Dialogue Alliance DAO: Don't start a "company" in the form of a DAO, the product is more important than the economic model

Source: "The Web3 Founder's Playbook" podcast

Compiled by: Deep Tide

Do you know about Alliance DAO?

Its predecessor was the Web3 accelerator DeFi Alliance, which has participated in the incubation of 140 crypto startups and DeFi projects, including star projects like 0x, Alpha Finance, dYdX, Kyber, Olympus DAO, Paraswap, Ribbon Finance, Sushiswap, Synthetix, and Zerion.

In January 2022, DeFi Alliance created the decentralized autonomous organization Alliance DAO and completed a $50 million funding round, with over 300 contributors joining the DAO and participating in the funding. Mentors of DeFi Alliance include Solana CEO Anatoly Yakovenko, Polygon COO Sandeep Nailwal, Synthetix CEO Kain Warwick, and others. It has now become the largest acceleration DAO in the WEB3 field.

Christy Choi, former investment director at Binance Labs, was asked in an interview which top Twitter accounts in the crypto space are worth following.

She replied, "I currently recommend only one, Qiao Wang, co-founder of DeFi Alliance. He is the only person worth turning on Twitter notifications for. He is very good at capturing what is happening in cryptocurrency, but explains it in a very insightful way. Simple words, but very insightful; he is one of the people I respect the most in the crypto space."

What are the thoughts of Alliance DAO's two founders, Qiao Wang and Imran Khan, at this moment?

The following content is a整理 of the discussions by Alliance DAO co-founders Qiao Wang and Imran Khan on "The Web3 Founder's Playbook" podcast, hosted by Jason, founder of Blockworks.

TL;DR

1. This is the first cycle where crypto intersects with other macroeconomics. Many traditional funds and the startups they invest in have reached a consensus—every founder should tighten their belts and remain lean.

2. If you are in the Pre-seed stage, the first thing is to go out and raise funds to prove the value of the community. In fact, some founders we work with have started to lower their valuations to seek the funding needed for the next two to three years. In this case, you just need to raise funds and then go back to work.

3. I think this is very likely the last cycle for cryptocurrency. Because in the last cycle, Bitcoin grew from about 1200 to 20,000, roughly a 20x increase, while this cycle has grown from 20,000 to 60,000, a 3x increase. The growth is much smaller than in the previous cycle. I think cryptocurrency will likely trade like Nasdaq in the future. But in terms of cycles, it may eventually become a trading model similar to other risk assets.

4. Now may be the best time to launch products. There is too much noise in a bull market. When these startups face reality, they begin to realize: without product traction, token prices will eventually decline and they will be blamed by holders.

5. I advise startups not to use tokens as a way to attract early users, but to use products as a market entry strategy, building their products into a foundational layer to serve the community. Without a product as traction, the token itself will only create more noise.

6. Don’t start as a DAO. Much of our internal governance/decision-making or interactions among members are not as you typically see; I think community governance is extremely inefficient and meaningless for most products. I believe DAOs only make sense for some niche products.

7. You can’t just raise funds and become a DAO; that won’t work. You need to build a product and establish a mechanism to sustain the product and community, making people fall in love with the product and willing to contribute. Gradually, you can let the community take over and think about the product's development direction.

8. One question I tend to ask founders is: how many potential customers have you talked to? Just this one question can reveal the founder's views on the product and market. If you are building tools for a DAO, I might ask: how many DAOs have you talked to? What did you learn from those conversations? I like founders with unique insights who can teach me something.

9. There is a lot of noise in crypto, and founders often forget their purpose is to build a great product for people. Some founders get lost in tokens; for many founders, token economics has become an important topic. But I don’t believe there is a truly effective token economics; we are still entangled in whether token economics is user-oriented or protocol-oriented.

10. Many founders are too obsessed with numbers. They focus on Discord numbers and Twitter followers. These are the worst kinds of vanity metrics, and I urge founders to ignore these numbers because usually quality is more important than quantity.

