Understanding Flamingo DAO in One Article: Background, Mechanism, and Business Model

Written by: Fateh Singh Mann

Compiled by: TechFlow Volunteer Community TechFlow Friends Organization

Reading Summary:

This article refreshes some inherent perceptions of the translator:

1. There are not many DAOs that are not investment-oriented; rather, things with strong financial attributes and heavy financial characteristics are inherently suitable for DAO-ification (smart contractification), especially in the crypto space.

2. The narrative of DAOs may indeed be underestimated and overly abstracted; composability is equally important in DAOs, as evidenced by TheLAO's DAO birth, and DAO to DAO is already illustrating the issue.

3. Friends involved in investments, if they have ambition, courage, and confidence in the future, can sincerely try to DAO-ify their organizations, not just in narrative and thought but in execution and code.

Background

• What is a DAO?

In 2013, Ethereum co-founders Daniel Larmier and Vitalik Buterin first explored this concept in an article. The premise is that companies organize human activities under a set of rules and goals defined in contracts. To clarify and execute the contract content, traditional companies adopt a hierarchical management structure.

"DAO" replaces this hierarchical management structure with software, operating through "smart contracts," with goals, rules, and transaction records encoded on the blockchain, thus eliminating the need for centralized authority to participate. Theoretically, DAOs have the following advantages:

1. Automation through smart contracts reduces costs.

2. This model ensures complete transparency in transactions, fostering greater trust among stakeholders.

3. This model gives participants a sense of belonging, enabling them to support each other economically and psychologically, and they are more willing to enhance others' work efficiency. Compared to traditional workers, their work efficiency is higher.

• The Story of the First DAO

In May 2016, some members of the Ethereum team established the first DAO to operate venture capital in the blockchain and crypto space.

The DAO raised funds by issuing tokens in exchange for ETH, achieving tremendous success, raising nearly $150 million in total.

However, due to a now well-known technical flaw, one or several hackers stole nearly $70 million from the DAO. Later, Ethereum forcibly redirected the hackers' funds to accounts that could be used by the original owners, although this move was highly controversial.

Additionally, the U.S. Securities and Exchange Commission found that the DAO's tokens were securities and thus subject to federal securities laws. To protect investors and ensure proper disclosure, any tokens related to the interests of profit-seeking DAO owners must be traded on registered exchanges unless exempted.

As expected, the DAO soon shut down, but interest in DAOs was far from over, and related experiments continued.

Company History and Key Personnel

• TributeLabs (formerly Open Law):

In June 2017, the founding team of Flamingo DAO first gathered to create "OpenLaw - Ricardian Contract System," aiming to create contracts that could be understood by both humans and machines, more importantly, for machines to understand, as this would allow contracts to be signed, verified, and stored on the blockchain in a cryptographic manner. Thus, OpenLaw could serve as a bridge connecting traditional legal systems and the emerging crypto world.

The Ricardian Contract System was proposed by Aaron Wright. Aaron Wright is a trained lawyer dedicated to researching blockchain and related regulations, and he has published a book titled "Blockchain and the Law."

The OpenLaw team began experimenting with various use cases, such as real-time tax transmission. Ultimately, they decided that the best application was to help the emerging DAO ecosystem establish a legal structure compliant with U.S. securities laws.

This is crucial because the first DAO established in May 2016 clearly failed. Its failure was not only due to the nearly $70 million loss caused by that infamous hack but also because the SEC ruled that the first DAO and its investors violated relevant SEC laws. Therefore, DAOs operating under the same model would function under extremely uncertain regulatory conditions.

Note: In September 2021, Open Law officially rebranded to Tribute Labs, with the explicit purpose of helping DAOs operate legally in the U.S.

• LAO

To better understand the precise products needed by DAOs, they began to "eat their own dog food" (using their developed software as much as possible) when creating the DAO. The first such significant organization was LAO.

LAO stands for "Limited Liability Autonomous Organization," established in April 2020, and is a limited liability entity (compliant with securities laws). People can purchase "LAO Units" with ETH to become members. The pooled funds will be used to invest in blockchain-related projects in exchange for tokenized equity or functional tokens. All management and execution (such as voting, funding, capital transfer, etc.) are conducted through smart contracts, and the project raised $5 million in funding.

