Summary

An investment DAO is a decentralized organization that invests funds as a group. Anyone who holds governance tokens of an investment DAO can participate in the decision-making process. The more tokens you have, the greater your voting power. Investment DAOs fund their treasury by selling tokens, issuing NFTs, and providing income-generating services. The legality of investment DAOs will depend on the laws of your jurisdiction.

Introduction

Thanks to its decentralization capabilities, blockchain technology has forever changed the way we view investing. Entrepreneurs and startups no longer rely solely on venture capital firms, seed rounds, and traditional fundraising models. It is now relatively easy to create your own token and use some of the various on-chain methods to sell your project tokens.

Not only did fundraisers experience a major shift, but so did investors. With investment DAOs, the approach to financing projects is now more easily accessible to even the smallest investors.

What is an investment DAO?

An investment DAO allows its members to decide when and where to invest their funds. It could be in real estate, DeFi investment instruments, or any other asset the DAO chooses. 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 made up of the money managers of venture capital funds, wealth management offices and hedge funds. In contrast, investment DAOs offer the ability to make investment decisions to anyone who holds their governance tokens. Instead of using the experience of a small group of individuals, this model prioritizes the wisdom of the crowd to make investment decisions.

What is a DAO?

A Decentralized Autonomous Organization (DAO) is an organization that is powered by smart contracts, self-executing pieces of code that run on a blockchain. DAO members deliberate and make decisions that are executed through these smart contracts. A DAO, in fact, can operate without human maintenance and do so uninterrupted. Even if DAO members lose interest or leave the project, the DAO framework will live on due to its immutable nature.

The most common way DAOs make decisions is through voting mechanisms based on governance tokens. The more governance tokens you have, the more voting power you have. Some DAOs allow any member to make proposals, while others may limit this right to a specific group. Typically, DAOs are used to manage DeFi (Decentralized Finance) projects, blockchains, and other crypto protocols.

How do investment DAOs work?

Generally, any investment DAO will have an overarching objective or principle by which it is governed. Some invest in specific segments of the sector, such as GameFi or DeFi protocols. Based on these principles, they make investment decisions through a proposal mechanism.

Holders of investment DAO governance tokens can make proposals. Some DAOs limit this ability to holders with a certain number of tokens or some other subsection of the pool. This works as a possible measure to stop spam or to allow only members with a high enough staking level to suggest investment decisions.

Once the proposal is made, in order to exercise their voting rights, users must stake their tokens or follow a snapshot mechanism. Snapshots show the number of governance tokens in each wallet. Based on that amount, voting rights are distributed without the need to lock tokens. This helps prevent users from influencing the vote by purchasing more tokens after learning about the proposal. Once the voting is over, the decision is implemented according to the results.

Profits from investments are distributed to token holders through airdrops or the staking mechanism. By staking your governance tokens, you will receive a portion of the rewards that you can withdraw from the smart contract.

Investment DAOs typically have active community channels on Discord and Telegram to help organize, inform, and facilitate their pitches. The success of a DAO depends on its community, so you need to maintain a thriving and active group of members.

Where does the investment DAO get funds from?

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

A DAO created by expert investors with a solid investment strategy is likely to attract a large community of potential DAO members. After selling its governance tokens for a cryptocurrency, such as Bitcoin (BTC), Ether (ETH), BUSD, or another stablecoin, the DAO will have contributed funds to its treasury. You can also save some governance tokens for future sales.

Another popular method is to issue and sell non-fungible tokens (NFTs), which may be purely for collection purposes or also offer some other utility. For example, an NFT could be issued that provides additional governance rights.

Finally, some investment DAOs likely already have funds and digital assets in treasury generated from previous successes. For example, a DeFi project may have earned profits from services offered. Your DAO could decide to invest that money. However, when we talk about investment DAOs, we are generally referring to those that are dedicated solely to investments.

The answer to this question depends on your jurisdiction. At the moment, there are no specific regulations when it comes to investment DAOs, making their status difficult to determine. To guide you, the first thing you should do is check that the DAO token is properly regulated. In your country it may be classified as a security and therefore require a specific license. It could also be in some other cryptocurrency regulations.

The concept of investing together as a collective is not new, and many countries already have regulations for investment clubs. The US Internal Revenue Service, for example, has specific requirements for groups that invest collectively regarding how profits are shared. Whether an investment DAO should be regulated in the same way is something you should confirm with your local regulatory entity.

What are the risks of investment DAOs?

Although investment DAOs successfully decentralize power based on token ownership, risks remain. Don't forget that holding any cryptocurrency carries risks and that investment DAOs also have certain specific risks associated with them:

1. Smart contract failure: Smart contracts that the DAO executes can fail due to hacking, vulnerability exploitation, or faulty code. This could break the mechanisms necessary to efficiently operate and manage DAO funds.

2. Bad investment decisions: The investment DAO could invest in projects that provide a negative ROI (return on investment). After all, there are no guarantees that the majority's decision will always be the best.

3. Poor fund management: Investment DAOs must maintain the health of their treasury. If you do not diversify your investment portfolio or manage it well, your DAO funds could be at risk.

Traditional Venture Capital Firms vs. Investment DAO

When we compare venture capital firms with investment DAOs, we notice that there are a variety of advantages and disadvantages that go hand in hand. Although the investment DAO opened a sector that was traditionally very closed, being still in a "gray" zone makes it difficult for investors and projects to raise funds to work with. Due to the strict requirements of traditional investments, in practice, most investment DAOs could only work with other cryptocurrency projects.

However, when Web3 comes into play, investment DAOs offer some important advantages. Traditional venture capital firms show great interest in the potential of Web3 but typically demand a lot in return for their investment and expertise. But if we add blockchain technology to Web3, venture capital firms are generally not as informed as their decentralized counterparts. Therefore, funding an investment DAO could provide the same principle, a “raised from the crowd” experience, and a more equitable deal.

For more traditional sectors, the added value that a venture capital company can provide is enormous. These companies usually have established networks and a wide variety of support services. And, above all, they also have the necessary legal and regulatory support to operate with peace of mind.

Conclusions

Investment DAOs have become a very popular topic since the recent cryptocurrency boom of 2020 and 2021. The idea that the long-standing venture capital model could be revolutionized is attractive to small investors and blockchain fans. . How the relationship between these two types of participants will develop remains to be seen, as the concept is still very young. As always, if you decide to try investment DAOs, do your best to understand the risks and how they fit into your investment portfolio strategy.