Ethereum and smart contracts enabled the concept of the decentralized autonomous organization. These for-and-non profit organizations without apparent hierarchy have become a major disruptive instrument in the current economic narrative.
The upcoming Web3 revolution is heavily leaning towards decentralized finance and NFTs as a new paradigm to leverage the mass adoption of new tech. And in the last two years, the results have been nothing short of stunning. DeFi grew into a $70 billion industry while some of the biggest NFT marketplaces like OpenSea are raking in over $5 billion in monthly volumes.
Consequently, a wide range of ethical DAOs have emerged on the market, jumping on the bandwagon of popularity. What’s more, many of them genuinely try to make the world a better place. In this Nouns DAO review, we take a look at one of those organizations that use NFTs’ utility to empower artists and communities. To this end, we thoroughly analyze how the Nouns DAO functions and what benefit it brings to the crypto ecosystem as a whole.
Before we delve deeper into our Nouns DAO review, let’s have a quick overview of DAOs and their applications.
What are DAOs and How Do They Work?
DAOs are organizations where all the participants and team members work towards one particular goal. The interesting part of this is that the rules to achieve this goal are immutably recorded on the blockchain. DAOs use smart contracts to define the workflow of the organizations and their governance.
This allows DAOs to eliminate the principal-agent problem, which is a common issue in traditional hierarchical organizations. The issue derives from the conflict in priorities between the owner of an asset and the person to whom control of the asset has been delegated. In a nutshell, by relying on predetermined rules enforced by technology, DAOs attempt to remove this conflict of interest that individuals might have.
To achieve this, DAOs use tokens to allocate governing rights as well as create incentives for participants in the organization. Smart contract technology makes tokenization possible by providing a means to create peer-to-peer fungible or non-fungible tokens.
The advantages of using a DAO in startups are numerous, and the most important ones include:
- Since DAOs do not rely on hierarchy for big decisions, implementing innovations and improvements becomes frictionless. However, this implies that all the participants in the DAO remain involved at all times.
- The blockchain architecture provides full transparency and immutability of the decisions partaken by the DAO. Everything is recorded on the digital ledger, without the possibility of modification through proper consensus.
- DAOs remove the hierarchical power play common to conventional organizations. All members are equally responsible for the direction the organization will take to achieve its goals.
Next in this Nouns DAO review, let’s see whether this NFT-centric organization succeeds at ticking all the boxes in this benefit list.
What Is Nouns DAO?
Each noun is a pixelated, colorful avatar that creators can build using different tools provided by the DAO. The protocol randomizes these images and selects the next Noun for the next auction, with the cycle repeating every 24 hours. The protocol creates a Noun NFT auction and sends the revenue to the Nouns treasury, over which all the participants and Noun owners have the right of governance through voting.
The goal of Nouns DAO is to use the proceeds of the auctions to empower artists and communities by funding various projects. So, instead of having the profits from the sales go to the artists, the DAO acts like a massive NFT hedge fund. The DAO uses the funds towards further development of the project and to initiate the so-called “Nouns virtuous circle”. This encompasses the fact that the Nouns treasury serves a precise goal of bootstrapping the community through something as simple as 32×32 pixel avatars.
Getting to Know the Nouns DAO
For the uninitiated, the Nouns DAO can be difficult to navigate. Its eclectic community uses a wide variety of terms that might sound pretty strange if you are just getting started on the platform. To make this Nouns DAO review a bit more graspable, you should get accustomed to some of the following terminology:
- Nounders – is the name given to the founders of the Nouns DAO. More precisely, there are 10 founders that jumpstarted the project. The NFT community is quite familiar with most of them, but two stand out from the crowd – punk4156 and Dom Hoffman. The former is an influential participant in the NFT scene and an early adopter of the Bored Ape Yacht Club. Hoffman, on the other hand, is the co-founder of Vine, Peach, and TikTok competitor Clash.
- Nouns – are the 32×32 pixel avatar NFTs on the Ethereum blockchain. Every day, the protocol auctions a new NFT, and the profits go into the Nouns Treasury.
- Nouns Treasury – is the backbone of the DAO. This common fund is governed by all the Noun owners. At the moment of writing (March 2022), the treasury has managed to collect over 20.000 ETH. This data is transparently available at all times, and you can consult every transaction of the treasury on its Ethereum address.
- Noun DAO – is the collective of all Noun owners. They collaborate, vote on community proposals, and govern the treasury fund allocation for accepted proposals.
- Noun Derivatives – are projects that are built using the Nouns open-source protocol or create derivative art using Nouns imagery. Note that Nouns are public domain, so any artists can use them to create artwork for their project and call it their own.
- Noun O’clock – is considered the time of day when the daily Noun auction goes live.
While it’s a simple enough system, the community jargon can be quite confusing for newcomers. With those basics out of the way, let’s continue our Nouns DAO review with an in-depth look at how the NFT creation and treasury function.
How Does Nouns DAO Work?
Nouns is a generative NFT project that saw the light of day in Q2 2021. Every day, a new Noun NFT is recorded on the blockchain, following an automated protocol using smart contracts. In a nutshell, the protocol generates on-chain art by populating a 32×32 pixel grid with various pre-recorded base traits, including body, head, accessories, background, and glasses.
Each one of these categories has dozens of different options. The combination of items from these five categories results in a unique Noun, that the protocol randomly selects to put into the next auction. The Nouns Playground provides an off-chain example of what the protocol can create.
Every day, at Noun O’clock, the protocol creates a new auction by generating a new Noun. This auction stays active for 24 hours. Once the previous auction is settled, a new Noun and auction are created in the same transaction batch by the protocol.
