Cannabis DAOs

I wrote recently about cannabis NFTs (see here) and tokenization of cannabis assets (see here). This post covers cannabis DAOs (Decentralized Autonomous Organizations) within the industry space (“DAO” is pronounced like “dow”).

Web3: cannabis DAOs, cryptocurrencies, NFTs, and smart contracts

If you have been paying attention, you know at least something about Bitcoin, which is the flagship cryptocurrency in use today. You have probably heard of “blockchain technology” that underpins this new wave of technology. This new ecosystem of technology is called “Web3,” and it encompasses cryptocurrencies like Bitcoin, Ethereum, and the hundreds of others currently vying for viability. All of these currencies are part of the decentralized finance (“defi”) movement.

Web3 also encompasses NFTs (non-fungible tokens), which you could also think of as unique digital-only assets that are created, bought, sold, and collected all over the world. Recently I spoke with an entrepreneur who has hired a web3 artist to render (or “mint”) 100 unique three-dimensional pieces of artwork of marijuana (these details have been changed to protect his confidentiality). He is using these first 100 NFTs to test the marketplace. If the response is good, he will mint and drop (sell) a total of 1,000 unique NFTs. He will use the proceeds from these NFT sales as seed money for his cannabis DAO and to form the user base for his DAO (more on both of these concepts below).

Smart contracts are used in cannabis cryptocurrency transactions, NFT drops, and DAOs. Smart contracts refer to computer code that executes certain transaction protocols without the use of any intermediary approving the transaction or pushing the approval button. You can think of smart contracts as functioning like automatic escrow agents.

These smart contracts do not, should not, and cannot yet replace traditional contracts because they only contain certain parts of traditional contracts. When the day arrives that smart contracts incorporate terms and conditions that replicate traditional contracts, they will be good enough to use as traditional contracts (though user anonymity will remain a hurdle). We will need wider adoption and better integration of lawyers with the coding community before that happens. And people will need to care about legal strategies underpinning business strategies, which is not the case even today in traditional business environments.

Just like the early days of cannabis, all of this web3 technology is moving quickly, and everyone is operating somewhere between unregulated and marginally regulated guardrails. We are in the middle of an explosion of technology and terminology. Not far behind is the proliferation of litigation, followed by laws and regulations. Most people see this as a good thing because when investors and entrepreneurs know that their investments of coin and time will be both rewarded and protected, we will get more widespread adoption, providing more opportunities for everyone.

Cannabis DAOs: the entrepreneurs I know

The entrepreneur I mentioned above is not unique. Minting cannabis NFTs as a springboard to developing a cannabis DAO is a technique used outside of the cannabis realm, as well. But cannabis entrepreneurs have always had to be creative, so I am not surprised when I hear their business plans.

I recently spoke with another cannabis entrepreneur in southwestern Europe. He is minting NFTs, which he will use as ownership interests in his DAO. Anyone who purchases an NFT will automatically be a member of his DAO. The DAO intends to purchase some U.S. cannabis business assets. The group will decide and vote on the business model, which will likely be impacted by the expertise of the DAO members. It will also be impacted by U.S. federal (immigration) and state restrictions on cannabis asset ownership by non-U.S. citizens or non-state residents (e.g. Washington State).

What can a cannabis DAO do?

Not all DAOs are focused on forming a business venture. Some are merely interest groups that act like a subreddit. People form DAOs based on common interests. Thanks to the worldwide internet, DAOs are inherently cross-border, bringing together people across language, country, interest, and financial barriers.

But many DAOs are created with the express purpose of making money. Some cannabis-focused DAOs create and sell cannabis NFTs. Other DAOs buy and hold cannabis NFTs as investments. And other DAOs have big aspirations, like acquiring functional cannabis businesses and operating them.

Some DAOs use NFTs as tickets to entry (see here) to make the DAO more exclusive. This exclusivity has many functions. By creating artificial scarcity, the DAO can remain small enough to get something done. It can also increase the value of the DAO and the NFTs that are required to join the DAO.

MoonDAO was initially created around the group’s interest regarding space exploration. It mid-term aspirations are to send two DAO members on a trip to the moon. Its long-term aspirations are to help rewrite the participation criteria and rules of engagement for everything outside of planet earth. Perhaps an analogous cannabis DAO would aspire to be the first group to grow cannabis on the moon.

What can’t a cannabis DAO do?

Cannabis DAOs cannot by themselves replace traditional companies without integration into existing legal and financial systems. Many smart legal, financial, and technical minds are working to develop DAO models that preserve the best aspects of DAOs while applying legal and financial best practices to ensure that DAO members have the best of all of these worlds.

The best DAO models I have seen stretch across at least two international jurisdictions and employ no less than three legal entities. If it sounds cumbersome, it is, but that is because DAOs are rewriting the way business will be done. Those of us who lived through the last two decades of cannabis legalization felt the same way as the legal industry emerged. Web3 technology is doing the same thing to every industry in every country. We are excited to be a part of these early developments.