The BauDAO

0x5E69
November 7th, 2021

The BauDAO is a technical model that uses Web3 financial instruments to crowdfund and collectively own architecture. While the vision for collective architecture is not a new political project, the obstacles to its realization are constantly changing, as are the means and mechanisms for achieving it.

The BauDAO, short for ‘Building DAO,’ is designed to enable communities of people to exit the rentier and credit-based mortgage models of occupancy. American homebuyers are currently facing the most competitive market in decades, and paradigmatic models exacerbate this issue through the concentration of wealth in the hands of managing intermediaries such as real estate developers, corporations, or banks. The model makes use of new software mechanisms for socio-economic organization to decrease the capital barriers to ownership in urban markets by replacing extractive entities with the capital of crowds, orchestrated by smart contracts and a new kind of Architect. The BauDAO stack can realize what was hitherto infeasible – the thoughtful and equitable management of the complexity of fractional ownership of architecture.

The goal is simple, but the mechanisms for achieving it are fairly complex. In each context it will necessarily assume a different form. We use approximate numbers to model an example in a major American city, but the intent is to imply a parametric flexibility that can be adapted to many contexts, each with different tax rates, building regulations, construction costs, land values, cultural will, and so on.

It is important to parse out hype from the legitimate affordances of programmable money, smart contracts, DAOs, and blockchains. The hype can often obscure some of their affordances for the distributed ownership of assets. On their own, the technologies of DAOs do not guarantee any kind of socio-economic outcome. However, fractional ownership was historically a prohibitively complex bureaucratic obstacle, which is now generally feasible for tangible asset management and capital formation in the range of millions to billions of dollars.

The BauDAO model references these technologies, but is agnostic to any particular cryptocurrency. The model presented here is mathematically anti-speculative. It features coded financial mechanisms which actively prohibit agents from approaching architecture as a speculative investment that realizes rapid, high-value returns. The BauDAO is designed to counter the prevailing forms of extractive finance which themselves make use of any opportunity, whether fiat, cryptocurrency, or otherwise.

Secondly, while there is a proliferation of structures for managing digital assets on blockchain apps or in various metaverse contexts, there are very few frameworks for the management of tangible assets such as land, energy, buildings, or computing hardware. In many cases there is no need for establishing distributed ownership of tangible assets, but as architects, it is our contention that this model can provide an alternative to the rentier and debt models that produce precarious and indebted forms subjectivity. The careful distribution and/or fractionalization of the ownership of tangible assets is a profound opportunity for the edification and resilience of communities. Smart contracts can become the design framework for building governing ideologies into code, with a range of potential outcomes.

Figure 1. The broad space of fractionally owned tangible assets.
Figure 1. The broad space of fractionally owned tangible assets.

The DAO in BauDAO

A ‘DAO’ is a Decentralized Autonomous Organization. A ‘DO’ is a Decentralized Organization, one without any legitimately ‘autonomous’ components. The ‘BauDO’ would be a more honest name for the initial model outlined in this report, but The ‘BauDAO’ evokes some of the ways that these systems will likely behave in the future – when the process of establishing and managing distributed ownership can be partially or mostly automated, with self-executing protocols in the center and people at the edges. The BauDAO could become a semi-automated network for real estate acquisition, which sources capital from crowds, and converts districts into Resident-owned communities with a diminishing role for extractive management intermediaries.

Figure 2. Emerging organization types (Ethereum Foundation Blog, Buterin 2014).‘Construction’ grid by the author. Note that ‘center’ and ‘edges’ do not necessarily refer to the distribution of capital, but rather to the distribution of cognition, labor, and actuation. The ‘edge’ condition is not synonymous with marginality, but is desirable in some applications.
Figure 2. Emerging organization types (Ethereum Foundation Blog, Buterin 2014).‘Construction’ grid by the author. Note that ‘center’ and ‘edges’ do not necessarily refer to the distribution of capital, but rather to the distribution of cognition, labor, and actuation. The ‘edge’ condition is not synonymous with marginality, but is desirable in some applications.

A real estate ‘DO’, operating with internal capital, represents the steady replacement of a central managerial authority that forms capital quickly and extracts urban value over time, such as a Real Estate Investment Trust (REIT), with a system of protocols that facilitate the accumulation and allocation of capital from crowds for a community of Residents.

