How to value the community? A brief discussion on DAO valuation framework

原文标题：《 DAOrayaki ｜浅谈 DAO 估值框架 》

原文来源： DAOrayaki 

Apple is the most valuable company in the world, currently valued at around $2.83 trillion, and we all know why it's valued so high -- fat cash flow! All companies have profit/revenue as their core motivation and the entire valuation is based on revenue potential. This is the mainstream valuation method, but how to value the community, especially with daOs today, is still a topic worth exploring. Therefore, In this article, DAOrayaki will discuss some possible valuation methods.

First, let's understand what community context is:

What gives community value?

Community is inherently valuable. They bring together members' resources, skills, knowledge and experience to create value for members and other stakeholders with whom they interact. From crowdsourcing advice to supporting nonprofit causes, and even raising money and saving lives during the COVID wave, communities have historically been used to achieve and advance goals. In many rural Indian societies, for example, community-based initiatives such as cooperatives are a time-honoured tool that has enabled millions of people without bank accounts to access credit and other financial services.

As we've spent more and more time on the Internet over the past few years, we've created and built more online communities. For example, we are members of groups like WhatsApp, Facebook, Discord, Reddit, Quora, etc. These Internet-based communities are able to utilize more resources and operate more efficiently because membership knows no geographic boundaries. People from different backgrounds can bring different perspectives and skills to make their communities more valuable. The influence and value of these communities can also reach many more people around the world. Communities no longer have to be made up of people who look like us; They can be formed around more diverse factors, such as ideology, hobbies, and even arbitrary interests.

Based on community goals, a physical community can often create and assign financial value to its members. For example, a local community of teachers could pool funds to start a business that would allow members to share in the profits. They can do this because when community members are close to each other, it is easier to establish the level of trust and coordination needed to manage financial resources.

Not so for online communities whose members are often strangers spread across the globe. Building trust and coordinating decision-making is almost impossible. For example, if you're part of an online community of digital art enthusiasts, and your group decides to go beyond discussing art to maintain the collection, it's almost impossible to manage. As a result, the financial value created by today's Internet-based communities is ultimately captured by community "leaders" or hosting platforms such as Reddit.

To coordinate financially, members need to:

· Legal infrastructure

·  用于付款和收款的银行账户

·  一种以民主和公平的方式做出决策的可扩展方式

Traditional communities lack all this but Web3 solves this problem! How does it work out?

Community - the heart of Web3

In Web3, everything from DeFi to NFT is community-centric. Communities become the first adopters of projects, incentivizing community members through tokens to contribute, drive distribution, and create significant value in return for benefits. In the Web2 world, communities are more like an engagement feature, with different companies embedding communities so that their users stick with the platform and ultimately help companies profit from this engagement. They have no intrinsic value per se. The fuel for creating value for the Web3 Internet is tokens.

After any Web3 project releases its first version, it tries to build a community around it -- community members are like early adopters. Just as in open source development, companies try to invite community participation, give bounties, grants, and other incentives, grow in openness, build community, and introduce consensus into decision-making. Web3 projects follow a similar strategy. But here they go one step further -- offering tokens (equity) in addition to fees/grants, which is a game changer!

To make things even cooler, the community in Web3 also got its own name - DAO! Think of the DAO as "a group of people with a shared bank account." They are digital native communities centered on a common mission.

DAO is a new way to finance projects, manage communities, and share value. If blockchains, NFT, smart contracts, DeFi protocols, and DApps are tools, daOs are communities that use them to create new things. This is a common term for people who decide to pool resources into smart contracts and then allocate those resources using some form of decision mechanism (voting).

Now that we know the basic aspects of communities and DAOs, let's look at the core question -- how do we value them?

Revenue and Cash Flow: Drivers of DAO Valuation? (As the DAO of the company)

Daos are often referred to as decentralized organizations or new LLC (limited liability company). They are also thought of as a transition from an enterprise hierarchy to a value creation network. For traditional companies, the core is to generate cash or revenue now or in the near future and value it on that basis.

DCF model model:

A typical company uses DCF (Discounted Cash Flow) to get a broad valuation -- a company's intrinsic value comes from its expected Cash Flow.

DCF is a complex valuation model! For simplicity, let's understand what drives the value of traditional companies to the DCF model:

· What cash flows will be generated?

·  增长率是多少？

·  企业的风险有多大？

·  公司何时会成为稳定增长的公司——最终估值？

The type of DAO

For example, the Service DAO will generate cash through the various types of projects they undertake, the Social DAO will generate cash from their followers buying tokens or NFT, and the Protocol DAO will generate cash through borrowing and borrowing.

