In the past two years, there has been a notable decline in the activity and popularity of countless DAO projects, most of which very optimistically popped up during the 2021 hype, when NFTs and web3 technologies entered the mainstream. In 2022, “the broader NFT market experienced a 91% drop in trading and sweeping layoffs” [1], including several very promising propositions from the music production and distribution field - firms which were looking to build an infrastructure that could enable fairer revenue streams for musicians and labels by taking a long-term perspective.
Such a scenario feels almost existential, but Katherine Bassett flips this grim view in her recent article for Water & Music titled Web3 music strategy in a bear market: Tips from our community, [2] suggesting that the departure of most speculative actors from the game could turn out to be a blessing, since the few remaining firms are the ones driven by a communitarian spirit and belief in the possibility of building a durable and sustainable technological infrastructure. Bassett collects the opinions of music practitioners such as Syd Sidney, Heno, Jamie Reddington, and Black Dave, in order to examine this prospect further. Their testimonies remain optimistic considering the monumental market loss and the current lack of investment into the ecosystem’s infrastructure.
The article mentions several notable shifts that markedly contrast the hyped phase. There has been a rise in the number of free mints and open editions, for instance, and the number of NFT campaigns released in autumn of 2022 has doubled. The article is hopeful that the market will stabilise at some point and that the number of collectors will increase. There is a disparity between independent creators, who don’t enjoy the same success as before, and those who depend on platforms such as Sound or Catalogue to maintain their pool of collectors. One positive element is that the NFT market is now more focused on unlocking certain features, instead of merely incentivising speculation through infinite resale.
In Bassett’s article, some tips are listed for surviving the bear market, such as staying flexible with pricing, experimenting with different platforms and blockchains, and finally, prioritising world-building and storytelling over the fetishising of technical features.
The article concludes that returns will remain unpredictable, but that blockchain serves many as a kind of blank slate. Experimentation and openness, therefore, remain key. [3]
What are cooperatives?
The International Cooperative Association defines cooperatives as “autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise”. [4]
Following this basic description, there are some overarching seven Rochdale principles that can help to refine a definition [5]:
1. voluntary and open membership
2. democratic member control, with each member having one vote
3. economic participation by members
4. autonomy and independence
5. education, training, and information
6. cooperation among cooperatives
7. concern for community
What are DAOs?
A Decentralised Autonomous Organisation – a.k.a. DAO – is an organisation owned and administered by its members, not so different from an offline cooperative. As cooperatives, DAOs don’t have a centralised leadership. Their rules regarding ownership and administration are usually built upon flat, democratic structures, and are written into smart contracts, and thus become automatised. In his article Blockchain: the Internet of Cooperation [6], Dacade founder, Moritz Stellmacher, claims that DAOs are the most direct example of how blockchain technology can enable cooperation.
The rules and methods for managing governance differ from organisation to organisation, whether centralised or decentralised. They depend mainly on the organisation’s ultimate goals. As mentioned earlier, each DAO has the capacity to organise and build a particular economic infrastructure based on their needs, which are intended to be coherent with its vision, maintaining flat hierarchies and giving voice to everyone engaged. One way to define this kind of infrastructure is by creating a native token for the organisation, in addition to a governance token. The first would allow internal and external circulation of funds, whereas the governance token grants rights among the community to take part in core decisions and platform development.
Financials
As with any cooperative, the financial flows of a DAO are made possible thanks to its members, their contributions, their voting regarding the treasury’s use, and community maintenance. This collective infrastructure can help to support the material realisation of projects and ideas, since the individual contributions enable a potentially significant fund pool, built up upon them. The decision of where to allocate these funds should be taken collectively, and, should such a financial structure and operation allow for revenue, there would be fair sharing among DAO members. Moreover, the organisation can create its own currency and value proposition, and even exchange it on the market. The increase in the value of the native token, and, thus, the pool funds, allow the funding of further productions and other investments.