DAOs and DOs both enable groups of people to make collective decisions about the allocation of resources. They can automate the formal governance rules in law by baking governance protocols into software, as opposed to trusting bureaucracies or management organizations to execute on decisions once they have been reached. This is the spirit in which Figure 2 refers to automation at the center. DAOs also make use of consensus mechanisms and quadratic voting, which can ease many of the troubles associated with the complexity of fractional ownership (Jentzsch 2016).

DAOs descend from the concept of Autonomous Corporations which conceived of natural entities as self-governing systems able to interact with human financial and legal systems, such the automated ecosystem resilience framework of Terra0, often referred to as a self-owning forest. In their partially-automated, humanized form, DAOs more closely resemble peer-to-peer institutions that have the potential to significantly decrease the barriers to and costs of operating an organization (Kreutler 2020). In the domain of architecture, there is a blockchain- based platform for equitable housing called DOMA which has been exploring this provocation for several years. DOMA has modeled case studies in the Ukraine and British Columbia and has built prototype simulations. While the project describes different mechanism designs for different markets, the ambition is similar to the BauDAO.

These types of organizations can also introduce high degrees of transparency.
Transparency isn’t always useful or necessary, but in this case it can create strong
trust for potential Supporters or cities who gain confidence by vetting the
framework.

The kinds of decisions made by a residential BauDAO are inherently multi- stakeholder. They would include design choices, contractor selection, unit sizes, maintenance schedules, the terms of sale, and so on. While reaching consensus on these decisions is challenging, a DAO can make it manageable.

As a note to readers: This BauDAO model is intended to be criticized and modified. Comments, suggestions, and information will improve the model, and will be incorporated as notes in the text. The identification of errors or shortcomings is desirable. To those with experience or expertise in relevant fields, please share your thoughts on what is missing so that the model can be brought closer to realizability.

The Software Toolset

The BauDAO model is realized and made legible through a software toolset. While
software is not synonymous with governance, our social codes and values are
increasingly baked into the structure of computing. While we are aware of the
political centrality of the issue of home ownership, there is very little software
which is designed to help realize alternatives.

The BauDAO can perhaps only be built by Architects and smart contract developers, working in tandem. The toolset procures and manages funds from would-be Residents and a distributed set of Supporters, each of which are fractional owners. The system must be built in a way that distributes value to everyone involved, which means healthy ownership for Residents and steady returns for Supporters. Architects can do this because they are fluent in the relevant domains, including municipal regulations, building codes, community relations, the construction process, architectural considerations, and software design.

The software toolset includes an application portal for Residents, a smart contract crowdfund interface with Web3 connectivity (similar to Mirror), individual wallet interfaces, and a social space (similar to a Discord) for discussion, propositions, news, and voting. The toolset has features designed to make building code, architectural options, taxes, utilities, internet, regulations, and finances legible. Architects can present these options to the DAO through a parametric tool. The BauDAO UI presents financial information for members to understand their ownership positions and to automate payments. For the managers, there is a UI for movement between crypto and fiat, such that the BauDAO can move funds into its corresponding LLC, REIT, HOA, or DST, described in more detail below.

Trusted Web3 software UIs have already enabled millions of people to interact confidently with smart contracts, which is a major technical affordance to de- risked crowdfunding and insertion of thousands of people into net-positive urban value chains. Much of this interaction has been with volatile systems, in part because none of the assets or currencies are tethered to tangible assets, and the technology itself is not yet regulated.

The Crowdfund

It is possible to imagine distributed crowdfunds for DAOs to acquire and manage many different types of tangible assets. In the case of architecture, it is possible to imagine both the acquisition of existing buildings or the construction of new ones, depending on the factors of the site context and the community’s needs. A BauDAO could be a creative DAO acquiring studio space. It could also be a school, an arts organization, a company, a food system, or any other kind of institutional collective. Crowdfunding and distributed ownership, managed with a DAO or DO, is a viable technique for any complex organization whose members stand to benefit economically and socially from the removal of management entities that extract significant value from the activity while contributing relatively little work beyond capital formation.

Initial Crowdfund

In this report we use the example of a 100-Unit Residential Building with a $30 million cost. The average unit size in the example is 850 sq. ft., totaling 85,000 sq.ft. The building is built at a cost of $350 per sq. ft., derived from an above-
average building cost in major American cities.