Uniswap, for example, is a decentralized exchange (DEX) DAO that makes it easy for people to trade cryptocurrencies. It charges a fee of about 0.3**%** * (ranging from 0.05% to 1%), which is divided between the liquidity provider and the Treasury. In this case, cash flow comes from expenses. Uniswap DAO generates $1 billion in daily transaction volume and approximately $3 million in daily transaction fees, or up to $1 billion in annual cash flow at this rate! Thus, we can calculate its value by discounting its estimated cash flow over time and using appropriate growth rates and risk factors.

Revenue Multiple:

Another typical method used by startups is the revenue multiple, and it's simple: valuation/revenue

It measures the value of a business's equity relative to the revenue it generates. A high multiple indicates that it has a lot of growth potential that will eventually generate large revenues and is therefore overvalued in the short term.

For example, early-stage revenue-generating startups have revenue multiples of 20-40, while companies like Uber have revenue multiples of 4-5. Now, let's go back to Uniswap:

Uniswap generates transaction fees of approximately $3 million per day, distributed by the liquidity provider (LP). So let's assume that this is Uniswap's daily revenue as a community and we get about $1 billion in annual revenue for the community or DAO. Based on its current market cap, it is valued at around $10 billion, which gives it a revenue multiple of 10 times! But why only 10 times? The reason for this may be that Uniswap is fairly stable as a protocol, growth prospects are not very high and the risk of bifurcation is everywhere.

GDP: The magic indicator for DAO? (DAO as a state)

What is a nation -- a group of people with a constitution and an economic system? The same goes for DAO or any Web3 community! Let's use an analogy to make it sound more convincing:

· A country relies on its people to create "value" or "GDP" -- THE DAO depends on its communities.

·  各国起草一部制定土地法律的宪法。对于 DAO，本章程被写入智能合约的规则中。

·  国家决定其政治结构，以及相关的治理和权力分配，就像 Web3 社区决定其治理和代币分配一样。

·  培育一种新兴文化，这种文化源于社区成员本身。

·  通过应用程序或代币创建边界。

·  发展充满活力的经济，无论是通过代币还是其他创收过程。

·  共享国库——中央储备

What is GDP?

It is the total monetary or market value of all goods and services produced within a country during a given period of time.

Now, let's try to demystify all of these components and draw some analogies:

C Consumer spending: In a country, every citizen spends money to buy their needs and luxuries. In the Web3 community, people typically spend their fiat/token to buy NFT, transact on DeFi protocols, and these can essentially form a consumption component.

I Investments: Just as individuals and companies invest in a country, community members invest in community projects.

G Government spending: The government spends money for national benefits, just as the DAO can spend money to upgrade community functions, perform airdrops, etc. The DAO's Treasury balance can serve as another measure.

X-m (exports minus imports) : Just as a country exports or imports, a Service DAO might export their services, an Investment DAO might import services, and so on. We can see a lot of transactions between DAOs in the near future.

Outputs as measures -- depending on the DAO type:

Another way to measure a community's GDP is to measure its "output" :

· Distribution (How big is the DAO's reach)

·  机会（DAO 的成员有多少机会接触到机会）

·  资本（部署了多少资本）

Depending on the DAO type, the output value can vary greatly, for example:

1) Protocol DAO: The metrics here will be protocol-specific, for example:

DeFi -> Total value lock up

· L1/L2 blockchain: unique wallet, transaction volume

·  消费者应用程序：产生的收入

2) Service DAO: Total revenue generated through services

3) Social DAO: Collection Treasury, member income

4) Investment DAO: Return on Investment (ROI), AUM (Assets under management)

5) Media DAO: channels covering DAO, such as Podcast and Newsletter

In general, the ratio between opportunity, distribution, and capital depends largely on the type of DAO. For Media DAOs, the proportion of distribution (influence) is very high, while for Investment DAOs, the proportion of capital is very high.

L1 Metrics: Metrics that drive community valuation

In addition to GDP, various other indicators such as employment, foreign direct investment, and gross national income indices also determine a country's health and wealth. Also, let's look at some interesting community indicators to measure the health of a community and its valuation:

1. Contributor Level:

· GDP per capita (represents individual income methods) Average/median community income

·  幸福指数（代表公民的幸福程度）NPS（净推荐值）、社区效用满意度（CSAT）、社区的视觉感知和一致性

·  就业水平活跃贡献者的百分比，保留水平

DAOrayaki Note: Retention Level here refers to employee Retention. Employee retention was an economic development concept in the early and mid-20th century. Retention is defined as the process by which a company ensures that its employees do not resign. Each company and industry has a different retention rate, which indicates the percentage of employees who remain in the organization for a fixed period of time.

