Many problems with blockchain-based ideas has been that speculators have driven the first adoption. Bitcoin’s original purpose was to facilitate payments, but it was quickly subverted into a Ponzi scheme.

The same fate has met other ideas behind “Web3”, the notion that blockchain infrastructure can deconstruct the ownership of data away from centralized platforms.

One of these is the decentralized autonomous organization, or DAO, which crypto enthusiasts tout as “the future of work” or the way to incorporate enterprises without relying on traditional legal frameworks. In practice, most DAOs have been incapable of proper governance, or have been kidnapped by speculative insiders.

What if DAOs are designed to serve a more basic governance function instead of as mechanisms for get-rich schemes? What if they can be organized to help individuals or small businesses coordinate in a mutually beneficial way?

One notable experiment is CoffeeDAO, begun by a small foundation in Hong Kong. The idea is to use the underlying blockchain infrastructure to enable independent coffee shops to cooperate in order to gain the benefits of scale, without sacrificing their freedom or owners’ equity.

Proving DAOs

If it succeeds, it could be mimicked by any other group catering to consumers. Eventually this could pave the way to more ambitious ideas of DAOs as corporate treasuries for digital-asset enterprises. Once tokens gain more widespread circulation – once the underlying use case has been proved and adopted – then their governance tokens could become tradable assets. But in that sequence, as opposed to failed ideas such as the collapsed Terra/Luna algorithmic ‘stablecoins’.

The main driver behind CoffeeDAO is Cheney Cheng, co-founder and CEO of Apoidea, a Hong Kong-based artificial-intelligence company with business lines that include blockchain-enabled private-market funds, digital media, and a digital-asset custody business.

He teamed up with RadicalxChange (RxC), a non-profit foundation for “next-generation political economies”, which seeks to use decentralized models to advance equality and community. RxC was created by economist E. Glen Weyl and its board members include Vitalik Buterin, the co-creator of Ethereum.

The other four original members of the CoffeeDAO foundation are the owners of local Hong Kong coffee shops.

Rebalancing power

Cheng said: “Most people are using DAOs to escape legal liability, or as hype factors to raise money. But I view them more like cooperatives, offering a fairer economic structure to gather labor and other resources.”

He envisages DAOs serving to organize gig workers and small businesses that rely on platforms such as Uber or Amazon – the giants of the “Web2”, centralized and extractive businesses that exploit everyone else’s data.

“But we need to see examples,” Cheng said. Hence, the modest beginnings of a DAO for local coffee shops.

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Despite crypto’s speculative excesses, it’s the ultimate reference for a DAO. Bitcoin began as a means for millions of people to share computational resources to support a digital asset. Similarly, the underlying technology can support people with no other commonalities to work towards a unified objective.

In theory, hundreds of coffee shops could band together to share resources via a DAO that gives them the ability to compete as a collective against global chains such as Starbucks.

CoffeeDAO mechanics

For now, the experiment is far more modest. CoffeeDAO’s foundation has just completed its alpha test with the four participating coffee shops. The scheme relies on affiliated-marketing techniques.

The foundation minted 2 billion CoffeeDAO tokens, called $COFFEE. Each token represents one espresso shot, courtesy of a participating store. Apoidea’s digital custody arm, ADAM Vault, holds these in cold storage.

The four coffee shops were each granted 1,000 tokens to give to their customers as loyalty gifts. Stores get another 200 tokens if they bring in another shop to participate. The coffee shops relied on gifts as well as local influencers (who get a token for every paying customer they bring to the store).

Few people go to a store just to buy a single espresso, so the shops use the tokens as lures to upsell. “We’re tokenizing marketing value,” Cheng said.

The shops aren’t trading $COFFEE, and the tokens are not listed on crypto exchanges. ADAM Vault charges a fee of 1 percent of the tokens it holds in custody, but it doesn’t cash this out: it uses this pool to make markets and keep the token liquid.

If the price of $COFFEE tumbles, there is an incentive for coffee aficionados to purchase tokens at the discount. This equates to getting lots of cheap espresso. But an espresso isn’t worth enough to attract speculators: it’s only coffee drinkers who would care.

Going for scale

Cheng says the alpha test has proved the concept. The token program brought in about 300 customers. Their average cost of acquisition was HK$20 (about $3), which is cheap considering the cost of a regular cup or other menu items.

The experiment needed help, though. Apoidea paid for a dedicated digital marketer to drive awareness via Instagram (at coffee.daohk). IG and other social media are usually difficult for small businesses to use. IG doesn’t even allow hyperlinks on its posts. It’s usually giant brands who can afford to pay superstar influencers that can generate meaningful traffic from these platforms. But Cheng says CoffeeDAO leveraged its marketing effort for all of its shops, and collectively it became the leading business account from Hong Kong on IG.

Apoidea is preparing to launch a beta test. The goal is to prove the concept at scale. The alpha test attracted new coffee shops, including some in Singapore. These all become voting members in the DAO. Cheng hopes to conclude beta testing by the end of the year, and grow the DAO to 100 shops. (Customers with $COFFEE tokens can also be DAO members but don’t get a vote.)

Pooling some resources, the DAO can operate like the headquarters of a global franchise. Individual owner-managers of Starbucks or McDonalds outlets rely on the parent for marketing, loyalty programs, and promotions. Now coffee shop owners can do the same, with the DAO serving that role.

Other attempts at DAOs have failed at basic governance. The most vital questions are about control of budgets and cashflows. But too often, most participants are clueless or uninterested in governance, which can lead to capture by bad actors.

To keep things simple, Apoidea and RxC designed CoffeeDAO to enable decisions to be made easily, with a minimum of three votes to serve as a quorum. But if the community doesn’t like a proposal, it can fight to block it, because every resolution requires a majority to pass.

Mass retail adoption

The challenge for the beta test is how to get the mass retail market interested in coffee tokens. Another flaw in DAOs is they rely on people using crypto wallets to operate. These are complex, requiring people to usually move from fiat to Ether and open a brokerage account just to get hold of other tokens. And the user experience in these systems is poor.

CoffeeDAO isn’t interested in promoting crypto speculation or mass usage. It wants to get people to use $COFFEE as reward points to get free coffee. Instead of fussing with crypto wallets, it created a web-based app that allows people to scan a shop’s QR code to pay for coffee or earn a loyalty token. It’s this simplicity that made it possible to expand the DAO to include shops in Singapore.

Behind the scenes, though, CoffeeDAO’s website relies on blockchain-based authentication. It uses open-source multi-party computation that splits keys three ways (one to a social media login that gets stored on a decentralized network, a second to the device or mobile, and a third to a ‘forget password’ question. There’s no need for a seed phrase as with Bitcoin (which requires people memorize a random 12-word sequence). Cheng says this makes the system feel like a normal online experience but it’s got blockchain’s decentralized security to power it.

If the beta is a success, CoffeeDAO will work its way to becoming a global network, one that would come to rely more on stablecoins as well as its native token. In this scenario, $COFFEE is no longer traded in a closed-loop of customers, but becomes a tradable asset on crypto exchanges. The CoffeeDAO foundation members will have expanded to the point that the original six have no special powers, and Apoidea is no longer required to support the DAO with marketing budgets or other services: the DAO’s own treasury will be more than adequate.

“To be truly efficient, a DAO has to decentralize its treasury management,” Cheng said. “That enables decentralized governance. Otherwise the DAO is pointless.”

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• Source: https://www.digfingroup.com/coffeedao/