Decision-making
The decisions about whether technical issues, operational, or financial ones are taken through collective voting. The main point of such decision-making infrastructures is to allow the possibility for cooperation. In the case of music production, in a regular constellation, a master recording is usually owned by the agency. Through web3 platforms, the master can be owned by the users, creating a flow of distribution with a fairer ratio that compensates every individual who has contributed and the community to which it belongs.
Community building
Water & Music would agree that “shared implicit characteristics across self-described DAOs include membership, financing and governance activities that are mediated by tokens and can be viewed transparently on the blockchain by the wider public” [7]. In fact the ICA definition of a cooperative – “internet communities with a shared goal and a shared bank account” – would hold for most DAOs. They represent places where like-minded individuals come together to gather their resources, talent and vision, and construct a sustainable community in which token holders can participate in the organisation’s cultural, organizational and financial growth. In other words, DAOs represent an alternative corporate built on the blockchain, yet where the emphasis lies on the power of collective contribution, as opposed to the amount of capital you might have invested” [8]. Regarding musicians, low prices, building a community, multitasking and technical burdens are still the main problems that musicians presently confront. And the question arises: could these issues finally be solved by new forms of digital cooperatives?
Practical
In practice, DAOs typically consist of (at least some of) the following [9]:
- Group chat: Where members can discuss the DAO’s goals, make proposals, and reach a rough consensus on decisions.
- Treasury: It holds the DAO’s funds, e.g. cryptocurrencies and NFTs. The treasury is typically a multi-signature (multi-sig) wallet that needs multiple entities to sign transactions.
- Token: Most DAOs issue their own tokens that can provide access and represent ownership and decision-making power.
- Governance tools: DAOs often use governance tools that enable members of a DAO to vote on important decisions.
Capital
Raising capital for projects is often a significant challenge, especially for founders who don’t have connections to investors. DAOs can raise capital publically at any stage by issuing tokens.
Marketing
Spreading awareness and marketing about a project to a wider public is usually very resource-intensive. To be part of a DAO and might be a good incentive to compromise in these kinds of tasks and work towards spreading awareness of a project. In DAOs this process happens organically.
There are challenges most DAOs face:
- Security: Some blockchain projects can’t guarantee immutability in the face of sufficiently powerful adversaries, despite having immutable programs and data on paper. Poorly-written code, deficient user experience and sloppy user behavior could lead to hacks and losses. Hence, security is one of the biggest and most fundamental challenges.
- Energy usage: Blockchains such as the ones on which Bitcoin is operated have high energy usage for the sake of securing the data (proof-of-work). On its end, the Ethereum blockchain figured out an alternative in September 2022 with its fork, and functions now through proof of stake (PoS). Their security still needs to be proven, but the latter is demonstrably better in terms of efficient energy usage. Most blockchains that came after Ethereum have followed the PoS protocol, sticking to systems that are not as energy-intensive as Bitcoin is, and Ethereum was.
- Usability: Blockchain technology is still very young and was built by technically savvy engineers. It is, therefore, difficult to use and understand for a broad range of users.
- Coordination: Managing large-scale decentralised projects with a vast number of members is difficult. Decision-making can be very slow, and coordination between working groups is hard compared to offline, centralised organisations. On-chain tools such as Aragon or Coordinape, or Collab.land are available to facilitate this process reliably.
Are DAOs digital cooperatives?
DAOs can be thought of as blockchain-enabled versions of cooperatives. The description of a cooperative mentioned above, an “autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise” [10], also holds for most DAOs.
The difference between cooperatives, as traditional organisations, and DAOs is that DAOs enforce the rules of governance and ownership via immutable code instead of pure trust or legal contracts.
DAOs are not necessarily only digital, as many of them don’t use on-chain technologies. But we would agree that what differentiates a DAO from a traditional cooperative is the basis of a decentralised structure supporting it. DAOs usually use on-chain tools in order to run their governance. The benefit of this is that the most complex steps are automated and run smoothly without any individual entity having to maintain it. However, there are many tasks in DAOs that happen off-chain, their voting and overall communication with the members is manually executed. So, why should they be considered DAOs? What kind of benefits does it confer? What are the drawbacks?
