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Thomas Alomes | DAOs promise fans genuine ownership but are they a realistic source of investment for sport?

In his latest column, technology expert Thomas Alomes separates the reality from the theory to outline where decentralised autonomous organisations can be best applied in sport.
23 Jun 2022 Thomas Alomes
Opinion

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Sport is the cultural medium by which many innovative technology solutions are translated from their niche beginnings to a broader market. Blockchain and crypto, including decentralised autonomous organisations (DAOs), are no exception.

Proponents of the new blockchain-powered tech are keen to seek out real-world use cases and DAO ownership of professional sports teams and organisations seems to be one of the easiest uses. But is this actually needed or wanted in sports? And what functioning use cases do we have in action today?

What is a DAO?

According to Coindesk, a DAO is a blockchain-based form of organisation or company that is often governed by a non-fungible token (NFT). Anyone who purchases and holds these NFTs gains the ability to vote on important matters directly related to the DAO.

DAOs typically use smart contracts in place of traditional corporate structures to coordinate the efforts and resources of many individual members towards a common aim. These smart contracts are algorithms that automatically execute certain actions when conditions or rules established by the group are met. The DAO voting infrastructure ensures every member of the community will have the chance to easily make their voice heard in a transparent and efficient way.

It’s crowdfunding meets membership meets corporate governance, all with a crypto twist.

How could DAOs be applied to sports?

Often DAOs in sport feel like a solution looking for a problem. However, proponents argue it solves two major issues in sport today: fans want to be more invested in their team and sport needs more investment capital.

Fans already feel an emotional sense of ownership over their club which creates the desire for a more meaningful stake in how it operates. The balance is giving fans that “meaningful” (rather than tokenistic) stake without ceding day-to-day decision making.

Fans are irrational, passionate and committed and that’s what makes them “fanatics”. It doesn’t make them suited to be responsible administrators or highly-trained performance staff making specific operational decisions. Regardless of what supporter groups and some more idealistic industry thought leaders may say, realistically fans should not be involved in the minutia of these decisions. However, fans should be involved in crafting the long-term direction and strategy of their club or organisation.

A popular solution enabled by blockchain tech trying to answer this need is the crypto fan token, which gives fans ownership of a token of a club or team – and therefore a “say” in its operation – but not actual ownership of the club itself. Fan tokens can feel as if they are exactly that, “tokenistic”, in the decisions that get offered for fans to vote on, such as what music should play at halftime or what colour the dressing rooms should be painted.

DAOs as a governance tool can provide a far greater level of engagement than fan tokens by ceding a certain level of control and genuine “ownership” to fans without handing over day-to-day management. Fans need to be empowered to support but not to take over the club and DAOs allow for this through structured voting systems executed by smart contracts on clearly defined terms.

So fans can theoretically be more invested in their teams through a DAO, but can it solve sports need for more money?

Sport needs to fish in bigger ponds

The recent sale of the National Football League’s (NFL) Denver Broncos for US$4.5 billion and Premier League soccer club Chelsea for US$5.2 billion highlighted that the purchase price of professional sports franchises in top-tier leagues is becoming prohibitive to say the least.

Although the wealth of the global top one per cent increased by US$6.5 trillion last year, there are still only so many billionaires on the planet with the net worth and desire to invest in sports. This is exacerbated by the “peak” of live broadcast rights that most analysts believe we’ve reached in the current cycle. Put simply, to make the pie bigger and keep up with each new valuation benchmark, sports need more money from more sources.

So what’s the solution to running out of the pool of available individual owners and even consortiums of owners? Minority ownership through different investment vehicles. For example, in an effort to inject capital into its closed league ecosystem the National Basketball Association (NBA) has recently allowed private equity to pursue minority ownership in teams.

This is also where DAO acolytes say they have the fix. In theory, there’s huge potential for fractional or minority ownership facilitated by DAOs. By pooling individual fan resources across a large fanbase they can crowdfund vast sums of money needed to invest directly in a team.

