raised by selling TrumpDAOBonds)

100 Buildings worth 1,000 ETH [900 ETH purchase cost + 100 ETH improvement costs due to Tado Ando’s fee]

Liabilities + Shareholder’s Equity:

1,000 TrumpDAOBonds worth 1,000 ETH

1,000 TrumpTokens worth 1,000 ETH

In this short example the following actions, verifiable by a public blockchain, occurred:

  1. A DAO saw an opportunity to develop virtual land to let out.
  2. The DAO issued tokens in exchange for ETH.
  3. The DAO used the ETH to pay an architect and purchased virtual land, and then created 100 units for rent.
  4. The DAO earned rental income.
  5. The DAO issued a bond in order to finance additional development.

The DAO automatically and programmatically created accounting statements by using the transaction records of its actions from the Ethereum blockchain. This allowed a third-party avatar to confidently assume some credit risk in order to earn a yield on their ETH.

Metaverse Fixed-Income Markets

The simple example above is powerful in that the trust necessary to create a company, issue equity, engage in business, and issue debt for expansion featured in the TradFi system is absent in the Metaverse. The DAO structure is completely transparent, and it is cryptographically impossible for the DAO to misrepresent its actions because every piece of data generated by the DAO resides on a public blockchain.

The achilles heel of the crypto fixed-income markets will be – at least initially – the need to use an analogue legal system to enforce digital property rights. Lending Bitcoin or some other crypto to a potato farmer, for example, requires you to trust some nation-state’s legal system to uphold your property rights, should the farmer refuse to satisfy the contract. That is not an issue if both the investor and lender reside in the same jurisdiction. However, the promise of crypto finance is that, for the first time ever, we can connect the world and funnel capital to groups who otherwise would not be able to access TradFi capital due to jurisdiction-related issues.

A metaverse DAO raises crypto, earns crypto, and distributes crypto. It is an end-to-end crypto economy, where every action is publicly verifiable on a blockchain. Therefore, it is impossible to bamboozle investors by creating misleading and confusing accounting statements. Those who wish to judge the health of the DAO need only query the blockchain and presto! A complete, honest set of books appears.

Debt recovery is also aided by the programmatic nature of crypto capital. Programmatic liens can easily be placed on digital assets. Don’t pay up? After the grace period, ownership can be automatically stripped, the asset sold, and the net proceeds credited to lenders. The asset recovery process is open, transparent, and devoid of the egregious legal bankruptcy fees featured in TradFi. It is beyond absurd that after over 7 years, Mt. Gox claims are finally being paid out. If a similar situation occurred in the metaverse, the bankruptcy and recovery process would happen over a few blocks, which is measured in minutes. 

Once investors understand the potential activities and value of commercially-organised DAOs, the true power of metaverse capital markets will become evident. But even more interesting will be the simple financial products that will likely emerge after DAOs are used to organise capital inside the metaverse.

DAO Banks

A pure crypto fractional reserve bank that issues its own currency is now possible. Imagine CountryWideDAO, a bank that focuses on property lending. To fund its equity cushion, it raises ETH and issues a governance token. The token holders vote for members to sit on a loan committee that creates and amends the automated lending standards.

CountryWideDAO ingests the public address of the property asset as data, and does analysis on how much to lend against said property. It then places a digital lien on the property such that in the event of default, the asset is sold automatically on a decentralised exchange (DEX) and the net funds flow back to the bank.

To grow its deposit base, CountryWideDAO pays an interest rate in ETH on funds deposited. Its balance sheet consists of property loans against liabilities of ETH deposits. The DAO governance council discloses the reserve ratio requirement, token cushion, return on assets, and other standard banking accounting ratios. Depositors and investors of the governance token are able to view, in real time, the health of the bank.

If the bank breaches certain metrics defined by the DAO governance counsel, it will automatically rebalance its accounts by raising interest rates to attract deposits, disposing of property loans, and/or issuing additional tokens to beef up shareholders’ equity.

In the metaverse, avatars can organise themselves into banking DAOs, with different metaverse societal goals. These goals can be programmatically expressed via lending standards. These lending standards are completely transparent, so there is no question as to how banking DAOs originate loans.

Credit Scoring

There will be various types of employment offered in the metaverse. In the TrumpDAO example above, an architect offered his services in exchange for payment in ETH. In this way, avatars can build up a publicly verifiable employment history and, by extension, a credit score. All payments are public knowledge, so any time an avatar attempts to borrow funds, their complete financial picture is instantly available to a prospective lender. 

Various credit scoring dAPPs will use different algorithms in an attempt to determine the credit worthiness of an avatar. A few models will become standard due to their ability to predict default. In order to obtain credit in the metaverse, an avatar will have to purchase a credit score subscription from various dAPPs that lenders require when applying for loans.