The second project that LAO invested in on the Superrare platform is now a well-known digital art and non-fungible tokens (NFTs) market. Soon, members began to discuss whether LAO should only invest in projects, platforms, or infrastructure within the NFT space or also purchase individual artworks. They decided to pursue both paths and launched a new investment tool dedicated to the NFT market called Flamingo DAO.

LAO has become a DAO incubator and has begun to spawn other DAOs focused on specific areas of investment. To date, LAO has launched six different DAOs, with a total capital investment of $200 million on Ethereum. Two more DAOs are also set to launch soon.

1. FlamingoDAO

2. Neptune (DAO for DeFi)

3. Neon (DAO for Metaverse)

4. RedDAO (digital fashion)

5. ReadyPlayerDAO (gaming)

6. Museo's NFT (native museum, art collection)

• FlamingoDAO

FlamingoDAO was established in October 2020, with funding sourced through the sale of "Flamingo Units." Given its structure similar to LAO, FlamingoDAO raised approximately 6,000 ETH (equivalent to $6 million at the time).

In February 2021, Flamingo DAO purchased a Crypto Alien Punk for $750,000.

• Key Personnel:

Aaron Wright is a lawyer, scholar, and tech entrepreneur who sold his company to Wikia in 2007. He played a small role in the founding of Ethereum. His research on the intersection of blockchain and law was eventually published in a book that documented the motivations behind the establishment of Open Law.

Priyanka Desai is a seasoned lawyer who joined Aaron's OpenLaw project in 2017 and currently serves as Vice President of Operations while being an outstanding member of Flamingo.

Mechanism

• Membership

Due to regulations, Flamingo's membership is limited to accredited investors in the U.S., capped at 100.

Initially, members purchased 100,000 "Flamingo Units" at a price of 60 ETH, representing 1% voting rights and proportional rights. The maximum share a member can own is 9%. Importantly, these are not tokens and cannot be traded or transferred unless a majority of members agree otherwise.

Existing members can decide when or whether to open new memberships within a limited time. Aaron stated on the "This Week in Startups" show that the current cost for new members is 3,000 ETH. New members join by sharing the equity of existing shareholders. In traditional investment firms, new members can only benefit from future investments, while new members of Flamingo DAO can benefit from all investments made throughout Flamingo's entire operational cycle.

There are many outstanding applicants wanting to join Flamingo DAO, and the team decides their eligibility based on careful evaluation of their expertise in the NFT field.

• Investment Process

The company holds a call every two weeks to discuss potential new investments and trends.

To protect privacy and prevent front-running, members regularly conduct Moloch-style voting to discuss whether they should allocate a portion of Flamingo's assets (approximately 20%) to purchase new assets.

Existing members nominate projects or fund NFTs through a portal called "The dApp." After nomination, members vote on whether to support the proposal.

Currently, members conduct asset liquidity activities in two ways: proportionally allocating funds to members or creating tradable tokens representing yield interests.

If a member wishes to liquidate funds, they can sell a portion of their shares in Flamingo DAO to another member with the approval of other members; if multiple members wish to rotate assets simultaneously, a majority of members will decide how to achieve the aforementioned liquidity.

• Voting System

Blockchain-based smart contracts facilitate voting, and the results are recorded on the Ethereum blockchain.

Voting rights are allocated proportionally. Decisions are based on consensus, with no quorum requirement, meaning members do not need to vote, and the evaluation of proposal results excludes minimum vote counts.

For specific issues, voting rights can be delegated to other members, and authorized voting does not affect members' earnings.

In addition to voting on purchases, members can submit proposals and vote on the structure and form of Flamingo DAO or other strategic decisions (how to handle liquidity, launch FlamingoDAO tokens, etc.).

• Rage Quitting

Members can choose to withdraw funds at any time; as long as they wish, they can leave Flamingo—this process is known as "rage quitting," ensuring members feel secure when joining the DAO and can vote with peace of mind.

After voting on each proposal, if any member disagrees with the result, they can choose "rage quitting." Exiting members will receive a share of the unallocated capital, and they also have the right to receive earnings from investments made by Flamingo DAO before capital withdrawal, within the limits allowed by legal or investment terms. The document does not clearly specify how and when these earnings will be transferred to exiting members.

Note: Founder Aaron Wright pointed out that the Flamingo DAO governance document does not mention the right of exiting members to receive investment earnings. The above viewpoint comes from the LAO governance document, which is the same as Flamingo DAO's document.

