How to value a community? — DAO Valuation Frameworks

What gives the community value?

  • A Legal Infrastructure
  • A bank account to make and receive payments.
  • A scalable way to make decisions in a manner that is democratic and fair.

Community — The Heart of Web3

Revenue and Cashflows: Driver for DAO’s Valuation? (DAOs as Companies)

DCF Model:

DCF Model
  • What are the cash flows that will be generated?
  • What’s the growth rate?
  • How risky is the business?
  • When will the firm become a stable growth firm — to estimate a terminal value?
Types of DAOs

Revenue Multiple:

GDP: The Magic Metrics for DAOs? (DAOs as Countries)

  1. A Country relies on its people to generate “Value” or “GDP” — DAO relies on its community.
  2. Countries draft a constitution that creates the laws of the land. For DAOs, this constitution is written into the rules of the Smart Contract.
  3. Countries determine their political structure, with associated governance and power distribution, just like a Web3 community determines its governance and token distribution.
  4. Foster an emergent culture, which springs from the community members themselves.
  5. Create borders, either through an application process or token-gating.
  6. Develop a vibrant economy, whether through a token or other revenue-generating processes.
  7. Shared treasury — Central Reserves
GDP Formula

Outputs as a Measure — Depending on the type of DAOs:

  • Distribution (How much is the DAO’s reach)
  • Opportunities (How much are DAO’s members exposed to opportunities)
  • Capital (How much Capital deployed)
  • DeFi -> Total Value Locked
  • L1/L2 Blockchains: Unique Wallets, Volume of Transactions
  • Consumer Apps: Revenue generated

L1 Metrics: Metrics that can drive Community’s Valuation

  1. Contributor Level:
  • GDP per Capita (represents how individuals are earning) → Mean/Median Community Earnings
  • Happiness Index (represents how citizens are happy) → NPS (Net Promoter Score), Community Utility Satisfaction (CSAT), Community’s Vision Perception & Alignment
  • Employment Level → % of Active Contributors, Retention Level

Moats of DAO: The drivers of Valuation

  1. Network Economies: The value of service to each user increases as new users join the network. Network economies are where DAOs have the potential to grow over their traditional counterparts. This can be the strongest moat for successful DAOs. A good example of network economies is Instagram, which gets more valuable to you each time one of your friends joins because you can talk to them and see what they’re up to. DAOs, built on crypto networks that combine innovative protocols directly with money (tokens), provide network effects on steroids. With DAOs, users are owners, and every time someone else joins the DAO and/or uses the protocol, the user’s tokens theoretically get more valuable. Additionally, as the DAO gets stronger, more people build on top of it, which makes it stronger, attracts more people, and so on. For instance, Solana has platform network effects, like Windows, but with financial steroids. Once a DAO picks up steam, it’s going to be very hard to reverse it.
  2. Switching Costs: The value loss expected by a customer would be incurred from switching to an alternative supplier for additional purchases. This is a tricky one. On the one hand, DAO members would incur switching costs because the tokens they own in one DAO may become less valuable if they switch to a competing DAO, but the fear of forking is omnipresent. For instance, SushiSwap was forked from UniSwap as all the codes are completely open to the world — so this means DAOs can easily be copied exactly. While this scores low as a moat, the low switching costs are part of the beauty of DAOs: it creates an interesting dynamic in which protocols are constantly competing to keep their stakeholders happy and well-compensated. If the DAO does something members don’t agree with, they might run away quickly. The Moloch DAO, which awards grants to advance the Ethereum ecosystem, even has a “rage quit” mechanism built-in, through which a member can rage quit and withdraw their tokens if they don’t agree with a particular community decision.
  3. Brand: The durable attribution of higher value to an objectively identical offering that arises from historic info about the seller. Part of the reason that certain brands are able to charge higher prices for the same item is that people tie their identity to those brands. Carrying a Louis Vuitton HandBags says something different than a regular handbag. Similarly, people will tie their identity to the DAOs in which they’re contributing members and of which they’re an owner. If you consider Solana a DAO, think about all of the people whose identities are tied up in owning Solana. They’re willing to market Solana, buy dips, and bash non-believers for free.
  4. Cornered Resource: Preferential access at attractive terms to a coveted asset that can independently enhance value. A DAO’s community is its cornered resource. While many DAOs employ or otherwise compensate people for their contributions, there are many instances in which people contribute to the DAO just to make it, or the blockchain on which it’s built, more valuable. The Moloch DAO gives grants from its members’ own pooled ETH in order to make ETH more valuable and can submit proposals to do free work to make Ethereum better. Those engineers’ time is independently valuable.

Community as a Product:

Mergers and Acquisition:

Overvalued or Undervalued?: Conclusion

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Passionate about FinTech, Banking, and Financial Markets. Final year Engineering & Economics Student at BITS Pilani Goa.

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Yash Agarwal

Yash Agarwal

Passionate about FinTech, Banking, and Financial Markets. Final year Engineering & Economics Student at BITS Pilani Goa.

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