Real Estate DAO’s are Decentralized Autonomous Organization’s that use a model of investing where there are no hierarchies. Each member of the DAO is a partner proportionate with their contribution and where each member has a relatively equal vote (depending on how the DAO’s smart contract is setup).
With new cryptocurrencies, blockchains, NFT’s and DAO’s popping up every single day, it might be worth it to take the time to understand exactly what it is and how you could benefit (or lose significantly) from them. This article will not go into all of that, but it will discuss:
- Understanding DAOs
- How Do DAOs Work?
- Investing in a DAO
- How Can DAOs Earn Money?
- Can DAOs Invest and Own Real Estate?
- Why a Real Estate DAO is a More Secure Option
- How to Earn Money with a Real Estate DAO
- What to Look Out for With Real Estate DAO’s and DAO’s in General
- Overview of Red Flags
- Real Estate DAO’s
Understanding DAOs
In today’s investment market, the ideas of cryptocurrency and NFTs (non-fungible tokens) are ones that are brought up ad nauseam. However, there is a third investment option from the blockchain that many people should start paying attention to. This third concept of investing is a DAO. DAOs expand from the idea of cryptocurrencies and NFTs and operate in a way that allows investors with like minds to team up and make investment decisions as a singular unit.
One of the most appealing things to think about investing in is real estate. A DAO provides a great opportunity for group investors to raise the capital needed to buy property all over the world. Before we go into how a DAO can raise funds and earn a profit off real estate investments, one must become familiar with how DAOs work as a whole and familiarize themselves with the nuances of this new way to trade and invest.
DAO Definition
Let’s start off by first defining what a DAO is. For starters, DAO stands for decentralized autonomous organization. Now many people still might have no clue what that means. Breaking it down, a DAO is an organization that features an entirely self-governed system, with no centralized leader, and operates in a way that takes all investors’ opinions into consideration during decisions. Decisions get made by getting votes from all members of the DAO, and only decisions that reflect the values and rules of the DAO typically receive enough votes to pass. DAOs are made up of hundreds or even thousands of investors that have purchased tokens or shares in the DAO from the blockchain. The more money raised inside the DAO by accepting new members or a member buying more shares, the more money the DAO has to fund the project that the DAO was created to undertake.
What is the Blockchain
As previously mentioned, DAO operates almost exclusively using the blockchain network. The blockchain is a key component in investing in cryptos, NFTs, and DAOs because it electronically stores information in a decentralized way while maintaining optimal security. The blockchain plays a crucial role in the trade of major cryptocurrencies such as Bitcoin and Ethereum.
How Do DAOs Work?
Even with understanding some of the key elements that go into making sure the DAO is functional, there is still much to know about how DAOs actually operate on a daily basis. The one true thing that keeps DAOs operational is the many investors. The DAO, its investments, charitable donations, and future projects are all dependent on the investments made by its members. Typically a good DAO will also have a set of rules that these members can vote on or read over before joining the DAO. These rules established by the DAO and enforced by the blockchain is a great way to ensure every investing member of the DAO is on the same page with one another. Another failsafe of DAOs is the concept of a smart contract. Simply put, a smart contract makes it so the DAO can only take action after exact criteria has been met.
What is a Smart Contract?
As mentioned, a smart contract is one of the main support systems that all DAOs have in place to ensure potential success. Simply put, smart contracts are programs that run in the blockchain at only allow activity when predetermined conditions are met. Smart contracts are typically used to help automate and streamline all moves the DAO voted on making. When a rule or agreement is reached in the DAO, the smart contract allows for action to be taken place immediately once the conditions are met. This allows for a smoother workflow and less involvement and time loss.
Smart contracts work in a similar way as traditional contracts. They are pre-agreed upon terms of a transaction made electronically between two or more parties that are then stored on the blockchain. Blockchain technology allows the contracts to be fulfilled autonomously because the network will only execute it when the contract’s predetermined conditions have met specific requirements which have been verified. The concept of if/then is what truly drives a smart contract.
Smart contracts also prevent a third party like a bank for example from being able to censor you or alter information about your purchase if you’re buying an airline ticket for example, and it also ensures that only relevant persons can view these transactions and corresponding information via private/public keys.
In smart contracts, there can be as many “ifs” as needed in order to ease the minds of participants and their investments. All the predetermining factors and what actions should be taken after those factors are met are voted on by investors of the DAO. When terms are voted on and established, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when…then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes.