An example of resilience
In March 2022, the research platform Water and Music published a survey titled The state of music DAOs [11] in which they reviewed a set of successful projects self-defined as DAOs, which were succeeding in different aspects of creating sustainable DAO-based musical architecture, including building a supportive community. The survey was based on a series of interviews and case-specific research [12]. It involved projects such as PHLOTE, SongADAO, Ampled DAO, Elektra DAO, Good Karma Records, Holly+, RAC, MODA DAO, Mudd DAO, Dreams Never Die, Sone (a spinoff of Topshelf Records), and GENRE (spinoff of Leaving Records).
Regrettably, prior to publication, most of these projects have lost traction and users and are now inactive or in a standby state. Two examples of resilience are, however, PHLOTE and MODA DAO, have continued operating and developing their infrastructure. MODA DAO is “built on a non-profit foundation where that middleman[’s] cut is reduced, automated, improved, and streamlined, and the value that’s created goes to the token holders and back into the ecosystem.” The project has a constitution that needs to be signed by the users, who would need to hold MODA tokens and stake them in order to take part in the decision-making process. For instance, users would have to “stake MODA behind each track that they wish to ‘exploit’ in the Music3 way” [13]. Due to the fall in prices they created a buyback proposal, because they consider the token to be currently underpriced.
Options that can be voted on by the DAO include:
- the membership structure for ensuring authenticity and network effect
- an open on-chain music registration
- International Standard Collaboration Code (ISCC) contract creation
The Potential of Digital Cooperatives
As the Water & Music article points out [14], one of the main challenges of any music project – whether web3 or web2 – is building a sustainable community. Every community has the capability of generating its own economic flow through each member’s individual contributions. Goals that would be impossible for a single individual can be reached, and the economic power of the community can grow thanks to strategic contributions, in addition to external market interactions. In fact, individual contributions don’t have to be huge to maintain a high-value community as a whole. This can incentivise individuals to contribute. Incentives can take different shapes, though mainly economic ones; they are crucial to keep the community active and motivated. With single members contributing economic means, a pool or treasury can be created to fund the production of upcoming projects, including artworks, records, concerts, and other formats.
The choice of what is to be produced is carried out by a collective decision taken by the DAO members and it is verified through on- or off-chain voting.
Navigating on-chain governance
The on-chain dimension is also crucial in terms of managing the treasury and executing decisions through votes from the members. The automation of certain steps can facilitate the process of unlocking the funds after a decision has been reached, for instance.
The possible participants in on-chain governance include the following:
- Miners: They operate the nodes, which validate the transactions.
- Developers: They are responsible for core blockchain algorithms.
- Users or participants: They use and invest in various cryptocurrencies and blockchain products.
Users, or, mainly, stakeholders, get incentives in order to participate in this voting. For example, each node can earn a cut of the overall transaction fees for voting, while developers are rewarded through alternate funding mechanisms [15].
Governance
Finding and implementing the right governance system is still a significant challenge. Coin voting, where individuals with the most financial resources have the most voting power, is currently an industry standard, but it might not lead to the best outcome for a project, as discussed by the Ethereum inventor Vitalik Buterin in his post Moving beyond coin voting governance [16]. All in all, research and experience with new governance systems might lead to exciting solutions beyond the blockchain space.
To learn more about governance and different voting possibilities in a decentralised organisation check our upcoming entry on Governance.
Redefining Music Labels through DAOs
Music cooperatives have existed for a long time. The Barcelona-based label Repetidor, founded by Daniel Ardura, is an example of a decentralised structure with a common treasury devoted to finding future projects that the community may deem to be of interest. The structure is flat, every member contributes with a small monthly fee and the funds are reinvested in record distribution and marketing services upon voting.
There are two main uses of music DAOs that are relevant for the industry. One is the replacement of the label’s role, or the creation of fairer redistribution of the conditions between labels and musicians. DAOs could allow the musicians to become independent from the labels, rendering any relationship optional. Thus, revenue distribution can be redefined, disrupting the usual exploitative split model, which is invariably favours the label.
