Watching the history and evolution of DAOs unfolding in front of us is fascinating. Despite the better half of a decade’s experience in this field, every DAO still feels like a fresh experiment, and one where we have no idea what twists and turns their story will take. And though some DAOs have already been hugely successful, it’s fair to say that none have yet stood the test of time.

When a new DAO with exciting potential signals its intention to emerge, the first question that often comes to mind is: are they making a mistake? There’s a worrying tendency for groups to want to position themselves as being a part of humanity’s decentralization arc. That is to say that they make very large decisions about the structure of their organizations without actually considering whether decentralization is necessary or even helpful for them. The simple fact is that not everything needs to be decentralized, and properly decentralizing anything comes at an enormous cost.

Today, it’s exciting to be mulling over the new plans from Karpatkey - one of the leading DAO treasury and risk management groups - to “spin-off” their own DAO and governance token, and set in motion their own experiment for the future of finance.

A Brief History

Karpatkey was borne of out Gnosis, a group originally dedicated to prediction markets which pivoted into running their own blockchain before spinning out a range of other innovative projects. Gnosis emerged from its own token offering in 2017, which endowed the project with a large treasury and led to the incorporation of Gnosis Ltd. In 2020, the company announced its intention to set up an adjacent DAO - Gnosis DAO - and allocated the majority of its token supply to the DAO’s treasury.

Shortly before the formation of the DAO, Gnosis Ltd. had begun investing its considerable treasury into low-risk liquidity mining positions. By mid 2021, the company had tasked what is now Karpatkey with responsibility for researching, executing and reporting on its treasury management decisions. Karpatkey then assumed the same role in respect of the far larger DAO treasury under Gnosis Improvement Proposal (“GIP”) 20 in November 2021. As part of the deal, Gnosis DAO invested $1 million into Karpatkey at a $50 million valuation.

Within a year, Karpatkey sought to significantly expand the scope of its work, now including commercial dealmaking, analytics, ecosystem development and technological solutions. Through GIP 58, the team renewed and extended their mandate, and redesigned their fee structure. Under the new deal, Karpatkey takes 1% of all assets under management each year as a management fee, plus a performance fee of 20% of all yield obtained in each month.

Throughout the second and third year of its life, Karpatkey proceeded to rampage its way across many of the largest and most strategically-important treasuries in Web 3.0, including Balancer, ENS, CoW Protocol and Aave. It also assumed a position on the Lido DAO Treasury Management Committee, and won research grant funding from Arbitrum DAO’s Treasury and Sustainability working group. That’s quite the roster!

That brings us up to present day, when the proposed GIP 92 announced Karpatkey’s intention to “spin-off” and form its own separate DAO and $KPK governance token.

The Karpatkey Model

Karpatkey’s model is surprisingly opaque. In early proposals, Karpatkey framed itself as a DAO, however this description has been subsequently abandoned as the group expanded beyond the Gnosis ecosystem. This is evidently correct, as although Karpatkey operates primarily in public, its own decision-making, financing and strategy are kept mostly behind closed doors.

Like governments, the purpose of DAOs is not actually to take action, but instead to ensure that the actions which are taken are reserved only for legitimate purposes and through legitimate processes. For example, the purpose of Gnosis DAO is to propagate the growth and development of the Gnosis ecosystem by governing key decisions about the use of its treasury. By contrast, Karpatkey was formed with specific DAO treasury management functions in mind. It has (until now) maintained its own autonomy and direction, and does not have an open means for public engagement.