The entire $30M cost of the new building project is aggregated up front in the
form of a de-risked smart contract crowdfund. Both the Residents that intend to
live in the 100 Units and the Supporters that contribute capital commit their funds
as orchestrated by the Architects. In the model there is no traditional financing, no
loan, no banks, and no major private funders. Residents and Supporters provide all
of the capital for the project, and are entitled to their fraction of the value of the
building once it has been built. The initial sum contributed by each Resident
should be an achievable number that doesn’t require an outside loan. Funds
supplied by Residents for their Units could technically be anywhere between zero
and a majority amount of the cost of the project, but for the sake of the model, we
have selected $60,000 per Unit to represent an even 20% of the crowdfund.

Figure 3. Owner Types and Crowdfund Distribution. Note the 10% Cost to Value Margin, the difference between the cost to build, and the market value immediately following completion. This margin is distributed more or less evenly across the three owner types, thus Architects receiving 3% Ownership.
Figure 3. Owner Types and Crowdfund Distribution. Note the 10% Cost to Value Margin, the difference between the cost to build, and the market value immediately following completion. This margin is distributed more or less evenly across the three owner types, thus Architects receiving 3% Ownership.

There is a predetermined window of time in which the crowdfund smart contract is open. All Residents who have joined must send their funds into the smart contract. Anyone in the world can be a Supporter, the group which meets the remaining total of the goal. In the case that Residents provide 20% of the Building Cost upfront, Supporters supply the next 80%, and fractions of ownership are then distributed accordingly.

Supporters are incentivized to contribute capital on the mathematical likelihood of realizing steady, slow returns on their fraction in an urban market with prospects for growth. In this model we involve 10,000 Supporters of average means whose investment range is hundreds to tens of thousands dollars. The 10,000 Supporters in this model supply an average contribution of $2,400 per individual, or $24M total, which is 80% of the Building Cost.

If the funding goal is met, the project moves forward. If the total sum is not met within the window of time, all of the money is returned to the wallets from which it was initially sent, minus the relatively small transaction costs. In the case of a failed crowdfund, another crowdfund may be scheduled again if it appears that the shortages of the first can be resolved. If not, the project may be abandoned entirely at no cost to anyone except for the fruitless work put into the launch itself, the initial property assessment, and the time spent organizing the prospective Residents. These are relatively insignificant risks in relation to the possible upside. They are non-financial and amount to wasted time. Actors associated with multiple failed attempts will have insights into what does and doesn’t work, while mismanaged or predatory projects may face severe reputation risk.

In the case of a successful crowdfund, the total sum is sent into the Building Fund, a multisig wallet or ‘safe’, which then becomes the source of funds used for initial acquisitions of property, fees and taxes, and for hiring contractors according to the BauDAO's design decisions. These decisions are not simple, but between the Architects and the DAO’s leaders, the BauDAO can facilitate mechanisms like quadratic voting when feedback from Residents is desired. All funds for contractor services are procured from the Building Fund, including paying Architectural fees, and those contractors begin the process of site preparation, materials procurement, and the building process.

Ownership Model

There are three types of fractional owners in the BauDAO model: Architects, Residents, and Supporters. For their work in building the software that enables the crowdfund, as well as their initial site preparation work, the Architects are given a minority fraction, generally (2-5%) of the value of the property. The Residents own their Units, and Supporters replace the financier or the bank, retaining fractions of ownership that correspond to their contribution.

Residents begin with owning a fraction of their Unit, and slowly approach 100% ownership of their Unit according to the time length of the Buy Back plan, elaborated below. Notably, the Resident’s ownership status includes all standard rights, regardless of the fraction they own.

In the case shown here, the 100 Residents each commit $60,000 up front, which is 20% of the $30M building cost. After completion, the building is valued at $33M, and the 3% Architectural ownership is issued. The Residents then own 19% of the $33M building, each Resident owning that fraction of their $330,000 apartment, which equates to $62,700, expressed fractionally as 0.0019. See Figure 3 below.

In this starting distribution, the 10,000 Supporters own an average of 0.000078 of the total building, or $2,574 after its new market valuation.

Architects’ Ownership

Architects are currently a commodity or service. Sometimes both. The value they introduce into cities is captured by those who pay them for their work. As such they do not exercise long term holdings or retrieve steady streams of revenue for their work. Without needing developers or banks for capital formation, crowdfunding makes this possible, and desirable for Architects.

In this model, Architects are compensated in two ways. For their preemptive work in building and managing the software toolset before the capital formation phase, which resembles a SaaS model, they receive a minority fraction of the building’s ownership 3%. This percentage can be determined by the anticipated cost-to- value margin of the building once it has been built. For their design services after capital formation, they receive fees from the BauDAO, which is the standard revenue model in which Architects are generally paid in exchange for their design services. This means that Architects still have liquid operating budgets. They therefore own a small percentage of the building with options to sell those fractions, while also being paid for design services from the BauDAO.

