In brief

Investment DAO is a decentralized organization that carries out investment activities as a group. Anyone who owns the investment DAO's governance tokens can participate in the decision-making process. The more tokens you hold, the greater your voting power. Investment DAOs fund their treasuries through selling tokens, issuing NFTs, and providing revenue-generating services. The legality of investment DAOs will depend on the laws from your jurisdiction.

Introduce

With its decentralized nature, blockchain has certainly changed the face of investing forever. Entrepreneurs and startups no longer need to rely solely on venture capital firms, seed rounds, and traditional fundraising models. It has become relatively simple to create your own tokens and use one of the various on-chain methods to sell your project tokens.

It's not just those who need to raise funds that are experiencing a significant change: Investors are too. With investment DAOs, we now have a new approach to funding projects that is easily accessible to even the smallest investors.

What is DAO investment?

Investment DAOs allow members to decide when and where their funds are invested. This can apply to real estate, DeFi investment vehicles, or any other asset the DAO chooses to invest in. An investment DAO uses the Decentralized Autonomous Organization (DAO) model to democratize and decentralize the entire investment process.

Traditional models place investment power in the hands of a relatively small group of money managers from venture capital funds, family offices and hedge funds. Additionally, investment DAOs give anyone holding governance tokens the ability to make decisions regarding its investments. Instead of using the expertise of a narrow group of individuals, this model prioritizes the wisdom of the crowd when making investment decisions.

What is DAO?

A Decentralized Autonomous Organization (DAO) is an organization governed by smart contracts, self-executing pieces of code that run on a blockchain. DAO members deliberate and make decisions, which are then executed using these smart contracts. In fact, a DAO can operate without the need for constant human maintenance and operation. Even if DAO members lose interest or abandon the project, the DAO framework will still exist due to its immutable nature.

The most common way DAOs make decisions is through a voting mechanism based on governance tokens. The more tokens you own, the more voting rights you have. Some DAOs allow any member to make suggestions, while others may limit this permission to a specific group. DAOs are commonly used to manage DeFi (Decentralized Finance) projects, blockchain and other protocols in the cryptocurrency sector.

How do investment DAOs work?

An investment DAO will usually have a general goal or principle by which it operates. Some invest in specific industry segments like GameFi or DeFi protocols, for example. Investment decisions are made according to these principles using the proposed mechanism.

Holders of investment DAO governance tokens are given proposals. Some DAOs will limit this to holders of a certain amount of tokens or some other subsection of the group. This could be to prevent spam or only allow members with high enough stakes to recommend investment decisions.

When proposals are made, users will stake or use a snapshot mechanism to exercise their voting rights. The snapshot looks at the number of governance tokens in each wallet and distributes voting power based on that without locking up the tokens. This helps avoid users swaying votes by buying more tokens once they have seen the proposal. When the voting ends, the decision is made according to the results.

Profits from investments are distributed via airdrop to governance token holders or through a staking mechanism. By staking your governance tokens, you will receive a reward that can be withdrawn from the smart contract.

Investment DAOs are often active on community channels like Discord and Telegram to help them organize, inform, and facilitate proposals. A DAO is only as successful as its community, so the DAO needs to maintain a positive and healthy relationship with its members.

Where does DAO get investment money from?

There are several ways an investing DAO can build its bankroll. The most common method is to launch a governance token sale. A new DAO will mint its own tokens and offer them to the market using one of the various sales mechanisms available. Investors will buy it for speculative purposes, voting rights, or both.

A DAO established by experienced investors with a solid investment strategy will likely attract a large community of potential DAO members. After selling governance tokens for a cryptocurrency such as bitcoin (BTC), ether (ETH), BUSD or other stablecoins, the DAO will then have the funds in the treasury. The DAO may also keep some governance tokens available in the treasury for future sale.

Another popular method is to issue and sell non-fungible tokens, or NFTs. These may be purely collectibles or may also provide some other utility. For example, an NFT could be issued to provide additional governance rights.

Finally, some investing DAOs will have treasury and digital assets from previous successes. For example, a DeFi project may already have revenue from its services. Its DAO can then decide where to invest these funds. However, when we refer to investment DAOs, they usually mean DAOs that only deal with investments.

The answer depends on your jurisdiction. It can be seen that there are no specific regulations on investment DAOs, so this is difficult to determine. To get a rough idea, you should first see if the investment DAO token is fully regulated. It may be classified as confidential in your country and requires specific licensing. It may also fall under some other cryptocurrency regulations.

The concept of investing together as a group is not new and many countries already have provisions for investment clubs. The United States General Revenue Service, for example, has specific requirements for joint investment groups to share profits. Whether or not an investment DAO is regulated is up to your local regulator.

Risks of investing in DAOs

While DAOs invest successfully in decentralizing power according to ownership of tokens, there are still risks involved. Don't forget that holding any cryptocurrency is risky, and investment DAOs also have specific risks associated with them:

1. Faulty smart contracts - Smart contracts running DAO can fail due to hacks, exploits or faulty code. This could disrupt the mechanisms needed to efficiently run and manage DAO funds.

2. Unwise investment decisions - Investment DAOs may invest in projects that bring negative ROI (return on investment). After all, there is no guarantee that the majority's decision is always the best one.

3. Poor fund management - Investing DAOs need to maintain their funds properly. If they do not diversify their portfolio or manage it well, DAO investment funds can be at high risk.

Compare traditional venture capital funds with investment DAOs

There are many advantages and disadvantages when comparing VC (venture capital funds) and DAO investments. While DAO investment has contributed to opening up a traditionally “closed” industry, its “opaque” status also makes it difficult for investors and projects needing to raise funds to work with. Due to the strict requirements in the traditional investment industry; In reality, most investment DAOs will only be able to work with other cryptocurrency projects.

However, when it comes to Web3, investment DAOs have some significant advantages. Traditional VC firms show great interest in Web3's potential but often demand a lot in return for their investment and expertise. But when it comes to Web3 and blockchain technology, VCs often don't know as much about the field as their decentralized counterparts. Therefore, an investment DAO can provide principles, crowdsourced expert advice, and fairer agreements.

For more traditional industries, the added value that VC can bring is huge. These companies often have networks of relationships and a range of support services. Above all, they have legal support and necessary regulations to help investors feel more secure.

summary

Investment DAOs have become a hot topic since the most recent cryptocurrency boom in 2020/2021. The idea that the long-standing hedge fund model could be disrupted is appealing to small investors and blockchain fans. However, we still do not know how these two types of organizations will develop and relate to each other, because the concepts are still so new. As always, if you decide to experiment with investment DAOs, fully understand the risks and figure out how it fits into your portfolio strategy.