A couple of months ago, I conducted brief research on accounting and financial reporting practices in DAOs (Decentralized Autonomous Organizations). I found a few interesting articles on this topic (here, here, here, and here). However, there are many questions in DAO accounting that still needs to be answered. In this post, I wanted to share some thoughts related to DAO accounting for bounties.
The project work in DAO often is performed by individual contractors (bounty holders) after they apply for open bounties listed on a bounty board using DeWork, Notion, or any other systems out there. The bounty rewards are assigned to applicants based on various approaches (first come first served basis, core team member decision, the voting process, etc.). Rewards may be distributed either at the completion of the work or for each milestone. Under traditional accrual basis accounting, we would record costs of services provided by an individual contractor as they are received based on the current fiat value.
Now let's assume that we prepare books for DAO under US GAAP. Bounty rewards are usually paid in cryptocurrency based on two main scenarios:
The reward is stated as the fixed number of tokens. In order to account for the most accurate fiat value of traded tokens (provided that there is an active market for tokens paid to bounty holders) and measure the liability accordingly, we would be required to bifurcate and account for an embedded derivative related to fluctuations in the market prices of tokens. However, this would not be required if tokens did not have an active market.
The bounty reward is stated in fiat currency but paid in tokens at spot price on or around the payment date. The reward is payable in the variable number of tokens that depends on the market price of tokens at a certain point in time in the future. Here the fair value of DAO liability to pay the variable number of tokens will often approximate the fiat amount of the stated reward.
Payments may be processed upon deliverable submission by a bounty holder and review and acceptance by the core team members. If we were accounting for similar transactions in a traditional business entity, we would account for these transactions with journal entries below.
Journal entries
Record costs as we receive deliverables to our satisfaction:
Debit Operating Expenses
Debit Assets at Costs
Credit Accounts PayableRecord an increase/decrease in the fiat value of the fixed number of tokens payable at the end of each reporting period before the payment date:
Debit Embedded Derivative Asset [/Other Expense]
Credit Other Income [/Embedded Derivative Liability]Payment sent in cryptocurrency at historical costs of tokens transferred with the corresponding reduction in payables and gains/losses on the settlement:
Debit Accounts Payable
Debit Embedded Derivative Liability
Debit Loss on Settlement
Credit Cryptocurrency at cost
Credit Embedded Derivative Asset
Credit Gain on SettlementAccounting at DAOs would typically only capture the payments made and do not account for the amounts payable to bounty holders for work performed but not paid. The absence of accrual accounting may reduce the ability of DAO to assess whether they have sufficient resources to pay for new projects because the amounts already due are not assessed. Of course, under US GAAP we would record payables at their fair value while our cryptocurrency would be recorded at historical costs, so comparing these numbers would also not necessarily be helpful. But this is a part of another conversation -