11. Coinbase is moving towards being crypto-native, while FTX is moving away from being crypto-native, so Coinbase will be the winner in crypto, while FTX may be the winner in other markets.

Main Text

Jason: We are fortunate to have two founders from Alliance DAO, Qiao Wang and Imran Khan, with us. Alliance DAO completed a $50 million funding round in January this year.

It is the most powerful accelerator in the cryptocurrency space, covering over 80 startups with a total value exceeding $13 billion, with a community of 120 mentors and over 400 network members. This data may have some discrepancies; I am not entirely sure of the latest figures.

Imran Khan: We have around 140 startups, and the other data is correct.

Jason: Many people are restless in the bear market, and in this episode, I want to give founders and builders some advice on "how to deal with the market." Regarding our current situation, I will pose the first question: what is the current market situation?

Qiao Wang: This is a very tricky question because, first of all, no one can predict the market direction, but it can be said for sure that this is the first cycle where crypto intersects with other macroeconomics. Many traditional funds and the startups they invest in have reached a consensus—everyone/founder should tighten their belts and remain lean. I strongly agree with this cautious advice.

I like to go against the trend. But if the market doesn’t give you the opportunity to raise funds at a very favorable valuation in the next 12 months or so, then going against it makes no sense. You should strive to remain lean because startups have path dependency; if you run out of money, you are done and can never go back. So I think it is wise for founders to stay lean.

My advice to our founders is very specific, tailored to each startup's situation:

• Some startups have raised a lot of funds and have plenty of time to take this opportunity to expand their market share.

• Some startups that haven’t raised much funding may have a six-month runway, and in this case, staying lean makes more sense. But the exact numbers: when should they start? How much should they raise? How much should they cut? These things are very personalized, and I really don’t want to give all founders a one-size-fits-all answer.

I’m curious about Imran’s thoughts.

Imran Khan: It largely depends on the stage the founder is in. If in the Pre-seed stage, perhaps with a team developing a product, the first thing is to go out and raise funds to prove the value of the community.

Investors are more attentive to companies they like. Investors want to see something attractive; they want to see an MVP and need to understand the founder's thoughts on hiring.

Teams that have previously raised funds are now at a loss. For them, raising funds again at expected valuations becomes more difficult. In fact, some founders we work with have started to lower their valuations to seek the funding needed for the next two to three years. In this case, you just need to raise funds and then go back to work.

Jason: Yes, surviving is key. Qiao, you mentioned an interesting point that this market cycle is the first time the crypto market is so intertwined with the global macro market. Many cryptocurrency holders say this is just another cycle. Every few years, we experience a new cycle, but this is actually the first time cryptocurrency is facing off against the Federal Reserve and the global macro market.

Since January 2009, crypto has been in a bull market, but now it is entering a global macro bear market for the first time. I don’t know if the bear market will last a year or two, nor do I know what it will look like, like the internet bubble of 2000 or the global financial crisis of 2009, but it does feel like macro control.

So Qiao, does this give you a different perspective on the intensity or duration of this bear market?

Qiao Wang: I think this is very likely the last cycle for cryptocurrency.

• Because in the last cycle, Bitcoin grew from about 1200 to 20,000, roughly a 20x increase.

• While this cycle has grown from 20,000 to 60,000, a 3x increase. The growth is much smaller than in the previous cycle.

Maybe this cycle is not over yet, maybe this is the last cycle, or maybe this is not a cycle at all. I think cryptocurrency will likely trade like Nasdaq in the future. But in terms of cycles, it may eventually become a trading model similar to other risk assets.

Jason: From an investment perspective, will this make cryptocurrency less exciting?

Qiao Wang: If we use traditional finance language, like Beta vs Alpha. Beta is indeed less exciting. In hindsight, every previous cycle had an accelerated peak period where Beta was predictable. But Alpha is still something to look forward to, unless you think cryptocurrency won’t rise or innovate anymore. There are still many good products in the market for investors to choose from.

Jason: Imran, do you see it this way too? Over time, the cycles are getting smaller and not as intense as the last one. Or do you agree with Qiao that this is the last cycle?