• Other Miscellaneous:

All administrative and operational activities, such as establishing legal frameworks, maintaining software (referred to as dApp when decisions and governance occur), smart contracts, community support, taxes, and regulations, etc.

Business Model and Secrets

• Activities

1. Purchase NFTs and, where applicable, convert them into refined works, including the famous "Alien CryptoPunk," priced at $750,000.

2. Invest in core NFT infrastructure and projects. According to Crunchbase data, Flamingo DAO has invested in at least 10 such projects: for example, participating in OpenSea's $23 million financing and nameless's $15 million financing (nameless is an API software developer for issuing, testing, and selling NFTs).

3. Commission artists like Joy and Hackato to create new works and launch new NFTs.

4. Invest in digital artists through their respective communities or community tokens.

5. Organize acquired works to create digital museums and exhibition galleries.

6. Seek ways to develop and further monetize existing assets. For example, after acquiring the copyright of "Alien CryptoPunk," they created a social media account, giving it personality, turning it into a 3D existence, creating a Zoom skin for it, and making it visible in the metaverse, even launching a DAO with it.

This trend may lead to a clear endgame, namely virtual idols (like the virtual pop star Miquela).

• Portfolio

FlamingoDAO initially had $6 million in ETH. Over time, they have acquired over 1,300 NFTs, including hundreds of CryptoPunks (Flamingo DAO is the third-largest holder of CryptoPunks), five rare auto-glyphs, NFTs from digital artists, and shares in OpenSea.

Although the total value is difficult to estimate due to volatility, Flamingo DAO currently holds an estimated value of approximately $100 million in its shares. This data source was mentioned by Aaron at the 54-minute mark of the Boardroom Governance podcast on November 8, 2021.

• Economics

1. Revenue Sources:

1) Sales of digital assets and investments: including previously acquired assets and new NFTs launched in collaboration with artists.

2) Sale of tokens to new members.

Flamingo currently has about 70 members, and according to the organization's original charter, the number can rise to 100 members. As noted earlier in the mechanism section, existing members decide when and whether to open new memberships and at what price. Currently, the price of 100,000 Flamingo Units has risen from 60 ETH at launch to 3,000 ETH, a 2000-fold increase in dollar terms.

As this is an extremely emerging field, more revenue opportunities are expected to arise, potentially including the monetization of digital museums and gallery exhibitions, creating a community or DAO around existing NFTs, and so on.

2. Cost Structure

1) Fees to service provider OpenLaw (now Tribute Labs) for legal structuring. Handling administrative and compliance issues and community support through DAO tools. The initial fee is 2% of the subscribed capital's annual fee, dropping to 0.7% after five years. (Source - This Week in Startups - LAO's subscribed capital and explanation of the 2% annual fee).

2) Open Law does not charge carry; members make their own decisions. Flamingo DAO does not have investment rights.

3) In addition to the above fees, service providers will be entitled to 2% of the total revenue from any NFTs acquired by Flamingo DAO. If the service provider diversifies the ownership interests of NFTs acquired by Flamingo, then it is 2% of those ownership interests.

4) Market commissions, such as 2.5% for OpenSea.

• Competitive Advantages

Note: Flamingo DAO has a very limited operational history compared to common DAOs, and it is in a cryptocurrency bull market, making it perhaps too early to draw conclusions.

1. While the competitive landscape is not yet clear, Flamingo DAO has the potential to compete for investment opportunities with other DAOs on one hand and with venture capital firms and traditional investors on the other. The ability to identify new deals and opportunities: in a highly dynamic, decentralized industry, participating individuals are distributed globally, making it far more challenging to scout terrain and identify deals than in a centralized world, such as investing in Silicon Valley startups.

1) Comparison of FlamingoDAO with VC.

FlamingoDAO has "collective intelligence" and a flat organizational structure, in which there is a network of 70 digital asset experts from diverse backgrounds, making it more suitable for identifying opportunities in a rapidly evolving ecosystem compared to traditional investment institutions.

