We are living in a brave new world, a planet of the apes.
This week, decentralized autonomous organizations (DAOs) took another step into the mainstream with the airdrop of Bored Ape Yacht Club-licensed ApeCoins to BAYC’s existing community of crypto-wealthy ape owners. Andreessen Horowitz was heavily involved in this DAO, accruing nearly 14% of the available coins along with Animoca. The DAO drop follows Bored Ape parent Yuga Labs’ recently-announced $450 million round led by Andreessen Horowitz, according to the Financial Times:
The four founders of Yuga — until recently known only by their online pseudonyms such as Gargamel and Emperor Tomato Ketchup — were allocated 8 per cent. A group of “launch partners”, including Andreessen and Hong Kong-based NFT and crypto investor Animoca Brands, were together given a 14 per cent allocation, in exchange for helping prepare for the issuance.
This isn’t A16Z’s first rodeo. In December 2021, it was announced that Andreessen Horowitz made an investment into PleasrDAO, a blockchain-aligned group of crypto investors who partnered to acquire high-priced NFTs to fractionalize. One was the $4 million purchase of the Doge image, sold as 17 billion pieces that once amassed an implied market cap of $100 million. Just three years ago, the idea of this was unfathomable. The deal was highly visible to the crypto power users.
But unlike the intent behind many DAOs, ApeCoin ownership does not give you a governance interest in Yuga Labs, A16Z’s recent investment. Casey Newton explained:
ApeCoin DAO is not Yuga Labs, its PR firm took pains to explain to me in a press release Thursday. (This information was highlighted for me in a section of the release that was outlined in a box and headlined “Important facts.”) Rather: Yuga Labs gifted ApeCoin DAO a one-of-one NFT featuring a blue version of the Bored Ape Yacht Club logo. This NFT conveys along with it all rights and privileges of the logo’s intellectual property to the ApeCoin DAO. The ApeCoin DAO will decide how the IP is used.
This may not always be so easy to do from a regulations perspective. This week, I sat with an official at the Securities and Exchange Commission; she and I riffed on the next generation of securitization. I began researching the Howey Test in the context of the increasing popularity of DAOs. According to the Howey Test, a transaction is only an investment contract if:
- An investment that requires money
- There is an expected profit associated with the investment
- The investment is a common enterprise
- Profit comes by way of the third-party or promoter’s efforts
Oh yes, the SEC will certainly regulate investments like these. It was easy to see that most web3 consumers are unaware of what they are purchasing. In a recent academic paper published in the Boston University Law Review, it explains the potential for market failure due to information asymmetry or “the lack of understanding about what investors are buying.” It goes on to suggest that:
The relatively high perceived value of the interests in non-cash-flow monetizations suggests that some investors, possibly influenced by the recent history of rapidly rising prices, are looking to resale value.
Casey Newton’s recent essay mirrors this concern with respect to information asymmetry:
My guess is that it falls into the category of “legal for now,” a time-tested way for Silicon Valley startups to make money. But perhaps the Securities and Exchange Commission will have other ideas.
Regardless of the web iteration we’re operating in, consumer startups live and die by how well they live up to the promises they’ve made. It’s typical for investors to help founders fulfill those promises. In some cases, they can end up getting in between the vision of the founders and the reality for consumers.
The original direct-to-consumer retail boom was fueled by the same funds interested in Web3 today. In the worst case scenarios, failed startup autopsies reported stories of pressures to maximize investor interest, potentially clouding product decisions and roadmaps. They became cautionary tales. Web3 businesses are now pooling money from investors who view it as the next big opportunity. In The New Class System, 2PM laid out this opportunity in relation to how much time is now spent in online spaces:
Density precedes agglomeration, which influences consumer behaviors. Agglomeration economies are the benefits that come when firms and people locate near one another together in cities and industrial clusters. In short, agglomeration, once a physical phenomena, has digitized.
Consider the year-over-year growth in use for services like Slack, Microsoft Teams, Zoom, Instacart, Amazon, or Jokr. Consider the distance learning boom, the shift to home school, and the rising American ideal of remote work. And if you’re the type that is intensely into the internet, notice what seems like a sudden Web3 boom: NFTs, DAOs, and the normalization of cryptocurrencies as stores of value. We do more on the internet than ever before.
As early Web3 startups grow, how they handle the demands of their investors with the wants of their end users will play a role in shaping the future of Web3. I’d argue that the launch of ApeCoin is an example.
Understanding the Power of DAO
Bored Ape Yacht Club (BAYC) and its owner Yuga Labs is now the most powerful player – and among the most recognizable – in the Web3 space. Their decisions set the groundwork for others. The token associated with BAYC can be used to buy virtual goods and land in the Yuga Labs’ metaverse, according to the company. But the ApeCoin DAO is being held at arms’ length by Yuga Labs.
So far, ApeCoin DAO has decided to use the IP to reward all of Yuga Labs’ earliest backers. On Thursday, just a few days before today’s announcement, the DAO gifted a healthy chunk of the 1 billion total ApeCoin tokens to Yuga Labs, Yuga Labs’ founders, and the VCs who backed the project. Bored Apes owners got tokens as well. The coins hit a high of $40 per coin on trading markets before settling down to $12.20 today. At that price, VCs’ tokens are worth around $1.7 billion — far more than they have invested in the project to date. And that’s in addition to their equity stake.
DAOs are core to Web3’s promised land in that they are meant to decentralize control: they put the power in the hands of a community, which can mean everyday customers, fans and loyalists have the opportunity to buy into an organization they care about. With their tokens, they receive voting rights and other privileges that separate Web3 companies from Web2, in which only goods and services can be bought. In Web3, tokens are traded for control – or at least, a piece of it. With the majority of ApeCoin’s allotted tokens going to Yuga Lab’s major investors, can it still be considered decentralized?
ApeCoin risks diminishing the trust of its community by leaning into pleasing its investors and conventionally wealthy NFT owners. But there’s the potential of a favorable outcome for ApeCoin holders. By giving investors a return on investment long before the typical investment horizon, Yuga could be freed up to prioritize the consumer and the promises it made to its community. People will be watching. Whatever Yuga Labs does next will shape Web3’s next steps and, more than likely, the Security Exchange Commission’s.
Decentralized organizations were a key tenant of the Web3 promise. It may require one of our nation’s centralized organizations to determine which was the dominant species: the intelligent apes or regulators. The outcome may mean fewer airdrops for preferred guests, friends, family, and venture capitalists.