PopCorn DAO (Decentralized Autonomous Organization) – The “Lemonade” of DeFi
ESG (Environmental, Social & Governance) Meets Defi (Decentralized Finance) and Potentially Creates a New Class - Impact Trading
Six years ago, Lemonade set out to make insurance fairer (and maybe a little more interesting). The Lemonade model seeks to put power back in the hands of customers, both by aligning company and customer interest through a fixed fee premium model and also involving customers in allocations of grant dollars to impact organizations.
Specifically, the founders developed a new model of charging a flat fee on premiums and giving customers the ability to choose how to allocate year-end unpaid claim money to a cause of their choice. Though the company started five years ago, it heralded a fairer business model practice, shared ownership, and community involvement in governance that now also shapes hundreds of web3 initiatives.
Six years later, the company is publicly traded and commands a near $4 Bn market cap.
Popcorn, a new DAO (Decentralized Autonomous Organization) seeks to take the Lemonade model and apply it to the world of decentralized finance. The heart of its business model lies in a direct challenge to the operating model of traditional financial institutions, in three specific ways:
Philanthropy Embedded in Transaction Fees: 20-50% of the fees earned on executing financial contracts (via a smart contract architecture) will be allocated to social impact organizations decided by the community.
Broad Based Ownership: Fully 55% of the ownership structure of the company will be allocated to the community holding the native pop token with another 5% held by its foundation.
Community Governance: Owners of the $POP token that lock up (“stake”) their tokens with the protocol will have governance rights to vote on which social impact organizations are allocated transaction fees.
To understand whether Popcorn DAO has a chance of succeeding in the competitive world of DeFi, it's important to first understand the unique moment in time we find ourselves in by exploring three trends:
Liquid Tokens: A decade of loose monetary policy has created a liquidity bomb, with trillions of dollars’ worth of capital chasing yield and an increasing amount going towards crypto.
Total Portfolio Allocation Towards Impact: Impact investing no longer represents a small portion of assets and more institutional investors and family offices are moving towards 100% of assets screened for impact. Even venture capital firms are starting to be held accountable by their LPs for ESG indicators, for instance.
Empowered Participants: Web3 is enabling communities of stakeholders to become far more engaged in company governance than traditional firms, through governance tokens that determine budgets, initiatives, and product R&D.
Let’s explore each trend in more detail:
A Liquidity Bomb Concurrent with Crypto Maturation
Over the past decade, loose monetary policy, embodied by QE and extended through massive central bank capital injections in response to COVID, has created a liquidity bomb. The balance sheet of the federal reserve was bulging before COVID and has risen exponentially since the pandemic, with the Fed now holding a variety of assets including nearly 30% of Treasury notes.
With a world awash in liquidity, trillions of dollars’ worth of debt are now trading with negative yields (see more here). Institutional (and increasingly retail) investors are searching for yield wherever they can find it, leading to record highs across nearly all asset prices.
At the same time as the world has run awash with liquidity, blockchain technology and smart contracts have brought the transaction fees associated with complex swaps down to nearly zero. Tokens built on top of Ethereum (amongst other protocols) are now fungible and tradeable in a near infinite number of pairs (e.g. BTC/ETC) and indexes across decentralized exchanges.
To incentivize token holders (providers of capital) to lend these tokens out, traders and protocols (seekers of capital) are willing to pay a variable or fixed rate of return. Various reasons exist for providing yields (for a detailed analysis of DeFi yield, see here), but in plain English:
Providing Services to the Protocols: Protocols “lock-up” tokens/coins that are “staked” with the protocol, aligning ownership and governance rights to those that stake their assets. One example would be to build a more secure and less energy-intensive blockchain, for instance Eth2, which is the staked version of Eth and provides a variable APY on the amount of Eth staked until the two chains merge (https://launchpad.ethereum.org/en/)
Liquidity for Exchanges: Decentralized exchanges, where crypto assets are bought/sold/lent/etc., require deep pools of capital to make sure that trading between asset pairs is fluid (or liquid). When a user provides capital to exchanges by lending or staking their tokens/coins at the exchange, the exchange will often provide 1.) A reward in the form of a Native token/coin and/or 2.) A percentage of the transaction fee, dependent on their pro-rata stake in the liquidity pool, when a trade on that asset pair is executed by the exchange.