But Karpatkey’s model is now and always has been DAO-adjacent. Karpatkey are participants in each of the DAOs they serve, assuming a leading voice in community discussions and governance. Though the team has sought to impose a management fee for their services (to ensure they are not out of pocket for their services) the primary revenue for Karpatkey will be through performance fees charged on the gains they make. In bearish times, this may represent a 20% cut of the ~5% yields they’re generating on each DAO’s treasury. Given the size of their $1.2 billion assets under management (“AuM”), this is still a very significant amount of revenue. But in bullish times, Karpatkey’s earning potential is truly mind-boggling…

This makes the phraseology of Karpatkey’s proposal all the more interesting; a “spin-off” implies that Karpatkey is wholly part of Gnosis DAO. The proposal to approve the move is phrased much the same. However, Gnosis DAO owns just 2.5% of Karpatkey, and does not appear to have any significant control of the group’s day-to-day operations (beyond as a client in respect of its own treasury funds).

Assuming for a second that Karpatkey therefore isn’t (yet) a DAO, their model appears to be even more attractive. The team at Karpatkey have accumulated a massive amount of AuM, with the benefit of many large decentralized and incentivized communities closely aligned to their own goals. They take a share of the profits, with minimal personal skin in the game. And with each DAO added, their operations become increasingly effective and scaled, giving them a definitive lead for future opportunities.

Karpatkey has achieved enormous things in its current form. By being a small, private group of individuals, they have been equipped make tough decisions about how to invest or manage risk that would be utterly unsuitable for large-scale governance processes. By even opening up the possibility of their own decentralized governance, does Karpatkey threaten its own existence in the form we’ve come to know it?

This then begs the question: why become a DAO?

Proposal Insights

Well, I think the answer is pretty clear from GIP 92. The below-included diagram helpfully sets out plans for the $KPK token’s distribution, and what benefits becoming a DAO offers to Karpatkey.

Of course, there are reward in there for founders, early contributors, and Gnosis DAO for its early financing (altogether c. 14%). There’s also a significant 25% allocation for the Karpatkey team, which is presumably intended for long-term incentives to keep the project aligned and driving forwards. In a similar vein, the 5% allocation for partners may be with a view to further strengthening the ties of Karpatkey to key partners, and the range of groups interested in its long-term future.

But the more telling details are the 10% allocated for future fundraising, and the 20% allocated for “M&A” - mergers and acquisitions. Together, this 30% reflects the largest share of the planned allocation, all of which is directed at funding for future activities. From these two items, it’s clear that Karpatkey is fully intending to continue growing, and has carved out a range of options for how to do so with the $KPK token.

What will be the targets of its fundraising and M&A allocations? Could Karpatkey look to invest in other significant financial advisory teams, like Steakhouse Financial? Could it invest in growing its suite of tools to feature in every DAO’s treasury management playbook? Could it even expand into other DAO services verticals, like legal or HR?

The answer is it’s still too early to know (maybe all of the above!). The point is that GIP 92 gives Karpatkey the power to do it all. And the vision is that this allows Karpatkey to go from trusted advisors to strategically-significant organization…

Not All Sunshine…

But transitioning into a DAO is not all sunshine and rainbows; there is a word of caution to bear in mind. Decentralization - in a numerical sense - is actually not difficult to achieve. But maintaining control and direction after decentralization is much, much more difficult.

One consistent theme we’ve seen across the history of DAOs is the tendency to over-govern. Nothing draws moths to a flame like vaguely allocating a large pile of tokens for “airdrops” and “team” (except maybe “grants”). Leaving the door wide open for venture capitalists or activist outside investors is also sure to make it harder to keep decision-making concentrated in the core team. Unfortunately, as funding becomes increasingly tied up in politics and procedure, builders often begin to dream nostalgically about the days when their smaller teams started from scratch with everything still to gain. Ultimately, there’s a lot to lose from decentralization.

But Karpatkey’s team are seasoned professionals in the dark arts of DAOs. Similar concerns are likely why they’ve immediately set out guiding principles around “simplicity”, “focus”, “ownership” and “adaptability”. Though decentralization in some senses threatens each of these points, its ultimately a question of how well organised the team is in managing their own control. I - for one - wouldn’t bet against Karpatkey…

Though it’s early days for the Karpatkey DAO and the “spin-off” proposal, the prospects of what’s being offered are huge. I look forward to what comes next…