As owners, the Architects are the responsible party for the maintenance of this smart contract software toolset for crowdfunding, design, and building management.

Supporters’ Ownership

Supporters buy a building token, the total value of which is determined by the Supporters starting fraction of the crowdfund, here 80%. The value of the fractions owned by Supporters grow as the overall market value of the property grows. As Residents buy back these fractions over time, Supporters see returns. There can be an infinite number of Supporters, or access to that pool may be delimited in some way. Supporters could pay large amounts, or their contributions may be capped to prevent ‘whales’ from owning disproportionately large holdings. In some cases, large institutional supporters or investors may be desirable where crowds cannot meet the goal.

Notably, in the model proposed here, the tokens owned by Supporters can only be sold back to the Residents, and cannot be withheld from Residents. It is an open question whether or not these tokens can be bought or sold in open markets.

Legal Considerations

In places where DAOs and DOs are not yet recognized as legal entities, there is the need for a Janus-faced DAO/LLC, DAO/REIT, or DAO/HOA. There may be alternatives such as a Delaware Statutory Trust (DST) that serves a superior function. These Janus-faced organizations would likely use stablecoin tethers such as xDai which can transact with fiat systems, in order to enable smart contract capabilities while being tethered to the relative stability of fiat currencies.

Property taxes are generally low, around 1%, but there are possible scenarios in which the crowdfund of a BauDAO is required to pay capital gains taxes. This is not ideal, but jurisdictions may look favorably on projects like these, and create favorable tax situations for them. Obviously, these dynamics remain quite unclear for lack of real precedent. See the US SEC’s 2015 crowdfunds permissions laws for more information.

These kinds of projects might be extremely attractive to city governments, who may decide to provide favorable tax situations. A BauDAO would keep a much higher percentage of capital circulating within a given locality, which stimulates commerce and the local tax base. If instead of a renter paying $3,400/month into the hands of an international real estate corporation that pays a low tax rate, the Resident pays $908/month over a protracted Buy Back plan, then a 100-Unit building will hold $3 million of surplus value per year which is freed to circulate in the local environment, such as in restaurants, bars, art spaces, schools, services, and businesses, all of which obviously pay taxes. With ten district-located projects using the BauDAO model, there may be the opportunity to introduce hundreds of millions of dollars into a local economy over the course of a generation. The numbers behind these payment figures are outlined in detail in the Buy Back Plan section below.

European Baugruppe models serve as a reference, where governmental support is provided in the form of tax breaks, lower-than-market land sales, and other enabling fiscal incentives.

Lastly, there is the major question of the storing of Legal Titles of Ownership or Deeds on alternative property ledgers or blockchains. But it seems that it is simply a matter of time until this is paradigmatic.

Parameters and Context

Before and immediately after the launch of a project, the Architects and the BauDAO must make several decisions about the mathematical parameters that structure the terms of their community. These are outlined below, including the terms of Buy Back, anti-speculation mechanisms, time-locks, negligence penalties, forced sale, assumption of liabilities, the role of the Architects, and the design of exits.

Assume that these parameters are built into the code, and can only be modified when the DAO votes on specific changes.

Buy Back Plan (20-100 years)

The Buy Back Plan establishes the minimum agreed timeframe within which a Unit Owner must arrive at 100% ownership of their Unit by buying back fractions from Supporters. This minimum agreement provides assurance to Supporters that they will see returns for the stable growth on their contribution. The Buy Back Plan is the mechanism that creates the value proposition for Supporters, who can be reasonably assured of returns. If the term of the Buy Back is short (20 years), Supporters will realize lower but faster returns, based on the marginal growth of the value of that real estate. If the term is longer (100 years), Supporters will realize much higher but far slower returns, spanning multiple lifetimes.

Some Residents may opt to Buy Back their entire unit quickly, resulting in a larger holding if they intend to leave sooner rather than later, while others may take the minimum route, content as they are in their community.

The length of the term of this Buy Back can drastically reduce the yearly costs of rents or a 30-year mortgage payment plan. It may in fact reduce these payments by 75% of what one would pay in today's paradigm.