Imran Khan: I agree with Qiao’s perspective. I think we are in the early stages of the crypto market.

The reasons are as follows:

• Institutions are considering incorporating cryptocurrency into their investment/product strategies and even thinking about their development direction for the next ten to twenty years.

• Many crypto projects are starting to collaborate with traditional markets. For example, projects like Stepn are beginning to establish partnerships with major footwear brands.

So I do believe there are still many opportunities in the market.

Jason: If a startup has a dozen employees and is considering launching a new product or token, what would your advice be?

Imran Khan: Now may be the best time to launch products. There is too much noise in a bull market. When these startups face reality, they begin to realize: without product traction, token prices will eventually decline and they will be blamed by holders.

Jason: Imran, about three months ago, you talked about CAC (Customer Acquisition Cost). Can you elaborate? Because we may have entered a market that is harder to acquire users than in the past.

Imran Khan: In Web 2, you needed to set aside some money to pay for Facebook or Twitter ads to attract users to your product. It’s like a funnel for recruiting users.

In Web 3, you don’t need to advertise on Twitter or Facebook because we want to be Crypto Native. So tokens ultimately become a strategy for acquiring users, aiming to make users who use the product richer/better off.

Tokens are a good way to attract customers and investors to support your startup, but they can also harm them. If the product is unsustainable or what is being built doesn’t work, it can have the opposite effect.

For example, Luna, people were very interested in this decentralized stablecoin. But when the product ultimately failed to deliver, all the investors/believers in that product were harmed.

So CAC is very important for crypto startups. I advise startups not to use tokens as a way to attract early users, but to use products as a market entry strategy, building their products into a foundational layer to serve the community. Without a product as traction, the token itself will only create more noise.

For example, dydx was founded in 2016, launched its product around 2018, and introduced its token around 2021. They took four years to launch the token, at which point they could almost compete with Uniswap in terms of trading volume. After that, they airdropped tokens and surpassed Uniswap.

Therefore, tokens can be a way to grow strategically, but they cannot be the only growth strategy.

Jason: Many L2/expansion solutions have done the same thing; they didn’t launch tokens right away but first created a product that everyone liked and used before launching the token. Qiao, what do you think is the right time to create a DAO? Should founders consider structuring as a DAO from day one?

Qiao Wang: Don’t start as a DAO. Much of our internal governance/decision-making or interactions among members are not as you typically see. I think community governance is extremely inefficient and meaningless for most products. I believe DAOs only make sense for some niche products.

Jason: Why do we need a DAO?

Qiao Wang: There are two reasons.

• One is that DAOs are digital-native and borderless; it’s hard to start a borderless company. Collaborating with multiple jurisdictions is quite challenging, but DAOs eliminate that barrier.

• The second is to imagine: in Uber's early days, if Uber wanted to incentivize drivers with equity, it would have been impossible because you would need to ask 10,000 Uber drivers to sign documents. You can imagine how many legal obstacles there are behind that. So DAOs also eliminate this legal barrier in incentivizing early contributors.

DAOs are similar to NFTs. The significance of DAOs lies in eliminating legal friction, just as people talk about NFTs as digital-native intellectual property—this completely removes traditional legal frameworks and may bring about a series of new use cases. Therefore, fundamentally, this is the value proposition of DAOs compared to traditional companies.

Jason: Imran, if a DAO founder comes to you and says they have four people, a good idea, have built an MVP, and just raised a million dollars in seed funding, what advice would you give them?

Imran Khan: My biggest advice is to build a product and establish an early community around that product. If the startup is going to announce a token, I would give the same advice regarding the token, because without a product, building a community is meaningless. Of course, the product can be anything.

However, if there is no early traction and it’s unclear why the community would come together, then there’s no need to establish a DAO.

So I tell founders from the start to build a product, find the first batch of users, and double down. By building an increasing number of product offerings to attract these users, once the community grows, they can start considering decentralizing certain operations. This is very beneficial for the development of founders and startups.

Take Maker DAO as an example; Maker DAO started as a talented DAO, but then they realized they couldn’t scale without centralized management. So they launched a product in 2018 and voted to become a foundation. They transformed from a DAO into a centralized organization.