Community Building
In their article Mapping the fan journey in music and Web3 [17], Water & Music researchers point out tips for keeping a healthy and stable fanbase. Shared values among a community, having low expectations for shared experiences - beyond the music itself - in NFTs, and being curious and open to discover new things around music NFT projects. These are key steps to retaining the animating drive and maintaining a sustainable community. In fact, fan experience has been overlooked so far, focusing on artists and platforms over other considerations. Perhaps the time has come to shift focus to the fan base, ideally making the projects more accessible, since many are gated at present and require the purchase of token/s before allowing participation.
Legal
Creating the legal framework for large-scale traditional organisations is very time and resource-intensive, and setting up a joint bank account can take months, and might be impossible for some members, depending on their jurisdictions. This is before considering the difficulty of scaling up to gain large intakes of members. A decentralised on-chain structure including a collective wallet system, e.g. multisig, can allow sharing and processing transaction funds smoothly, while remaining in a jurisdisctional grey zone. However, in a recent report Ernst & Young Global foresee that, “without great care, participants are exposed to high levels of legal and tax risk [18].”
The report counts 13,000 DAOs in existence with a combined total treasury (invested funds and liquid assets) of nearly US$23b, as of May 2023. EY suggests registering a legal entity, or legal wrapper, over the DAO structure, in order to “achieve a basic level of legal and tax certainty”. A so-called legal wrapper would “introduce accountability, clarifies tax and reporting obligations for DAO members and the DAO and can improve regulatory compliance”, but it would bring the organisation a degree of centralisation, prompting the question of “whether it is necessary for DAOs to sacrifice a level of autonomy and decentralization to fit within existing legal and regulatory frameworks [19].”
In the paper A Primer on DAOs, for the Harvard Law School Forum on Corporate Governance, authors Gail Weinstein, Steven Lofchie, Jason Schwartz, and Frank Fried comment on a congeries of legal issues facing DAOs, including [20]:
- applicability of the U.S. securities laws
- lack of recognised legal status — leading to potential unlimited liability of members and other issues
- applicability of the (US) Investment Company Act
- antitrust uncertainty
- taxation uncertainty
- pending federal legislation to regulate digital assets - the RFIA (Responsible financial Investment Act)
- other regulation — Tornado Cash
In their article Unlocking the Potential of DAOs: Legal Challenges, Regulatory Solutions, and Opportunities for a New Paradigm in Business, Daniel Gässl from the University of Innsbruck and Julian Weidinger from the Munich University of Applied Sciences comment on the DAOs legal structures and implications, listing five possible concerns [21]:
- In Partnerships, individual partners can be held equally liable, meaning that a plaintiff can hold any one of the participants liable for the full extent of damages and to seek payment from the other participants.
- Unincorporated Associations do not have their own legal personality, and, therefore, cannot assert claims against other parties or be prosecuted in court.
- Legal ”Wrapper” Entites enable DAOs to perform functions beyond their capabilities, such as hiring staff, paying taxes, and owning property, including intellectual property rights.
- DAO as Company: there may be a company associated with the DAO, which could potentially be a valid party to legal proceedings.
- The Coalition of Automated Legal Applications (COALA) Model Law compares traditional corporate law standards to technological assurances offered by blockchain technology, resulting in the creation of ”functional equivalents” that allow DAOs to operate inside a legal framework.
Future Horizons for Music
Water & Music analyses highlighted the opportunity of web3 technologies on the scale of “sustaining long-term community and culture” [22], and not of “maximising short-term profitability.” Now that the bull market is history, rendering speculation pointless, there is more room for focusing on building a motivated and enduring community, as well as exploiting the potential of the technologies for the sake of creating democratic systems and flat hierarchies.