It’s important to note that Buy Back is not based on a fixed payment amount over the term of the plan (eg. $3,400 per month over 360 months), but is instead based on the monthly purchase of fractions, whose value is determined by the fraction of the market value of the property, calculated at the moment of each payment.

If the Residents begin with 19% ownership of the building, and need to arrive at 100% over 50 years, then they must Buy Back the 78% from the Supporters and 3% from the Architects, or the 81% total that they do not yet own.

Figure 4. 50-Year Buy Back PlanAnnual property value growth is calculated at a conservative rate of 3.5%. Actual annual value growth may range from 4-10% in strong markets undergoing urban renewal. We also presume an annual inflation rate of ~2%. Note that the fractions owned by Supporters and Architects diminish over time, but remain at a stable dollar value due to annual growth of the value of the property.
Figure 4. 50-Year Buy Back PlanAnnual property value growth is calculated at a conservative rate of 3.5%. Actual annual value growth may range from 4-10% in strong markets undergoing urban renewal. We also presume an annual inflation rate of ~2%. Note that the fractions owned by Supporters and Architects diminish over time, but remain at a stable dollar value due to annual growth of the value of the property.

If the 100 Residents pay monthly over 50 years, this equals 600 months and 60,000 total payments. Expressed as fractions, we divide the remaining 0.81 (81%) of the ownership by the 60,000 payments to arrive at a monthly payment of 0.0000135 of the building. Each Resident buys 0.0000135 of the Building from the Supporters and Architects per month.

To determine the cost of the payment, 0.0000135 is multiplied by the overall market value of the building at the point of each payment. With a starting market value of $33M, the initial monthly payment would be $445.50.

But we must also distribute the yearly property tax (~1%) of $330,000 across all Residents, which adds an additional $275 per month. If we then assume $150,000 of yearly maintenance, $50,000 of yearly insurance costs, and $25,000 in miscellaneous fees for inspection, compliance, etc., and distribute them across Residents, we add another $187.50 per month.

This monthly payment, modeled in a major American city, totals $908.

At present, the range of average rents per sq. ft. in these same markets is between $2.5 and $5+. Rent for an 850 sq. ft. apartment in these areas ranges between $2125 and $4250+ per month. But, a 0.0000135 fraction of this same building, with all applicable taxes and fees is only $908, or less than half of the lower range of rents for these markets. $908 is 42% of the low end of the spectrum of rents and only 21% of the upper end of the spectrum.

Over time, the function of buying fractions at the current market value of the building ensures that each BauDAO payment is valued against the constant of the market average for renters in that moment. Using a Market Value Oracle to stabilize payments at 42% to 21% of the average rent price ensures that the model remains affordable and attractive over time.

As a Resident buys back towards 100% of their Unit's value, those fractions of the Supporter tokens are converted to the specific Unit NFT of the Resident. A given Resident cannot buy back more fractions than 100% of their Unit’s market value.

Now, the Buy Back is the mathematical assurance that Supporters will receive returns on their investment. In markets where real estate value growth drastically outpaces inflation, this would automatically create strong returns for Supporters. In markets with 8-12+% yearly growth, this would be the case. Simply by virtue of holding a fraction of an asset in that market, the Supporter will be happy, and they will see returns on their contribution. But where strong growth is not highly likely, Buy Back needs to include some additional incentive that attracts Supporters to contribute to the project. If growth in that market seems low, they simply will not contribute. With Residents paying such low numbers over a long term, it will be feasible to impose a 5-12% rate on top of their monthly Buy Back payment in order to create stronger incentive for Supporters. There may be mixed models in which the market appears fairly strong, but Supporters still need additional incentive to contribute. In either case, it is still a win-win for everyone involved.

Note: There may also be the desire for a maximum speed parameter that governs the rate of Buy Back. This would prevent the situation in which Residents suddenly Buy Back a majority of fractions during a low market, creating low returns or losses for Supporters. Ideally the Buy Back is as constant and steady as possible.

Profit Cut (15-50%)

The Profit Cut addresses the problem of Residents buying into real estate positions speculatively. The Profit Cut applies to a Resident selling their Unit. This anti-speculative mechanism cuts a percentage of profit from a Unit sale and sends it back into the Building Fund. At entrance, this mechanism disincentivizes those who seek a high-speed, high-profit exit. The cut still allows for marginal positive growth, but prevents the vacancies which currently plague the real estate market today. The BauDAO is intended as a framework for better living, not as a pump- and-dump real estate scheme.