Smart contracts can either be developed and coded by an experienced computer programmer, or a template can be used and customized for your DAO’s needs.
Investing in a DAO
At this point, you should have a grasp of the basics of how DAOs work and operate. The next questions on your mind may be about the general investment process of a DAO. Questions may include things such as how to invest in a DAO, what a DAO itself invests in to make money, and many more things. If you have experience buying and selling cryptocurrency, then participating in a DAO should be easy for you. If this is all new to you, we will explain everything you need to know.
Where to Invest in a DAO
As of now, DAOs are only operating on the Ethereum network. This means that to invest money and participate in the DAO, you must first buy ETH to gain entry. Once you have ETH, you can then choose to invest that ETH into any DAO of your choice.
How to Invest in a DAO
There are two main types of DAO, token-based DAOs, and share-based DAOs. Depending on which method of entry you prefer, you will be in one of these two DAOs. Either method will require ETH to be transferred into the DAO however.
Token-Based DAOs
Token-based DAOs are the easier of the two DAOs to join as all it takes is the proper token. Joining a token-based DAO is completely permissionless, as anyone with the proper coin can join. Once the proper coin is in one’s possession, they can freely trade these tokens however they see fit. In a token-based DAO, anyone with the proper token has access to voting on what the DAO does. All people who buy this token on the blockchain are now participants of the DAO.
Share-Based DAOs
Unlike token-based, share-based DAOs have a much higher barrier of entry. To join a share-based DAO, any potential member must submit a proposal to join the DAO. Typically these proposals have the potential member offering something of value to the DAO, such as any token, or some form of work. Once admitted into the DAO, members are then given shares based on their contributions. Shares represent voting power and ownership of the DAO. Members with shares can exit at any time with their owed percentage of the total treasury.
What are Gas Fees?
When purchasing any form of token from the blockchain, one thing you must be aware of is gas fees. Gas fees are additional fees users pay in order for their transactions on the blockchain. Some gas fees are more than others depending on which network you buy and sell tokens on. Gas fees are required to compensate for the computing energy that is required to make sure all transactions are processed and validated securely and timely.
How Can DAOs Earn Money?
Just like any investment you make, you want to make sure it is one that will benefit you in the end. DAOs can be well worth your investment and if you’re lucky become very profitable. There are many different ways in which a DAO can invest in things that earn money. The most common method of investment seen in DAOs is in either NFTs or forms of cryptocurrency. This is understandable as many of these NFTs and cryptocurrencies are traded on the same marketplace as DAO tokens. DAO value can also rise due to popularity. One way to boost popularity and overall support is to have your DAO be involved in many charitable events and activities. By doing so more people will want to be included in the DAO if their views align.
DAOs can also earn money through real estate investments which is what we will go into more detail about in a little bit. Just like any investment group, a DAO can choose to spend their capital any way they choose, and real estate is always a great option. As long as it is properly agreed upon with a vote by all participants in the DAO, the investment options are limitless.
Can DAOs Invest and Own Real Estate?
As of now, there is no law or legislature that prohibits decentralized autonomous organizations from owning real assets such as real estate. In fact, there are already a few DAOs that have already invested in real estate.
In Wyoming, there is a DAO that consists of about 10,000 members that goes by CityDAO. This decentralized autonomous organization owns a 40-acre plot of land in Cody, Wyoming. Now, this plot of land is in the ownership of the DAO which allows each member to vote on the use of the property and the way in which they can utilize it.
Other examples of how decentralized autonomous organizations can utilize real estate could be the group purchasing a small office park. The DAO could then vote on all property management decisions and as a group run the park.
Why a Real Estate DAO is a More Secure Option
Out of all the potential investment options and asset acquisitions a DAO can partake in, real estate is one of the more secure options. There are many reasons why investing in real estate is a great option including appreciation, cash flow, and security. Other investment options such as NFTs and cryptocurrency do not offer these benefits.
Real Estate sees very regular appreciation that is not seen in many other investments. It is safe to assume any real estate that is maintained can see anywhere from 3%-5% in annual appreciation (traditionally, lately it has seen inflation up to 300% in a single year with some minor modifications, but this is not the norm, and the market should correct itself in the coming years). There are also ways to force appreciation. Appreciation can be forced with tactics such as renovations and additions to the property. Before doing any major work to the property however it would be best to consult a real estate agent or appraiser to make sure the renovation will be profitable.