From 2018 to 2021, they developed this incredible growth marketing strategy, with their biggest goal being to integrate DAI into as many protocols as possible. After that, they initiated another vote and transformed from a foundation back into a DAO. Thus, all marketing teams, business teams, and risk teams eventually became sub-DAOs or established new DAOs separate from Maker DAO. Maker DAO launched in 2014 and became a DAO again in 2022.

You can’t just raise funds and become a DAO; that won’t work. You need to build a product, and also establish a mechanism to sustain the product and community, making people fall in love with the product and willing to contribute. Gradually, you can let the community take over and think about the product's development direction.

Jason: Does this change your view on scaling teams? How is scaling a team in Web2 different from Web3?

Imran Khan: Yes, in fact, we are considering streamlining our team and plan to expand certain business units through the community. We will recruit founders to build the best talent pool.

80% to 90% of the Alliance DAO team are former founders. We do this purposefully because our founders will ultimately be responsible for certain business units and then drive the development of specific projects.

Our organization is hierarchical, with five sub-units: Business, Product, Engineering, Risk, Regulations. Initially, the sub-units are closed but will open to those who contribute to them, and once open, they can work with our business leaders.

This semi-open community can effectively filter talent. In the short to medium term, we will be closed, but in the long term, we may be somewhat open.

Qiao Wang: I suddenly think of a specific type of DAO that makes sense from the start. I posted about it on Twitter a few weeks ago; it’s basically a creator incubator. It tends to favor YouTube and TikTok creators, as well as professional gamers—those who earn well but face high career risks, or people like chefs engaged in highly creative work.

Basically, DAOs serve creators in three ways:

• One is to scout, select, and invest in these high-potential creators;

• Two is to build tools to support them;

• Three is to promote these creators to the outside world.

The reason DAOs are meaningful for these creators is that they are essentially composed of other successful individuals in the crypto industry. For example, a DAO could be formed by a group of very successful YouTube creators, musicians, or professional gamers. What they would initially do is vote to select new creators they want to bring into the DAO—this is a key difference between these creator DAOs and incubator DAOs like ours.

Because for Alliance DAO, we need to think in reverse, but we can’t let everyone in the DAO vote against the entrepreneurs. However, for creators, professionals often know who has the potential to become someone like them. So voting makes a lot of sense for this type of DAO.

Creator DAOs voting on the list of other creators is actually similar to a token curated registry. (TCR: token curated registry where users collectively vote (using tokens) to decide which submissions are valid and which should be included in the list.) In the current Alliance DAO queue, at least three startups were initially established as DAOs in this manner.

Jason: Last year, L1 was quite hot, but now the narrative is slowly shifting to scalability/L2, etc. What kind of tech stack should builders focus on? How should they choose which L1 to build on?

Imran Khan: Every L1/L2 has its community and products. What I want to tell founders is to look at the communities and products being built and consider the technical background to see if it aligns with your vision for the company over the next two years and five years.

• When you see Solana, you think of gaming and NFTs;

• When you see Ethereum, you think of Sandbox, DeFi, NFTs, music NFTs, etc.;

• When you see Avalanche, you think of gaming;

• When you see Arbitrum and Optimism, you think of Ethereum and the rapid development of communities built on Ethereum over the long term.

So the question becomes, what types of communities do you want to collaborate with? What types of products do you want to work on?

What I want to tell founders is to remove tribalism from the paper and think about how to drive your company from zero to one. If you are pursuing high throughput and looking for zero-knowledge proofs as a way to obfuscate certain types of data, then go with Starkware. Founders must think long-term about which types of communities/companies to ally with.

Qiao Wang: The ecosystem does not have a specific order. When talking about the growth of Solana, Polygon, and Avalanche in past practices, it’s simply because they started from a much lower point.

Strategies should change with the market.

• A year ago, I told founders that Solana was rising and it was a huge ecosystem plundering opportunity.

• But now, Solana is somewhat saturated. Now you can build on Avalanche. By the way, this is just my advice to our founders.