Moreover, the founders have programmed the protocol in such a way that for the first five years of its existence, it will evenly distribute every 10th noun to the 10 Nounders. This means that at every 100 newly created Noun, the founders gain control of an entire Noun. This is an important feature as 1 Noun = 1 Vote in the DAO. This is a pre-programmed incentive for the founders to provide continuous work on the protocol and remain active in the project.
Finally, it’s worth noting that the Nouns NFTs are public domain. This means that anyone can use the artwork for personal and commercial use. The NFT owner has no copyright claim on their Nouns. The Noun itself provides voting rights to its owner, nothing more. Artists, and even brands, can use Nouns to create their own merchandise and sell it.
The Nouns DAO Treasury
You should have realized by now that the Noun Treasury is what differentiates the Nouns DAO from other generative avatar NFT collections on the market. Every time an auction ends, the earnings end up in this treasury which is governed by the DAO.
And over time, the successful Nouns auctions have injected a consequential amount of funds into the treasury. Currently, the DAO disposes of over 20.000 ETH from the 200+ Nouns that the protocol auctioned since the release of the platform.
However, this treasury doesn’t have a specific goal. The DAO uses the Nouns as a community identity that projects can use as their proper branding. Because there’s no mission statement, Nouns buyers have carte blanche on the particular goals they will like to follow. And if you are wondering how they decide on the direction take, look no further than the Nouns Discourse.
The Nouns DAO Discourse
The Nouns Discourse is where the magic happens. Here, community members offer proposals to the DAO and the handlers of the treasury. This discourse has a goal to provide a long-lasting discussion medium on how to improve the Nouns DAO, or where to invest some of the treasury funds. Topics on the discourse between grant proposals for community projects, DAO governance improvements, and the future of the DAO itself.
The discourse uses an incremental trust level mechanism, proper to other forums. Consequently, new users can’t spam the proposals category with grant requests. They need to have spent some time with the platform and provide proof that they have been active members of the community.
Additionally, the variety of project proposals and ideas is nothing short of outstanding. They range from using Nouns into high-profile merchandise and toys, to creating onboarding programs and foundations for the community.
Selecting just a few of them for this Nouns DAO review wouldn’t do them justice. You should check the discourse yourself to fully understand the scope that the Nouns community is trying to cover.
The next level of discussion is the Proposals section of the DAO. Here, Noun owners can lock proposals on the blockchain for others to vote on. The community has offered and accepted more than 40 different proposals since the inception of the platform. These include donations to charities, funding art projects and the creation of merchandise, and protocol improvements, among others.
With that in mind, let’s showcase some successful projects that got their funding through the voting system of the Nouns DAO.
- Proposal #42 which encompassed an emergency aid fund for Ukraine has been accepted and carried out. Through this proposal, the DAO will send 100 ETH to Unicef with the goal to directly provide humanitarian help for children that live in conflict-affected areas.
- Proposal #40 participates in The Skatepark Project (TSP) initially founded by Tony Hawk. This non-profit has the goal to facilitate access to outdoor recreation by creating safe and inclusive community skateparks. The Nouns DAO will provide artwork as well as funding for the parts of 300 skateboards to be given away to children that can’t afford them.
In addition to social good projects like those stated above, the treasury has founded a small dozen of brand-boosting ventures. These include fashion collections, ad placement, and various merchandise.
Some Shortcomings of Nouns DAO
With all that in mind, the Nouns DAO still has a couple of setbacks that do not sit too well with us.
First, there’s the fact that Nouns are inflationary. Because the protocol creates a new Noun every day, endlessly, the voting power of the early backers might dilute over time. The increased number of Nouns on the market could reduce their floor value over time, which, in turn, would make them more accessible to the mainstream public.
However, those that invested early bought their Nouns at a strong premium. Buying in early provides a higher risk, as the same voting power could become available for cheaper down the road. As such, a smaller capital would grant higher voting power in the future, punishing the early adopters.
Second, Nouns are extremely expensive. This might be a result of the current NFT landscape and the general craze for non-fungible tokens. However, this doesn’t change the fact that Nouns are mostly an investment vehicle for whales. Most auctions fluctuate around 50 ETH and some Nouns have sold for over 100 ETH. The highest nouns sale reached a whopping 613.37 ETH for Noun 1. The floor value of these NFTs hovers around 70 ETH on OpenSea, requiring quite deep pockets to acquire one.
And third, there’s the fact that the protocol rewards founders with a new Noun NFT every 100 auctions. Considering their floor price at the moment, this is quite a consequential reward which might seem a bit unfair.
To sum up, we can say that the Nouns DAO looks like it could clearly one-up CryptoPunks or Bored Ape Yacht Club. The project manages to leverage the popularity of NFTs to provide its community with a transparent medium for exchanging ideas. Moreover, the DAO has proven in the past that they are serious about achieving the goals set by the community. With the hefty capital they have managed to acquire in the past year, this DAO can certainly go places.
It shouldn’t come as a surprise to see Nouns NFT branding start appearing in the wild, both as merch or art. Moreover, a portion of that fund will reach humanitarian causes as well. The DAO has already successfully participated in a few social welfare projects. This shows that their focus is not only on the brand but also on social good.
However, the DAO is not without some drawbacks. Their inflationary nature means that early backers will lose some of their vote value over time. Furthermore, their prohibitive prices prevent us from considering them as a viable DAO option for everyone. If you want to participate in any way, you need to be ready to dish out a consequential investment in ETH. While this might change in the future, Nouns DAO remains an organization for crypto whales.