BuyTheBroncosDAO was launched in an attempt to raise enough to purchase the Broncos. To match the eventual US$4.5 billion sale price to Walmart heir Rob Walton would have needed every single one of the Broncos’ four million Facebook “fans” (an already inflated number) to commit over US$11,000 each. Apart from generating a lot of press noise they didn’t raise the targeted amount. So in reality the sheer cost of entry, as well as franchise ownership restrictions within those closed leagues such as the NFL, NBA or Major League Baseball (MLB), prevent fan-backed collectives (via a DAO or any other mechanism) from being a serious option.

However, DAOs could still hold the answer for smaller leagues as well as different sports where collective ownership is already a more accepted model.

A sports DAO in action

LinksDAO is a decentralised autonomous organisation that defines itself as a ‘global community of golf enthusiasts in Web 3.0 reimagining the modern golf and leisure club.’ Its stated aim is to ‘build the world’s greatest golf community’, including through owning a high-profile golf course.

Involvement in the DAO is through membership in the form of an NFT. At the beginning of this year, LinksDAO raised over US$10 million through initial sales of 9,000 NFT memberships. These were sold at two price tiers: 6,363 basic ‘Leisure Memberships’ were on offer for 0.18 ether (roughly US$674) each and 2,727 higher-tier ‘Global Memberships’ were priced at 0.72 ether (roughly US$2,699) apiece. The initial batch of memberships sold out in less than 48 hours and can be resold on the secondary market, with an automatic royalty payment going to LinksDAO, a notable feature of NFT sales.

Although US$10 million may be a good starting point to look to purchase a golf course or at least a stake in one, the money raised in the initial NFT memberships sales cannot be used towards the purchase of a physical course or club. US law prohibits anonymous raises for the purpose of buying physical assets.

According to LinksDAO founder Jim Daily there are two different but complementary elements to the project: “The DAO, which is our community members who are putting forth [governance related] proposals and helping to steer decisions. Then we have a C Corp, which is the entity that will go out and actually buy the asset [golf course or club].”

To this end, the initial membership NFTs do not actually grant holders a membership to the future physical LinksDAO golf course or country club. Rather they grant the right to buy a physical membership at some point in the future. Each NFT membership tier also grants holders further perks: governance voting rights for LinksDAO; access to LinksDAO events, prizes and merchandise; as well as benefits from their strategic partners including Callaway, Topgolf, DraftKings and Five Iron Golf.

In addition to becoming a strategic partner, Callaway reportedly invested in LinksDAO’s recent undisclosed equity funding round. As part of the agreement, Callaway offers discounts and deals on branded items to the NFT holders and becomes LinksDAO’s official equipment provider.

Callaway is one of the world’s largest golf equipment and apparel manufacturers and owner of tech-focused range experience Topgolf and the Toptracer ball-tracking solution. An investment by Callaway as a company with a track record of investing in the future of golf is a vote of confidence in the potential of LinksDAO to have a meaningful and long-term impact on the market.

The key takeaways from the early success of LinksDAO are its focus on community and utility. Building and sustaining the community underpinning the organisation needs to be a focus for any successful endeavour in this space.

LinksDAO sold out its membership offering in 48 hours and has an active discord channel with over 15,000 members. This active community feeds into the utility offered to its members. There need to be tangible benefits from being involved in the community beyond the digital identity found with many other NFTs. Although the utopian vision of a purely digital world is presented as the ultimate end goal of Web 3.0, the reality is that currently physical benefits of a digital community are part of what sustains it.

Both in terms of engagement as well as the dollar value of the NFT memberships, LinksDAO has a long road ahead to raise enough capital to achieve its lofty aim of purchasing a physical golf course or club. But early signs indicate that it’s a workable model and with its continued success expect to see further meaningful applications of DAOs to sports.

About the author: Thomas Alomes is a sports tech subject matter expert passionate about positively impacting sports through innovation. As the SVP, Head of Market Insights at STWS, Thomas provides best in class consulting and strategic advisory services to vendors, governments, major events, sports tech investment funds and fast-growth sports innovators globally. Thomas is also the founder and director of Sports Innovation Texas, a not-for-profit realising the potential of the region to be a global innovation hub for sports innovation, business, and technology.

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