In urban markets with extremely high growth potential, the Profit Cut should be
correspondingly high. In markets with lower growth potential, Profit Cut should be
low.

Time-Lock (2-5 years)

A time-lock can be established to prevent the sale of a newly acquired Unit. This lock can further disincentivize speculation.

Forced Sale

When a Resident does not consistently meet the agreed-upon minimum Buy Back Plan, their Unit NFT is automatically placed onto the market for possible new Residents to replace them. The Unit NFT is the Legal Title, and when that sale is complete, it can be used as a legal document. While Forced Sale resembles eviction, it is different in a critical way, which is that the 'evicted' ex-owner, while being expelled from the building, is entitled to the entire % of value of their Unit that they own, minus the Profit Cut, which is applicable to any sale, forced or not. For instance, after 10 years in the model above, each Unit is worth $465,000, but the Resident only has acquired 35% of it, or $162,750. Therefore the ex-owner is paid that total in full, while the new buyer buys at that price and assumes the payment plan of the remaining 65% going forward.

A new Resident buys in at auction, or through an application process. Additionally, each DAO may decide up front to establish a penalty for payment negligence, which may be expressed as 1-25% of the entire Forced Unit Sale. This penalty payment would be directed into the collective Building Fund, incentivizing everyone to make their minimum payments back to the Supporters.

Supporter Contribution Cap

This parameter can be dialed to prevent a small number of wealthy entities from hogging the entire Supporter pool on a given project, lest whales simply replace banks or financiers. As mentioned above, there may be scalar exceptions made for specific Supporters such as nearby cultural institutions if they would like to contribute larger-than-cap.

Supporter Geolocation

Some projects may require Supporters to reside within a designated proximity to the built project. This obviously restricts the set of possible Supporters, but establishes a hierarchy of investor priorities that favors opportunities among those in a given district, city, or region. The Supporter Contribution Cap may also float according to this proximity, in which those local in the District may be able to contribute more, while those on the other side of the world have a lower cap. This geolocation parameter is intended to address the geopolitics of investment.

If a city or a regional government initiated a project like this, they may require that Supporters are residents of a certain area, to further encourage the retention of capital. This is a central mechanism in the design of the DOMA project, referenced above.

Market Value Oracle

Much of the math is determined by market values. This requires constant numerical input from some Oracle, and will be the subject of intense scrutiny. The derivation of Market Value may be fairly contentious and the source of the valuation must have trusted and transparent processes.

Parameter Adjustment Voting

When the desire emerges to adjust any of the above parameters, a proposition can be surfaced in the community and the appropriate deliberation can take place. Quadratic voting is a method that allows for degrees of expression of how deeply a contingency of voters care about a specific issue, which helps protect the interests of small groups of voters that care deeply about a particular issue.

Notably, adjustments that affect Supporter returns cannot be changed without the threat of significant upheaval. The degree of involvement of Supporters is an open question. Some might want to have input where others may prefer not to be bothered.

Exit Design

Exit Design is of heightened importance for any tangible asset model. The political stakes are much higher when assets are tangible.

The ideal version of a BauDAO would result in few exits – ie. a situation in which
people are so pleased with their living situation that they do not want to exit that
system and want to arrive at full ownership. But of course, the option must be
open. As such, exits must be designed in such a way that supports the overall
goal and does so in the best interest of everyone involved.

Resident Exit

After the Time-Lock is passed, Residents are entitled to sell their Unit. If a Resident has bought back the entire value of their unit, they are entitled to 100% of the market sale minus the Profit Cut, and the Unit is sold at market value. New Residents may tap the existing Supporter Index for new financing in order to acquire, in which case a new crowdfund is opened and then streamlined into the existing fractional model for Supporters to re-up their shares of the overall ownership.

Supporter Exit

Supporters can only exit their position by selling fractions to Residents. Their profit is in the form of payouts when they sell their tokens to Residents, the value of which is determined by the property's market value multiplied by the sold fraction of ownership. Supporters are incentivized to contribute for the stable appreciation of that asset. They shoulder some risk, in the event of the market dropping, but dips are smoothed out by the protracted term of the Buy Back.

Residents have the obligation to buy back these Supporter fractions of ownership over the time horizon of the Buy Back Plan. Each individual Resident cannot surpass 100% value of their own unit. It is an open question whether or not Supporters can sell their fractional tokens in open markets.