2. Network activities:

An economy's activity is determined by indicators such as GDP and manufacturing. Similarly, we can measure metrics such as interaction pairs, average number of responses, TAT per conversation (turnaround time), topic originators (daily, unique),

The MOat of the DAO: Valuation Drivers

With so many DAOs coming out of the market, maintaining the moat in the form of competitive advantage will be one of the biggest drivers of valuation. The cost of converting a community or DAO is very low. A particular person can be part of many communities, which can certainly fuel the numbers. In addition, these people can easily switch between communities. While tokens do cause some friction, there are also many DAOs and project airdrops that can easily take away a community's user base.

So what are the possible moats of the community? Let's discuss:

Network economy:As new users join the network, the value of each user's service increases. The network economy is where DAO has the potential to surpass its traditional peers. This is probably the strongest moat for a successful DAO. A great example of the online economy is Instagram, where every time one of your friends joins, it becomes more valuable to you because you can talk to them and see what they're doing. The DAO is built on a cryptographic network that directly combines innovative protocols with currencies (tokens), enhancing its network effects. With daOs, the user is the owner, and each time someone else joins the DAO and/or uses the protocol, the user's token theoretically becomes more valuable. Also, as DAO became more powerful, more people built on top of it, which made it more powerful, attractive to more people, and so on. For example, Solana platform network effects are similar to Windows financial effects. Once daOs take off, they are hard to reverse.

Switching costs:The anticipated loss of value by the customer is due to additional purchases to alternative suppliers. This is a tricky problem. On the one hand, DAO members incur conversion costs because tokens they own in one DAO may become less valuable if converted to competing DAOs, and fear of forks is pervasive. For example, SushiSwap forks out of UniSwap because all code is completely open to the world -- meaning daOs can easily be copied precisely. While this scores poorly as a moat, low conversion costs are part of the DAO: it creates an interesting dynamic in which protocols constantly compete with each other to keep their stakeholders happy and well compensated. If the DAO does something that members disagree with, those members can quickly lose out. The Moloch DAO awards grants to advance the Ethereum ecosystem and even has a built-in "angry exit" mechanism through which members can angrily exit and withdraw their tokens if they disagree with a particular community decision.

Brand:Persistent attributions to the higher value of objectively identical products derived from historical information about the seller. Part of the reason certain brands are able to charge more for the same goods is because people associate their identity with them. Carrying a Louis Vuitton bag is different from carrying a normal handbag. Similarly, people associate their identity with the members they contribute to and the DAOs they own. If you think of Solana as a DAO, consider all the people whose identities are associated with owning Solana. They are willing to sell Solana for free, buy and bash non-believers.

Monopolized resources:Preferential access to coveted assets that independently add value on attractive terms. The DAO's community is its monopolized resource. While many DAOs employ or otherwise compensate people for their contributions, in many cases people contribute to DAOs simply to make them or the blockchains that build them more valuable. Moloch DAO provides grants from its members' own pool of ETH to make ETH more valuable, and can submit proposals to do free work to make Ethereum better. The time of these engineers is independent and valuable.

Community as a product

Just as a product has a set of metrics based on its user journey, we can look at a set of metrics based on the contributors' journey through the community:

In summary, DAO has the opportunity to build a very strong moat by providing financial incentives to DAO users, contributors, and a broader ecosystem of stakeholders, and by giving those stakeholders a say in DAO governance. The strongest are network effects -- once a DAO reaches a certain growth rate, it can be difficult to dismantle, especially since community governance means it should be able to adapt and develop long-term value in ways that the community believes will create the most lasting.

That said, the DAO should be wary of using these moats to get too comfortable. They should not extract too much value, delegate too much power to too few stakeholders, move too slowly, or do anything else that might anger enough community members. If the DAO community does this, it will be giving someone else an opportunity. There is always the threat of a fork. It's survival of the fittest.

Mergers and acquisitions:

At the end of 2021, we saw one of the largest DAO mergers when Rari Capital (DeFi protocol) and Fei (algorithmatic stablecoin) merged to form a $2 billion liquidity participant and consolidated into a single governance token -- TRIBE, This is Fei's governance token. As we move forward and see more of these mergers and acquisitions take place, the valuation framework becomes critical for all stakeholders of the DAO to use to evaluate and vote accordingly. The other element of "synergies", how the various communities/DAOs benefit from the merged entity, will be an interesting consideration.

Verdict: Overvalued or undervalued?

A good valuation always contains a story, a bridge between the story and the numbers. Every number in a valuation has a story behind it, and every story about a company has to be accompanied by a number. Uber, for example, was originally valued at $6 billion as a city car service. However, when positioned as a logistics company, the valuation rises to $53bn. Again, the valuation of a Web3 community depends largely on the story and vision of the community.

"Valuation is not just a number, it's a story" -- Ashwath Damodaran

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