Is there hope for web3 in general, and specifically for web3 in the realm of culture and music? We agree with Water & Musics’ claims that the bear market and subsequent shrinking of propositions might be a blessing in disguise that can be navigated effectively by those who genuinely believe in the potential of decentralised technologies. It has been proven that, so far, DAOs can not grant specific outcomes and serve as viable financial products. Therefore, the prudent path for the short term, until these technologies mature, is a path of experimentation, a ride to enjoy, and an opportunity to learn. Regarding the financials, we believe the main point is to focus on the fairness of the revenue distribution, while keeping structures transparent. This approach may be more productive than having very precise ideas of how the outcomes will turn out.
[1]
“Web3 music strategy in a bear market: Tips from our community”, April 17, 2023, https://www.waterandmusic.com/web3-music-strategy-in-a-bear-market/
[2]
ibid.
[3]
“Web3 music strategy in a bear market: Tips from our community”, Water & Music, April 17, 2023, https://www.waterandmusic.com/web3-music-strategy-in-a-bear-market/
[4]
“Cooperative identity, values & principles”, ICA, https://www.ica.coop/en/whats-co-op/co-operative-identity-values-principles
[5]
“Cooperative”, Wikipedia, October 02, 2023, https://en.wikipedia.org/wiki/Cooperative
[6]
“Blockchain-the internet for cooperation”, Medium, July 07, 2022, https://medium.com/@moritzfelipe/blockchain-the-internet-for-cooperation-37a606bb3c0
[7]
“The state of music DAOs”, Water & Music, March 08, 2022, https://www.waterandmusic.com/the-state-of-music-daos/
[8]
“Music Related DAOs - What's Out There?”, NFT Plazas, January 04, 2023, https://nftplazas.com/music-related-daos/
[9]
“Blockchain-the internet for cooperation”, Medium, July 07, 2022, https://medium.com/@moritzfelipe/blockchain-the-internet-for-cooperation-37a606bb3c0
[10]
“Cooperative identity, values & principles”, ICA, https://www.ica.coop/en/whats-co-op/co-operative-identity-values-principles
[11]
“The state of music DAOs”, Water & Music, March 08, 2022, https://www.waterandmusic.com/the-state-of-music-daos/
[12]
“Water & Music $STREAM S1.5 - Artist/Label DAO Breakdown Chart”, Google Sheets, https://docs.google.com/spreadsheets/d/1Y7kXUvr4RaD1qz87HI1n15iRtza0LEIQFBsuc9PHoQI/edit#gid=0
[13]
“An introduction to MODA DAO”, Medium, November 30, 2021, https://medium.com/modadao/an-introduction-to-moda-dao-e9a5ac4e8ccd
[14]
“The state of music DAOs”, Water & Music, March 08, 2022, https://www.waterandmusic.com/the-state-of-music-daos/
[15]
“On-Chain Governance: Definition, Types, Vs. Off-Chain”, Investopedia, https://www.investopedia.com/terms/o/onchain-governance.asp
[16]
“Moving beyond coin voting governance”, Vitalik Buterin's website, https://vitalik.ca/general/2021/08/16/voting3.html
[17]
“Mapping the fan journey in music and Web3”, Water & Music, May 16, 2023, https://www.waterandmusic.com/music-web3-fan-journey/
[18]
“How to navigate tax and legal complexity associated with DAOs”, EY, August 02, 2023, https://www.ey.com/en_gl/tax/how-to-navigate-tax-and-legal-complexity-associated-with-daos
[19]
ibid.
[20]
“A Primer on DAOs”, The Harvard Law School Forum on Corporate Governance, September 17, 2022, https://corpgov.law.harvard.edu/2022/09/17/a-primer-on-daos/
[21]
“Unlocking the Potential of DAOs: Legal Challenges, Regulatory Solutions”, https://www.researchgate.net/publication/371539092_Unlocking_the_Potential_of_DAOs_Legal_Challenges_Regulatory_Solutions_and_Opportunities_for_a_New_Paradigm_in_Business
[22]
“The state of music DAOs”, Water & Music, March 08, 2022, https://www.waterandmusic.com/the-state-of-music-daos/