Architect Exit

Architects retain a minority ownership status of the project (2-5%). This ownership percentage is in exchange for building and maintaining the BauDAO financial architecture. These fractions are similar to the Supporter pool, but Architects can exercise more options than Supporters, able to sell or hold their shares with more freedom. This incentivizes a stronger relationship between Architects and their built work.

Architecture and Entropy

Architects owning shares of their built work can create a much better built environment, not only in terms of ownership, but in terms of style and durability as well. If Architects are compensated both in fees and in long term options on their ownership, then this will incentivize better work and higher long term valuations. A low quality building will not be valued so well in 30-50 years, whereas a high quality building will be disproportionately valuable in 30-50 years. If architects build high value buildings and can exercise sale options as they please, they will create strong revenue streams for themselves and much better architecture for people.

We can then think of the building cost per sq. ft. as a register of the entropy of architecture. A low cost per sq. ft. means a faster ROI for developers, but also poor architecture, lower detail, faster degradation, higher maintenance costs, and the increasing likelihood of a poorly valued sale followed by demolition. Alternatively, a high cost per sq. ft. means better architecture, higher detail, slower degradation, lower maintenance costs, and a long-term, high-value revenue stream over longer periods of time. It creates an endurance model for the discipline which is better positioned to weather market volatility and creates a much better city with much stronger local circulation of value.

In the model outlined here, the cost per sq. ft. was $350. This number determines the construction cost of the 100-Unit building. But seeing that this number resulted in a monthly payment for Residents that was 42% to 21% of the average market rent ($908 compared to $2125-4250), it would be possible to dial the cost per sq. ft. much higher towards $500-600, which would result in extremely high quality, durable, and highly detailed architecture. It would also be possible to include more square footage per apartment, and still keep payments pegged well below market rate rents.

Conclusions

The BauDAO model is put to Architects and software designers as a prompt for toying with the parameters of capital distribution and architecture. The major affordances of the model are its expanded entries into ownership, the speed of capital formation, and the protracted time length of contracts. In its idealized form, the BauDAO would sharply decrease the capital barriers to ownership in prohibitive urban markets, and would decrease forms of precarity that characterize the rentier paradigm. The model would also stimulate lower level (local) commerce dynamics that implicitly resemble trickle-up economics and create higher quality urban environments.

For the sake of simplicity, this model is written as a ready-to-use, one-off blueprint. With a few parameter adjustments and legal preparations this kind of project could happen in isolation somewhere soon. There are in fact versions of fractionally owned real estate endeavors already unfolding, albeit undertaken with an entirely different mentality.

Next iterations of the BauDAO model could scale to a municipal endeavor or a PPP. At this scale, a city would set up this model to stimulate growth in areas earmarked for renewal. It would bring capital from anywhere in the world, but keep a much higher percentage of it in the hands of citizens. In doing so, the city could diminish its reliance on corporate developers who 1) are no longer the only entity capable of the rapid capital formation, 2) pay low tax rates, 3) flee with money, and 4) build cheaply for fast ROIs. By entrusting the capital formation process to Architects, cities would be much better.

Appendix: Scenario Outcomes

Near Term Speculation

There is currently no governing entity in place to ensure that anti-speculative mechanisms are featured in projects like this. City governments, for lack of resources and/or Web3 literacy, may not be initially equipped to regulate the emerging market dynamics of Web3 capital formation. There are several near-term outcomes, some already unfolding, in which a distributed community with lots of capital and strong social influence in crypto and crypto-adjacent media spaces use a model for relatively low-risk investment options by aggregating funds and buying underdeveloped real estate in upcoming or disheveled markets. These projects may use crypto to acquire properties via fractional ownership, then distribute rents from impoverished residents as a gradual ROI. Under the auspices of a collective, a group could extract rents without the assumption of liability.

Long Term Speculation

It is the goal of powerful entities like SoftBank’s Masayoshi Son to automate Real Estate acquisition and management. Real estate is the most valuable asset class in the world, and SoftBank has invested heavily in Property Technology (PropTech) tools which may be fairly well-positioned to trigger runaway systems that capture large percentages of emerging markets through elaborate Matryoshkas of nested corporate subsidiaries. It serves the interests of banks to use PropTech tools to establish large portfolios or properties with vulnerable renters.

The transferral of property ledgers onto public blockchains could have very dangerous consequences if and when powerful corporate intelligences can autonomously transact with the legal titles of various tangible assets via smart contracts. With scenarios like this in mind, it behooves the urbanist to consider how smart contracts and property ledgers can be structured in ways that leverage their affordances to open cities as opposed to closing them down. With the right kind of software development today, it could be possible to create viral financial entrances to real estate that produce a different city in their image.