2) Comparison of FlamingoDAO with other DAOs.

a. Flamingo has a high-quality member base, with members having long-term exposure to the blockchain and NFT ecosystem, setting it apart from most DAOs. Although competitors like Pleasr DAO have also curated a high-quality member base, the high-quality curator network further strengthens this, assisting Flamingo in identifying trends and emerging opportunities without making any purchasing decisions.

b. Unlike many competitors, FlamingoDAO is a relatively tight-knit cavalry of over 70 members, potentially leading to higher participation rates. Aaron Wright (in this podcast) cited "60%" as the average participation rate across all DAOs in the LAO network. However, this data is much smaller than some peers (like Fingerprints DAO with 250 members), which may be better at discovering long-tail projects. Of course, time will tell us more about the potential trade-offs between DAO scale and member participation rates, as well as how governance can offset each other.

c. Goodwill, reputation, and community: The nascent NFT and cryptocurrency industry is highly idealistic and purpose-driven, with a good reputation and community guiding the generation of valuable deal flows.

3) Comparison with VC.

This is another area where DAOs, with the combined networks of all members and a spirit aligned with the ecosystem, may have an advantage over traditional investors.

4) Comparison with other DAOs.

Flamingo is the most prominent, earliest, and largest DAO. It is referred to as the Medici of NFTs and is the only DAO listed in Fortune magazine's list of the 50 most influential people in NFTs.

2. Speed and Flexibility

1) The structure of DAOs is optimized for speed and flexibility. Recently, LAO launched a new DAO called Neptune DAO, which completed a $20 million transaction in 40 minutes, while VCs typically take 3 to 6 months.

2) VCs are limited in the range of activities they can engage in, while DAOs can find interesting ways to increase the value of their holdings and discover additional monetization methods. For example, DAOs can launch new DAOs for their most popular NFTs and monetize their assets in digital museums, etc.

3. Compliance Cloak:

FlamingoDAO is member-guided, with members having the right to vote and invest, minimizing any delegation or agency conflicts.

4. First Principles:

NFTs are an emerging investment field, and regulatory bodies are still figuring out how to regulate them. Flamingo DAO, due to its relationship with Tribute Labs, has been structurally conservative as a "wrapped DAO" to meet regulatory compliance. Its lawyer founder Aaron Wright also makes it best suited to navigate the ever-changing regulatory environment.

Competitive Position

• Industry Outlook

1. NFTs are an emerging industry that has seen significant market capitalization growth over the past year, reaching $10.7 billion in the third quarter of 2021.

2. The public is gradually showing more interest in NFTs—celebrities, investors, individuals, and other DAOs (Democratic Autonomous Organizations) are coming together to bid on new artworks and projects. Some prominent "collectors" and holding DAOs (including Pleasr DAO and Fingerprints DAO) are among them. Additionally, members of DAOs often jointly purchase a single NFT, such as Constitution DAO, which can be used permanently for purchased goods.

3. The barriers to entry in this field are very low, and as the tools and infrastructure that enable DAOs to start are improved and established, the threshold for individuals to enter this field will only become lower. Meanwhile, laws like the Wyoming bill eliminate some regulatory uncertainties surrounding DAOs.

• Industry Position

1. For NFTs, Flamingo is the oldest and largest use case, yet it has only been established for a little over a year, indicating that this industry is still in its infancy.

2. Threats Faced:

1) NFT Market Collapse:

Even optimistic investors/collectors must admit that NFTs may currently be in the throes of speculative frenzy—many NFTs will become worthless.

2) Ethereum Price Collapse:

All of Flamingo's reserve assets are held in Ethereum, and a drop in ETH prices may limit the resources they could have accessed.

3) Innovations in DAO Formation and Governance:

a. To comply with regulatory requirements, Flamingo DAO only needs to have recognized members in the U.S., with a maximum personnel limit of 99. This may disadvantage it in competing with other global teams with broader memberships (although there may be a Dunbar number limit for optimal investment DAO performance).

b. The high entry price and limited membership of DAOs create exclusivity, which is detrimental when exploring investment markets with long-tail characteristics.

c. Flamingo DAO is supported by service provider OpenLaw, which is co-operated by Flamingo DAO members Aaron and Priya Desai. The rapid evolution of the market may lead to better tools emerging, and considering Open Law's economic interests, Flamingo DAO may theoretically be reluctant to deploy new tools.

4) Entry of High-Level Players: Currently, the NFT industry is too small for capital to provide strong protection. However, if it develops into a larger industry in the future, the situation may change. Based on the above scenarios, Flamingo and other DAOs may also face fierce competition from participants with larger and deeper capital pools in the future.