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Commentaryinvesting


CAN A COMMUNITY OF BASKETBALL FANATICS RUN AN NBA TEAM AS A DAO?

By 
Aron Solomon

December 16, 2021 3:34 PM GMT

The Krause House is eyeing an acquisition of the New Orleans Pelicans with Zion
Williamson as the face of the new franchise.Jonathan Daniel—Getty Images
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A group of developers who were deep into cryptocurrencies came up with the idea
for a decentralized autonomous organization (a DAO) in 2016. While the DAO had a
massive hack and was delisted later in the year of its creation, its goal of
facilitating crypto transactions and automating decisions is still alive.



The Krause House is now setting out to take the concept behind the original DAO
and apply it to the NBA. It wants to be the first virtual community to ever
leverage a DAO to own a professional sports franchise. Named after the architect
of the Chicago Bulls’ manifold championships, Jerry Krause, the Krause House
self-identifies as “a community of hoop fanatics that are just crazy enough to
buy an NBA team.”

With blog posts by the awesomely named “Flex Chapman” (hoops fanatics will get
this Kentucky reference), they covered the hows and whys through their Hypepaper
and Flightpaper, both published over the summer. As a massive NBA fan, it didn’t
take much for me to throw myself into what could either be a firepit for
professional sports leagues or a way for already hyperinflated franchise values
to further skyrocket.

The NBA earns awfully close to $10 billion in annual revenue, but the roots of
the sport are in people finding one another to form a group, to play the game,
then to collectively love it. “The game of basketball has always been predicated
on groups of self-organizing squads coming together to participate,” the group
said in its Flightpaper.



From that starting point, what the crowd has never been able to be involved in
is ownership. However, the very notion of ownership is in flux, transformed by
the startup world, the sharing economy, and the realities surrounding the
increasing scarcity of things.

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So, the Krause House argues, why not have a collective of basketball fans intent
on actually owning a team? Why leave team ownership to “a handful of
billionaires” out of touch with the needs and desires of fans? Why shouldn’t
fans be part of the decision-making and potential financial upside of owning an
NBA franchise?

These motivations—the why—are easy to understand. Many of us armchair
quarterbacks have imagined that we could make better player personnel decisions
than owners, so maybe we should form a cooperative and walk the talk?

The how gets more complicated. The Krause House is seeking the kind of ownership
that means both “equity and influence in governance—not just one or the other.”
In other words, it seeks majority ownership of a franchise.

The Krause House believes it can add a lot of value in areas such as key
business model decisions of the franchise, approving senior executive hires,
marketing, and branding, and what city the team should ultimately play in. Its
members feel that they add little value in the day-to-day operations of the
franchise, particularly those decisions traditionally reserved for the GM and
head coach.



They also talk about the potential for the DAO to own a minority stake in the
team, but I don’t see how that’s going to work well from a practical sense
absent exceptional circumstances, such as a team needing a cash infusion to stay
afloat or to remain in their city. That might give the DAO a little more
leverage than it would otherwise have, but, ultimately, where majority owners
can agree on key franchise decisions, they retain control.


SO CAN THIS WORK?

It’s a long shot, but that’s the nature of the NBA, a league full of stories
that range from the improbable to near impossible. The wealth that can be
leveraged from the past decade’s creation and gains on crypto could buy a lot of
franchises in multiple leagues. Who better to try this than those who are
already so well grounded in the notion of decentralization?

But the business model begins to fall apart at the decision-making stage. I’ve
been following the NBA extremely closely for decades and think that with my
background in business and law, I could make the right decisions as to the
direction and operations of a franchise. But I would strongly advise against any
individual or organization backing me with the $1.5 billion needed to buy the
league’s least expensive franchise and to make those decisions. Chances are, I’m
going to be terrible at it, especially competing against experienced NBA
executives, such as the Raptors’ Masai Ujiri. But if an organization can be run
through a DAO, why don’t they just make all of the operational decisions with an
algorithm?

With the advent of A.I.-based technologies such as ProFitX, what began in
baseball as sabermetrics and Moneyball, can now, in the hands of deep
technologists, drive the functional decisions that would make the purchase of an
NBA franchise such as the beleaguered New Orleans Pelicans a potentially viable
one. That’s exactly where the Krause House has set its sights: an acquisition of
the New Orleans franchise that has almost nowhere to go but up and a young
superstar in Zion Williamson as the face of the franchise.

Whether you see all of this as crypto kids playing fantasy sports or a
potentially compelling business model for virtual community ownership of
professional sports teams, the Krause House is actively working to make it all
happen. It had a successful fundraising round of 1,000 ETH ($4.6 million at the
time of fundraising). While this amount can’t even buy a second-division Swedish
hockey team, it acts as an impressive proof of concept that prospective DAO
community members will put their money behind their desire to own an NBA team.



Aron Solomon, JD, is the chief legal analyst for Esquire Digital and the editor
of Today’s Esquire. He has taught entrepreneurship at McGill University and the
University of Pennsylvania, and was elected to Fastcase 50, recognizing the top
50 legal innovators in the world. Aron is regularly featured in many leading
publications.


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