Reasons to start building on Avalanche:

• It is rising and relatively new. If one day Avalanche encounters similar issues as Solana and Polygon—having faced capacity bottlenecks and declining several times over the past few months. Because Avalanche is EVM compatible, even if it encounters these issues, it can easily migrate to other EVM chains.

• Avalanche is more flexible, with more options. The best alternative to Avalanche might be Ethereum's L2, which in my view is slightly underpowered, but they are also emerging. Arbitrum and Optimism are also good choices.

Jason: Qiao, do you think that as some L2s start launching tokens, along with the boost from the bear market, funds and talent will begin to flow back from L1s to Ethereum L2s?

Qiao Wang: I don’t see talent flowing back in this regard. There are still many talents entering Solana, and there are still many talents entering non-Ethereum L2 chains. Imran, what do you think? We often see different things.

Imran Khan: I think this will happen, like a pendulum swinging back and forth. Due to Ethereum's scalability issues and high gas fees, founders began to turn to other L1s. But with the arrival of Ethereum's merge, a lot of momentum will return to ETH.

If we replicate all the work of the internet in the crypto market, we will need more than one layer to handle all the transactions happening, so in the long run, we will live in a multi-chain, multi-layer world.

Jason: Many Web 2 VCs advise founders to focus on ARR, CAC, user LTV, gross margins, free cash flow, etc. What metrics do you focus on in Web 3? Is it TVL? Is it what the company is doing? Or is it core competencies?

Imran Khan: It depends on the product. If you are considering DeFi, I think you don’t need to focus too much on TVL because many people incentivize through tokens, so liquidity is not really a good metric. What we want to see is actual transactions; what is happening in the DeFi protocol? Are people trading it as a product? For example, in Uniswap, how much collateral has been staked? How much has been borrowed again?

• For DeFi, I focus on actual metrics like trading volume and loans.

• For gaming, I would focus on daily/monthly active users and how frequently users play the game.

• For the NFT market, I would focus on how much in fees is being taken and track trading volume.

Overall, it’s about looking at trading volume and distinguishing how much of it is legitimate.

Jason: Qiao, when you talk to founders, do you look for one or two specific metrics?

Qiao Wang: We mainly work with early-stage startups, so there aren’t really any metrics that are truly important. However, the product is important. One question I tend to ask founders is: how many potential customers have you talked to? Just this one question can reveal the founder's views on the product and market.

If you are building tools for a DAO, I might ask: how many DAOs have you talked to? What did you learn from those conversations? I like founders with unique insights who can teach me something.

Jason: Imran, what do you think is very important for founders?

Imran Khan: There is a lot of noise in crypto, and founders often forget their purpose is to build a great product for people. Some founders get lost in tokens; for many founders, token economics has become an important topic. But I don’t believe there is a truly effective token economics; we are still entangled in whether token economics is user-oriented or protocol-oriented, and how governance tokens acquire value, etc.

Regulations also prevent many founders from developing products; founders should consider regulations as part of building their products, understanding the regulatory environment or the system they are in, and finding ways to build something consistent with those systems. You definitely don’t want regulators knocking on your door when you launch your product.

Three things founders should pay attention to are:

1. Don’t worry about product building, and don’t mind the crypto noise; build a product that can attract the first batch of users.

2. Token economics is not something you need to worry about today.

3. Pay attention to regulations because it is part of making your product fit for the market.

Qiao Wang: I agree with these points, especially regarding token economics. For years, I have been saying not to worry about token economics but to have a product that fits the market. Recently, someone asked in our founders' forum: how to manage the community? What is the view on the community?

I have some personal views:

1. I think the vast majority of crypto products do poorly in community management.

When I enter a Discord, it’s filled with people discussing prices/markets. This kind of community adds no value to the products being developed and easily distracts founders. Some founders ask me, "There are many interesting questions on my forum, like how should I handle this when the price drops?" In fact, these people are not users of the product; they are distracting you.

• First, as your user base, your Discord should be your potential users, not supporters.