There is also a way to make a steady cash flow with the investment of real estate. This extra cash can be distributed among the members or can be put back into the DAO which will increase its value. The easiest way to ensure the property earns a regular cash flow is to rent out the property if it is not in use. By renting out the property, you can still see the benefits of the property appreciating over time, while also earning short-term cash for the DAO.
As stated, real estate investments can be very secure when compared to other investments. If the pandemic showed investors anything, it is that you can lose all your value seemingly overnight in certain markets. Real estate is not as volatile as other investments. One thing that is certain with real estate is that is a secure long-term investment. There will be highs and lows, but over the many years of ownership, you will see the value increase.
How to Earn Money with a Real Estate DAO
Although we mentioned why real estate is secure, that does not guarantee that your property will make your DAO extremely profitable. There are many ways to make money off real estate, you just want to make sure you put yourself in a good position. So before your DAO invests in a property, make sure it is the right one for your goals.
In order to find real estate that will be worth the investment in the long run, there are a few key things to keep your eye out for. The first thing to look for is an area that is attractive for renters or with fast-appreciating homes. It is also important to make sure this area has proper amenities and conveniences that most homeowners or renters will want. The history of the property is also crucial. The area’s crime rate, school ratings, and tax history are all major contributing factors to the property’s potential value.
After your DAO finds a property that has all the prerequisites that you wanted, it is now time to make the purchase. Once you make the purchase it is on the DAO to vote on which tasks and projects should be prioritized. If the DAO makes correct decisions and studies the real state market and history closely, your DAO will earn all of its investors money in little to no time.
What to Look Out for With Real Estate DAO’s and DAO’s in General
When we looked to start our real estate DAO, there was a lot of information to cover, and honestly, a lot of things we did NOT understand about the market around it.
I am going to start with what to look for in DAO in general, and then get more specifically into Real Estate DAO’s.
DAO’s In General
1. Does the DAO DO anything?
This is such a critical question… When looking into setting up DAO Estate, we joined a bunch of crypto communities to see if our idea could compete. We were SHOCKED to find that most of the DAO’s are just open Ponzi schemes. Essentially the WHOLE business model is to get in as early as possible, ride it up to the peak and dump before everyone else does, leaving the last purchasers holding the empty bag…
This is a truly terrible way of getting rich but has been successful for a few that get in on the right thing early enough, and bail at the right time. The creators of these DAO’s always win though. They keep everything from the initial sale of the tokens. I mean who cares if you are giving away 10,000,000 tokens for $100, if you have 10B tokens to sell (created from literally thin air) you can sell half for more than $500,000… Who cares if it becomes a pump and dump at that point right?
This is why there are so many of these. It is relatively cheap to create, there is virtually no regulation, and people are crazed to get in on the next Bitcoin, Ethereum, or blockchain boom… Which leads me to the next ting to look out for…
2. Tokenomics
We didn’t go much into tokenonics in this article. It is a relatively big topic, but has to do with how the tokens are created, handled and distributed. What to look out for here is an overinflated decimal point to make it seem more likely, psychologically, to grow than in reality. This isnt necessarily an indication that a DAO is not worth investing in, but understanding how it works, and why it is done this way is important to make sure that you arent being manipulated based solely on this.
A lot of offers have inital offerings that offer something like this: $1 gets 10,000 tokens. So the value of each token is $0.0001. Why that instead of just making each token $1? Each dollar gets 1 token, the math is easier…
The reason is simple.
The distance from 0.0001 to 1 seems MUCH smaller than from 1 to 10,000. The possibility of a token becoming worth “just a dollar” eventually seems MUCH more likely (psychologically) than it going from $1 to $10,000… but the difference is exactly the same.
In EITHER case, if you invested $100, you would have $1,000,000 once it hit the top value.
It just SEEMS like getting to $1 as opposed to $10,000 per token, would be easier. It isn’t actually. It is just an illusion.
So while projects might recognize this and take advantage of this psychological trick, it might not be a good reason to deter you (small investors specifically look for the most amount of tokens for their money, unknowingly, so you disclude them by using real numbers) but a company that starts their token off at $0.10 or $1, may be more legitimate, because they are interested in the project more than attracting potential “pump and dump” investors.
3. Does the plan look legitimate?
We have looked through many DeFi and DAO projects when researching this. Again, very surprised at how many talk about interest rates, etc. without actually saying how they are providing those interests rates… Although there are some clues, like bonus’s (in tokens of course 😉 ), for inviting more investors… So old investors are paid interest from the money that new investors invest, and those investors are paid interest based on newer investors, and… see a pattern here? Again, the definition of a Ponzi Scheme.