Gone will be the opaque and possibly discriminatory practices of TradFi credit scoring agencies. In the metaverse, the most successful credit scoring dAPPs by definition must be completely transparent about their scoring algorithm. And there will be no legal mandate to use one scoring method over the other, so only those that actually successfully predict default rates will likely gain market share.

Credit Card DAO

Want to buy that sexy Punk PFP, but lack the funds to do so? No worries – credit card DAOs will fill the need.

These DAOs will use your avatar’s credit score to issue you a metaverse credit card that allows you to spend crypto on approved purchases. The DAO can do instantaneous approvals based on credit score, the notional involved, and the purchase item. The credit card DAO could even adjust the interest charged depending on a variety of factors, all of which are publicly verifiable.

The risk of default is reduced because the DAO can automatically garnish metaverse income such that they get their money back first. 

The DAO, similar to a bank, will raise funds by offering a rate on crypto deposits that’s lower than the rate at which they lend. This is exactly how a TradFi credit card company works; however, in the metaverse, the risk of default will be much lower because all data about an avatar’s financial history is instantaneously publicly available and verifiable.

Mortgage DAO

Metaverse mortgage-backed securities (MBS) become possible. Imagine that you wish to purchase your pimp pad, but lack the funds to purchase it. No problem – you can borrow money based on your credit score. Various MBS_DAO origination outfits will lend money against property at various interest rates. These MBS_DAOs package these loans and sell these securitised products.

Fixed-Income Legos

The way in which every DAO and dAPP can programmatically communicate with each other allows for the creation of hyper-specialised financial products. The removal of information asymmetry between the borrower and lender – because all interactions are publicly verified –

brings down the cost of credit. I could go on and on about the different metaverse-flavoured TradFi fixed-income instruments. Whatever you can imagine in TradFi, armed with honest, public information, the metaverse fixed-income markets can offer products to more avatars at a lower interest rate.

Credit Boom Boom

The essence of credit and debt is the ability to energy time travel. Returning to the present, future energy production is the magic that drove a much larger global economy. This will always be true, as long as the economic activity created is greater than the real interest rate.

Given there is so much exploitable value in creating an entire new universe of human experience, the ability to borrow against a magnificent future will allow the flywheel of development to spin even faster. The absence of accounting fraud and the programmatic nature of metaverse asset recovery will raise the quality of borrowers, which in turn reduces the risk to lenders.

The metaverse fixed-income market will support a population of billions, and in a short time will become the largest, most liquid, and most important debt market globally. The current supremacy of the American economic model is directly predicated upon a deep and liquid corporate and government debt market. America is a nation of 350 million – so imagine the size and quality of the metaverse fixed-income markets, which will serve 3 to 4 billion internet-connected souls, and hundreds of thousands of DAOs.

As readers know, I am a metaverse uber-bull. However, after writing this piece, another intellectual boolish pillar appeared. The exponential increase in human living standards following the first industrial revolution is not only a product of better technology, but a product of a financial system that created the ability for companies and individuals to invest now for a better future. With all its flaws, TradFi underpins the improved living standards we enjoy today, and enabled governments, companies and individuals to create a better future by allocating capital efficiently. It is a shame that it has been so grotesquely perverted, but Lord Satoshi is here to deliver us from evil.

Now that we can have verifiable, perfect information about all the actors in a metaverse economy, the financial architecture that is possible will unleash a torrent of human creativity and growth that will leave future generations speechless.

One For All and All For One

Every single fixed-income financial product innovation of TradFi – and more – is possible in the metaverse because of the DAO structure. The main difference between the metaverse fixed-income markets and the TradFi ones is that the infrastructure will be publicly operated.

Every single DEX and dAPP will have its own token, which allows users to collectively construct the financial system they desire. It will not be a closed system in which the end customer has no ownership, but pays consistent economic rents in order to use the power of financial engineering. It will not be a system that selectively bars certain individuals and businesses based on their physical appearance, gender, or industry from accessing financial services. It will be a system that is inclusive, and through this inclusiveness generates a far greater economic pie to be shared amongst participants.

This will not be a system without risk or failure. There will be colossal collective errors as a cadre of computers and humans rewrite how financial services function inside the metaverse. 

For investors who wish to provide capital to the builders of a completely new financial system, this is a once in a millennia opportunity. Many wish they were the financiers, and not the assets being transported or financed during the European Age of Exploration. The creation of the metaverse fixed-income markets offers the opportunity to create the most essential financial services of a completely new universe. Raise your fist at TradFi and repeat after me – “DAO LAY LO MO!”

Publication date: 
11/25/2021 - 23:00
Author: 
Disclaimer

The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.