Charity DAOs
Note: Data in this section last updated July 3rd, 2022
What are Charity DAOs?
One of the earliest use cases of the decentralized autonomous organizational structure, charity DAOs could replace traditional charities such as the United Way or Salvation Army, or traditional grants institutions such as the NIH.
In a charity DAO – also known as a grants DAO – the community pools their capital into a blockchain-based treasury and then collectively votes on how to distribute these funds.
Charity DAOs have almost an unlimited number of potential use cases. They can be used to fund children’s and family services, homeless services, education, food banks, social services, youth development, environmental efforts, animal welfare, education, international NGOs, etc…
They offer several benefits over traditional charities such as:
Lower cost: On average, charities spend 25% on administrative and fundraising costs – the automated nature of DAOs can largely eliminate this
Governance: Unlike traditional grant / charity organizations, members have a direct say in the governance of the DAO, meaning that they can direct it to issue funds to projects they are passionate about
Transparency: It is estimated that over $40B of charitable donations are stolen each year. Because every transaction in a grants DAO is recorded on a blockchain, it will be easy to identify theft and fraud
How do Charity DAOs Work?
To understand how grants DAOs work, let’s take a look at Gitcoin – a crowd-sourcing platform that provides grants to developers working on open-source software projects. The project was founded in 2017 by Kevin Owocki, has 26K members and $75 million AUM. It is advised by Balaji Srinivasan, Naval Ravikant and Joe Lubin (founder of ConsenSys).
Gitcoin focuses on funding developers working on “public goods” projects. From an economic standpoint, the two features that distinguish a public good is that it’s: 1) “non-rivalrous” (i.e. it doesn’t decrease in supply if more people use it) and 2) “non-excludible” (i.e. it’s available to everyone). Common examples of public goods include clean air, better infrastructure and privacy.
Gitcoin Funds “Non-Excludable” and “Non-Rivalrous” Public Goods
Like many charitable organizations, Gitcoin uses “matching” – a process where individual donations are matched from a larger pool of funding supplied by bigger donors.
Unlike traditional charities, which match funding dollar-per-dollar or by a percentage of the total amount given, the platform uses a process called “quadratic funding”. Quadratic funding is mathematically-based scheme that rewards the number of contributions over the dollar amount of these contributions (incentivizing people to make many small donations vs. a few large ones). In theory, this creates a more democratic process and gets people more involved in the ecosystem.
Feel free to skip this section if you’re not interested in the math behind this, but if you are – quadratic funding works by taking the square root of each contribution to a project, summing and squaring that total and then comparing the result to similar projects.
This probably seems a bit confusing, so let’s explain with an example. Imagine that there is a $10,000 matching pool and three projects that each raise $5,000, but from a different number of donors (let’s say 5, 2 and 10 donors). In a traditional matching scheme, because each project raised the same amount, they would split the matching pool equally, getting $3.3K (33%) each. Under quadratic funding, however, we would get a different result:
Project A: If the first project raised $1,000 each from 5 donors, we would take the square root of all the donations (√$1,000 = $31.62), sum them up to get $158.12 and then square this to get $25,000
Project B: If the second project raised $2,500 each from 2 donors, we would take the square root of all the donations (√$2,500 = $50.00), sum them up to get $100.00 and then square this to get $10,000
Project C: If the third project raised $500 each from 10 donors, we would take the square root of all the donations (√$1,000 = $22.36), sum them up to get $223.61 and then square this to get $50,000
We would then sum all three totals to get $120,000. While this figure doesn’t represent an actual funding amount, it will be used to calculate the percentages of the matching pool given to each project. Based on these numbers, we can see that project A garnered 21% of the new total ($25,000 / $120,000), project B garnered 8% ($10,000 / $120,000) and project C garnered 71% ($85,000 / $120,000).
As such, out of the original matching pool of $10,000, project A would receive $2,083.33, project B $833.33 and project C $7,083.33.
Again, it’s not really necessary to understand the math, only that the even though each project raised the same amount, the one with the most donations received a lot more total funding.
Who are the Key Players?
In addition to Gitcoin, other notable Grants DAOs include Moloch, VitaDAO, Big Green, UkraineDAO and KlimaDAO.
Source: DeepDao as of 7.2.22
Note: The above list is not exhaustive. Although generally ranked by size, some smaller projects may be included for illustrative purposes. In addition, while DAOs often span multiple categories, they were only included once in the vertical that is believed to represent the best fit
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