BauDAOs for Non-Residential Institutions

The Buy Back mechanism proposed in the BauDAO relies on Residents who want to remain in their living situation. The sustenance of a good life and the threat of losing it through a Forced Sale obviously encourages Residents to continue paying Supporters for their enabling contributions.

This mechanism wouldn’t work for creative DAOs, companies, or schools that seek to own their work space or community space. Members of working organizations cannot be bound to Supporters in the same way, because losing a working space does not carry the same gravity as a living space.

BauDAOs formed by collectives that create outputs of various kinds can establish other value propositions for Supporters. A music venue acquired by a collective of sound artists via a BauDAO could offer free tickets to shows, exclusive albums, or a community event series that Supporters can access.

Creative DAOs and Squads

Creative DAOs or Squads who are engaged in diverse work but who seek to pool wealth to acquire space may see options with a BauDAO. If a Squad of twenty people could crowdfund $250 from 8000 Supporters, they could buy a ~$2M property, and hold that property for the duration until their collective dissolves. All of that money can be sent back to the original Supporters at the new market value. A Squad could do this under the banner of a Headless Brand, guided legally and financially by Architects, who work in exchange for a 3% fraction of ownership. The Architects manage the transactions, the titles, the deeds, and the taxes.

The yearly membership cost for being in the DAO is just paying the taxes, fees, operating costs, and utilities of the building. Besides that, Members of the Squad pay no rent and no acquisition costs. In this model, the BauDAO does not leverage any unhealthy tethers between membership status and productivity, it produces no corrosive game theoretical dynamics between members of the collective. By leveraging the cultural capital of members, a crowd could concentrate pieces of their discretionary income, especially if they desire to support the work of that particular collective.

Crypto-Capitalist Ghost Cities

In a race to the punch, an ambitious vision and a few billion dollars becomes a recipe for the crypto-capitalist version of China’s ghost cities, built from a crowdfund of Supporters. Without mechanisms in place that prevent speculation, it would be possible to build at the scale of a megastructure without a carefully considered program for occupancy or use.

Fractional Ownership = Offloaded Liability

In the uncharted legal territory of fractional ownership, there are sure to be projects that quietly offload liabilities onto fractional owners. One can imagine a utopian ownership scenario gone awry – an energy DAO that guarantees cheap, renewably-sourced energy for a large population that is later forced to shoulder responsibility for some unenvisaged ecological outcome.

Other common fiscal liabilities could be easily offloaded onto a distributed group of Supporters.

Enclaves

A predatory model could spread across higher tiers of society, creating a network of deregulated, tech-literate enclaves.

Rural In-Fill

The first US state jurisdiction to legally recognize DAOs (Wyoming) has the lowest population density in the contiguous United States. As the urban cost of living climbs alongside remote connectivity, the exurban compound becomes more attractive, especially with a cohort of friends or likeminded colleagues. A BauDAO would reduce the the complexity of group acquisition and management in this context.

Network Liquidity

Not discussed above is the situation in which many BauDAO projects simultaneously use the liquidity of a single, global Supporter Pool. As opposed to a Supporter contributing to a single building’s crowdfund, they would simply buy a token which corresponds to a fraction of the entire Supporter pool of BauDAO projects and receive payouts from the entire pool of Residents. This would have the effect of stabilizing the value of the returns, which when distributed across many assets in many markets is more like a macroeconomic register as opposed to a local market’s register. This kind of liquidity could provide capital for new projects to get off the ground.

It is also possible to imagine a partially automated system which pairs listed properties with possible communities of Residents, and matches them according to desirable variables.

Information

Creative Commons License: ©2021. This work is licensed under a CC BY-NC 4.0 license

Published by: Cope – Los Angeles, California

Publication Information: Future Systems and Models Report, Batch 1, No. 1

Funding: Research for Batch 1 reports was supported in part by the issuance of the non-fungible token (NFT) “$COPE01” valued at 1.0 ETH (Ethereum) through the contract number 0xb0c813151d18482a914a2b95b1a25d020532Bb36. Issuance was conducted via the Mirror platform (mirror.xyz).

Cite As: Myers, Pierce. 2021. “The BauDAO.” Future Systems and Models Report 01-1, Cope, Los Angeles, CA.

Author Contact Information:
spiercemyers@gmail.com
@piercze
cope.mirror.xyz

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