TL;DR
Investment DAOs are decentralized organizations that invest funds collectively as a group. Anyone who holds the DAOs governance tokens automatically becomes part of the decision-making process. Their voting power is proportional to the number of governance tokens they hold.
Funding for investment DAOs treasury is generated from token sales, NFTs, and other revenue-generating services. The legality surrounding investment DAOs depends on the laws of your jurisdiction.
Introduction
Blockchain has transformed the way we invest and think about decentralization with its blockchain capabilities. It has become the new wild west for many aspiring entrepreneurs. They no longer need to be beholden to venture capital firms, seed rounds, or traditional funding models. Through blockchain, you can easily create your own token, market it, and sell it through one of many on-chain methods.
This form of innovation is not exclusive to just funding. Investors have also experienced transformative technological advances that could signal a new approach to funding projects. With investment DAOs, small investors could also have a new way of funding projects easily.
An investment DAO raises and invests capital into assets on behalf of its community. Investment DAOs utilize Web3 to democratize the investment process and make it more inclusive even to the smallest investors.
What Is An Investment DAO?
Investment DAOs raise and invest money on behalf of their community using the power of web3. DAOs have their own governance token that is sold on different exchanges, centralized and decentralized. Holders of these tokens can take part in the investment DAOs decision-making process.
Investment DAOs allow their members to decide what their next investment should be. They could opt for real estate, Defi investment vehicles, or any other asset the DAO chooses. The method used to democratize, decentralize, and streamline the whole investment process is the Decentralized Autonomous Organization (DAO).
Decentralized Autonomous Organization (DAO)
This is basically a smart contract, a self-execution piece of code that runs on the blockchain. Therefore, most DAOs function with no human maintenance and run continuously. DAOs can exist indefinitely due to their immutable nature.
Decision Making Process
The method DAOs use to make their decision is a voting mechanism. As pointed out earlier, token holders automatically partake in the decision-making process. The more governance tokens you hold, the greater your voting power. This effectively allows anyone to take part in the decision-making process, making it inclusive to all.
Depending on the DAO you are part of, some DAOs allow their members to make proposals. The DAO then votes to support or reject the proposal. DAOs are typically used to manage Defi projects, blockchains, and other protocols in the crypto space.
Traditional Venture Capitalist (VC) Firms
To add more dimension to our understanding of investment DAOs, it helps to juxtapose them with the very thing it aims to replace, traditional VC firms. Tradition VC firms place the investment power in the hands of a relatively small group of money managers. The managers typically manage large amounts of money from different individuals.
On the other hand, investment DAOs offer anyone holding their governance token the ability to vote regarding their investments. This model prioritizes the wisdom of the crowd instead of a small group of individuals when making investment decisions.
Exclusivity
The VC model is very exclusive, and it is often only an option for very sophisticated investors due to the risk profile of the assets they invest in. Further, the model they employ makes it even more difficult for retail investors to be liquidity providers (LPs) in VC firms. This is because often times the minimum investment needed to invest in these funds is in the several millions of dollars.
Centralization
If participation as an LP to these traditional VC firms is exclusive, then the decisions made by the VC firms are even more so. The investment decision is generally made by a small group of individuals that sit on the investment committee of the VC fund. This makes most decisions centralized.
Further, this sort of centralization limits the potential investment frontiers that are offered in more decentralized DAOs. By limiting your decisions to a handful of people, traditional firms won't be able to invest in hyper-local opportunities or even those offered across the world. There is a significant limit to the capacity of the team.
Illiquidity
Traditional VC firms are also an illiquid asset class. This means any capital deployed into this fund will often be locked up for a certain period of time. The LPs only see their returns on their capital whenever the VC fund exits its position.
Nevertheless, they remain a popular option for investors since the returns tend to be greater than other asset classes.
How do Investment DAOs Work?
Any particular investment DAO will have a set of goals and principles it adheres to. Some investment DAOs are industry specific, in other words, they in invest in industry segments such as GameFi, or Defi protocols.
For some investment DAOs, holders of governance tokens have the ability to make proposals. They could propose ventures the DAO could take. Once proposed they will be voted on by the holders. Generally speaking, some DAOs will limit the ability to propose to certain holders who have a specific amount of governance tokens. This would be done to limit the potential for spamming and/or to allow members with the most skin in the game to suggest investment decisions.
Making Proposals in an Investment DAO
When someone wants to make a proposal, they would head over to the protocol itself. Typically, a snapshot mechanism is utilized to exercise the members' voting rights. The snapshot itself will look at the number of tokens each individual holder has and will distribute voting rights accordingly.
This is done to prevent any single individual from buying up more tokens with the proposal is made, thus, potentially swaying the votes. There is a time period for voting, and once that period ends the protocol will follow whatever decision was reached by the voters.
Profits
Investment DAOs distribute their profits via a staking mechanism or via airdrops to token holders. Holders who opt to stake their tokens will receive a share of the rewards when they withdraw it from the smart contract.
Medium for Communication
Many investment DAOs often run community channels such as Discord or Telegram to help organize, inform, and facilitate proposals.
This is a crucial component that makes a DAO unique since a DAO could only be as successful as the community it represents. Therefore, communication is incredibly important.
Funding for Investment DAO
There are several tools an investment DAO can utilize in order to raise funds. The most popular of these is a sale for its governance token. A newly created DAO will mint and offer its governance token to the public using one of the various sale mechanisms. Investors will then buy this token for speculative reasons, voting rights, or both.
The experience of the original founders of a DAO is also crucially important. A DAO could even sell its governance token for popular cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), or even stablecoins, and store it in their treasury. The DAO will then have funds for its investments.
Another popular method to raise funds is for investment DAOs to issue their very own NFT collection. Sales from those NFTs will automatically be part of the DAOs treasury. The NFT issued could simply be a collectible or have some form of extra governance rights.
What are some risks associated with Investment DAOs?
Though investment DAOs decentralized the investment process for their token holders, there is still some risk involved. Just like with any cryptocurrency, there is a certain risk that investors need to learn about before entering a new position:
Fund mismanagement - Just like with traditional VC funds, it is important to diversify. If decentralized DAOs don't do this adequately, the investment DAO's portfolio could be at high risk.
Bad investment decisions - There is no guarantee that any investment decision will pan out for the best. This is true for majority rule investment DAOs. It could be the case that the investment DAO invests in a project that provides a negative ROI.
Protocol Failures - Any smart contract or protocol could have vulnerabilities. This could cause the underlying system to fail. As a result, the DAOs funds could be compromised.
Final Thoughts
Investment DAOs have become a popular vehicle for retail investors to invest funds collectively. The crypto boom of 2020/21 propelled investment DAOs into the limelight and gained popular support from small investors and blockchains fans who seek to be part of a VC model that is as disruptive as DAOs are.
This concept is still incredibly new at its core, however. Keep in mind, if you do decide to experiment with this newer form of technology, to always do your own research and understand the full risks.
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