Aligned Incentives for Stakeholders: Given the fungibility and deep liquidity across a variety of token/coin asset pairs, creators of new protocols will often incentivize their community to buy and stake their native tokens/coins. The stakeholder who is offering up their asset is often making the bet that the token/coin will appreciate in relative comparison to other liquid tokens/coins. So the yield, even if nominal in the sense that the asset holder is being paid interest on the protocol’s own currency, could over time be swapped at a better rate against other liquid tokens/coins in the future.
The founders of Popcorn are looking at these yields, and betting that there is a significant client base that will be drawn to yield-bearing financial instruments that offer an intrinsic impact investment allocation as part of its revenue model. To really understand how much these ideas are part of the zeitgeist, let’s first step back and consider how mainstream impact investing has become over the past decade.
2.) Impact Investing is Mainstream
For most Baby Boomers and Gen Xers, the model of work was one of “Learn, Earn, and Return”, with life segmented into the phases of education, work and giving back. To that end, for a world where very little focus was placed on the social and environmental impacts of one’s work, this work/life model fit well with the “Colonize, Extract and Philanthropize” model of capitalism. Thirty years ago, one could spend one’s career working in the oil industry and then join the board of an environmental NGO, and the irony would be lost on most.
Through the hard work of tens of thousands of professionals (not to mention millions of activists) over the past thirty years, this model of capital growth and investment radically changed to incorporate a focus on social and environmental considerations. One tangible benefit of that sweat equity is the fact that every major asset manager’s research division utilizes increasingly standardized Environmental, Social and Governance indicators to allow for like-by-like comparison of impact performance within asset classes. These impact methodologies and classifications increasingly enable what Jed Emerson has long called “Total Portfolio Management”, where a diversified allocation of assets need not sacrifice on ESG performance:
“A total portfolio approach is far more accessible than it was even 10 years ago. Indeed, investors are providing proof that impact investing is not an asset class but an overall approach to maximizing total portfolio performance in pursuit of sustained, blended value within the world we want to live and pass along to generations to come.”
With more institutional investors taking a Total Portfolio Approach, fixed income investment is increasingly following ESG criteria. This is best evidenced by the rapid growth of corporate and sovereign green bond issuance. Yet, as Millennial and Gen Z investors are aware, the 60/40 equity/fixed income investment strategy that worked for their parents will not work in a world where sovereign and trillions in corporate bonds offer negative yields. And, while the meme-stock revolution and YOLO strategy of reddit traders makes headlines, younger investors over time will need to think through a diversified portfolio strategy. Popcorn can offer long term appeal to an investor base that requires a fixed income investment. To this end, the team is making the bet that many holders of cryptocurrencies are better served by simple diversified products that offer exposure to the asset class. Their first index product does just that and offers an index for investing in cryptos “top 3 most investable assets”:
Despite the appeal of its financial products, the market for investing in bundled crypto assets is likely to continue to become commoditized with time. Which is why Popcorn is adding three other elements to its platform to attract impact-oriented investors:
Carbon Neutral Trading: A Smart Contract Emissions dashboard developed by Popcorn, and informed by Patch-powered Ethereum network emissions data, enables calculating the carbon impact of any smart contract execution. From here, Patch steps in by providing automated contributions to a broad set of carbon offset and removal projects. These include frontier negative emission technology and nature-based carbon sequestration projects.
Decentralizing the Boardroom
Anyone who has had exposure to partners at bulge-bracket banks know that the foundation is often a pet project of a few of the partners at the firm. In the capital model that Popcorn is trying to reimagine, the beneficiary organization that participates in smart-contract fees will be selected by community members that stake their tokens with the network.
Through allocation of a percentage of their assets into $POP, token holders not only have the chance to earn yield but also can directly participate in governance of the firm’s cash flows that are allocated to social impact organizations. The governance model provides for a variety of edge case security and lack of participation risks, fully outlined in the governance white paper.
Popcorn’s Token Launch Auction completed two weeks ago at nearly an 8x premium on its recently completed private sale. While it is playing in a competitive market, its model is likely to continue to attract an audience of investors who do not want to sacrifice on yield or impact. Whether this proves to be a fruitful long-term investment strategy will be proven out as interest-rates rise and capital flows to higher yielded DeFi products face more competition from traditional assets.