• Second, the way to interact with the community is to seek product feedback from them, then update the product, and after they try the new features, they can tell you how to improve.

This is the best way to attract the community while building an excellent product.

2. Many founders are too obsessed with numbers.

They focus on Discord numbers and Twitter follower counts. These are the worst kinds of vanity metrics, and I urge founders to ignore these numbers because usually quality is more important than quantity. If you have 100 people in your Discord who love your product and continually give you feedback, that’s far more important than the actual total number of people on Discord/Twitter/Telegram.

Jason: Fund manager Jim Chanos said Coinbase is severely overvalued because the fee bonanza is about to end. Qiao, do you think Coinbase is overvalued or undervalued?

Qiao Wang: I tweeted last week that I bought Coinbase at around $50. I don’t know how much it is now; it may have risen a lot. Its value may still be undervalued; in a few years, the value of Coinbase's venture capital backing will exceed their current total market value.

Jason: I think so too. Imran, predict whether Robinhood will be acquired by the end of the year or not.

Imran Khan: Acquired. I say this because many interesting things are happening. SBF with FTX acquired BlockFolio to gain access to end users. SBF recently bought 7%/8% of Robinhood's shares. Meanwhile, Robinhood is competing with Metamask to launch a Web3 wallet.

We are starting to see a shift where whoever can enter can seize market share. SBF is chasing the traditional market, while Robinhood is trying to enter the crypto market by understanding more about crypto natives like Coinbase and FTX. Personally, I think Robinhood might fail.

By that time, I think SBF might own Robinhood, so FTX might acquire Robinhood by the end of this year.

Jason: Who will be stronger in five years? FTX or Coinbase?

Qiao Wang: What I understand is that Coinbase is moving towards being crypto-native, while FTX is moving away from being crypto-native. So Coinbase will be the winner in crypto, while FTX may be the winner in other markets.

Jason: FTX is indeed undergoing institutional regulation. Last year, they spent over a billion dollars to obtain licenses.

Imran Khan: I think Coinbase may become larger along with Coinbase Cloud and other things.

Jason: Their newly launched liquid staking is also very interesting. The NFT market has seen a 24% drop in market value and a 26% decline in total sales over the past 30 days. Qiao, what do you think will happen in the NFT market in the next six months?

Qiao Wang: NFTs are the most extreme on the risk curve and may change a lot with market fluctuations. I think NFTs will rebound after the broader market.

Jason: Imran/Qiao, other cryptocurrencies have dropped; why is the NFT market performing well?

Qiao Wang: Blue-chip NFTs are priced high, and holders are insensitive to price. Because the holders are already wealthy. When other parts of their portfolio drop by 30%, it doesn’t affect their lives, so they won’t sell their NFTs.

Imran Khan: The sale of artworks during financial crises and other periods has not been significantly impacted compared to asset prices. There are two reasons: one is a lack of liquidity. The second is that it is seen as safer. People believe art is more durable than all markets.

For example: Autoglyphs hit a bottom six months ago at around 115 ETH, and now it’s about 189 ETH. There have been three sales in the past few weeks, so people are buying the dip for high-quality generative art.

I categorize most PFPs and other similar art into the community category. I think they will be hit harder because they are inherently more unstable and speculative. But I believe art like Autoglyphs will retain value better.

Jason: Last question, Qiao, in terms of the percentage of ETH staked, Lido has been absolutely leading. It’s currently at 32%. A year from now, will the ETH staked in Lido be above or below 50%?

Qiao Wang: A year from now, it will be above 50%; five years from now, it may be much lower. Because the market will demand more decentralization.

Imran Khan: By the way, there is a company called Obol. I don’t know if you are following them; Obol essentially allows any validator that reaches a certain threshold to automatically delegate its excess assets to other validators through something called keys. So this means that over time, the community will demand decentralization through validators. To achieve this, Obol may be the best in its class. Obol was co-founded by Coinbase, Alliance DAO, and many others to help decentralize validators and push the blockchain forward.

Finally, I want to say to founders: if you have a verifiable idea, please contact us.