If they do actually have a plan, product, service, outcome, game, idea, or something that could be considered valuable they are actually working on, then it will be up to you to do your due diligence to make sure it is a good idea. This could be as simple as a gut feeling. This is better than investing in something with no plan at all either way.
But this brings me to the next part of determining whether a project will work, or COULD work…
4. Who are the founders?
If the DAO has a product, service or something else that they have, or are building, is there a good reason to trust that they could actually accomplish it? Do they have the right team around them, or a good plan to get the right team? How transparent are they about these things?
If you cannot find any of this information and cannot figure out who the founders are… proceed with caution. There are many rug pull-type offers out there and with no accountability, there is little incentive to not pull the rug, especially where a lot of money is concerned. Which again leads me to the next question…
5. Has the DAO been publicly audited by a 3rd party?
There are many audit companies and tools out there for DAO’s. They look into things like the coding and rules, and how secure the treasury is, etc. It will alert you to risks about having someone just rug pull (exit without notice and take the treasury with them) and safeguards against that, like multiple signers from the DAO community.
Just because it passes all of the checks, doesnt make it legitimate, but it makes it so you know there is little chance that someone could just disappear with all of the money.
5. Is the community active?
If this is a really new project, there might not be a massive community, but there should be some active voices at the top. These things make it based on hype, not quality (unfortunately) so having someone hyping it up is going to be very important for success. Sometimes there is a plan to implement a presence in the future, but enthusiasm should be coming from the initial founders and team, as well as initial investors to help it grow. If you really believe in a project though, you could really help build it, and make a lot of money, by helping build that community. There are certainly opportunities to do that.
6. How are the founders/devs compensated? Where does the money go?
Founders set these up for a lot of reasons. They see a gap, they have a good idea, they want to get rich, and everything in between. Two questions are just as important:
1. Did they give themselves enough for this to be a focus and a high priority?
2. Did they give themselves so much that they will no longer be motivated to continue?
Founders should be relatively well-compensated, but it should be upfront. It should NOT be a whale majority of tokens, and it should be based on an approximate value of the initial offering, and not enough to negatively impact the goal of the DAO. For instance, with the Real Estate DAO, if the founders are just taking 95% and charging transaction fees for the Real Estate investment, well that is not a real estate investment organization, that is a speculation based token, that happens to invest a small portion in real estate.
Overview of Red Flags
- No purpose (product, service, project)
- No community
- No Founder information
- Offering daily ROI, interest, or other unsustainable rewards/profits
Real Estate DAO’s
Most of the Real Estate DAO’s we have come across so far are either for very specific real estate projects and investments or only partially invested.
Besides the same things to look for above, you also want to look at these things.
1. What is the plan?
Once there is enough money to purchase real estate, how is it decided? What will be done with the real estate? Will it be flipped? If so, who is going to fix it up? Is this pre-determined or is it up to the DAO? Will it be held? How will it be maintained? Who is going to maintain it? If it is only a single property or plot of land, what happens AFTER the project is done? Will it be sold? Or maintained by the DAO?
Having a plan around all of this is going to be very important for deciding on whether you want to be involved. What decisions are already made, and what decisions will be put to a vote? Make sure that you are comfortable with these things beforehand.
2. What is being invested in real estate?
This is missing in SOOOO many DAOs, as mentioned above, and this is just an extension of where the money that is vested initially goes… I came across one DAO that charges a 5% transaction fee on all purchases and sales… 60% of that (3% total) goes toward real estate investment. So they claim their token is “backed by real estate”. Somewhat true, but what happens to the other 95%? When those tokens are initially sold by the DAO… What happens to the other 95% of the purchase price??? So essentially this is pretty much just another speculative token, that has a floor slightly higher than zero. (Since the DAO will presumably own real estate at some point)
This should be a red flag as well, unless you prefer to play the speculative game for quick potential returns. Just remember, everyone cannot win in these scenarios. Many people need to lose big for a few to gain big. This is an unsustainable model that only those that are prepared to lose big should participate in.
Conclusion
There is a LOT of information here, and we hope that you have learned a little bit from this article. If anything has been taken away from this, we hope that this was able to get you excited for the future of DAO’s, as well as what to look out for when you invest in one.
