Résumé

An investment DAO is a decentralized organization that invests funds as a group. Anyone with investment DAO governance tokens can participate in the decision-making process. The more tokens you hold, the greater your voting power. Investment DAOs finance their treasury through the sale of tokens, the issuance of NFTs and the provision of revenue-generating services. The legality of investment DAOs will depend on the laws of your jurisdiction.

Introduction

With its decentralized capabilities, blockchain has undoubtedly changed investing forever. Entrepreneurs and startups are no longer restricted to venture capital firms, seed capital, and traditional fundraising models. It is relatively simple to create your own token and use one of the different methods of selling your project token.

It’s not just fundraising that has seen a significant change: investors too. With investment DAOs, we now have a new approach to financing projects that are easily accessible to smaller investors.

What is an investment DAO?

An investment DAO allows its members to decide when and where to invest their funds. This could be in 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 put investment power in the hands of a small group of money managers from venture capital and hedge funds. Investment DAOs also provide anyone holding their governance token with the ability to make decisions regarding their investments. Instead of using the expertise of a select group of people, this model prioritizes the wisdom of the many when making investment decisions.

What is a DAO?

A decentralized autonomous organization (DAO) is an organization governed by smart contracts, self-executing pieces of code that run on a blockchain. The members of a DAO deliberate and make decisions which are then executed using these smart contracts. A DAO, in fact, can operate without human maintenance and continuously. Even if members of a DAO lose interest or abandon the project, the DAO framework will remain active due to its immutable nature.

The most common way DAOs make decisions is through voting mechanisms based on governance tokens. The more tokens you own, the more weight your vote has. Some DAOs allow any member to make a proposal, while others may limit this right to a specific group. DAOs are commonly used to manage DeFi (decentralized finance) projects, blockchains, and other protocols in the cryptocurrency world.

How do investment DAOs work?

An investment DAO will usually have an overall purpose or principle by which it operates. Some invest in specific industry segments such as GameFi or DeFi protocols, for example. Investment decisions are made according to these principles using a proposal mechanism.

Holders of the investment DAO governance token have the opportunity to make proposals. Some DAOs will limit this to holders of a certain amount of tokens or another subsection of the group. This may be the case to prevent spam or to only allow members with sufficient stake to suggest investment decisions.

Once the proposal is made, users stake their tokens 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 rights based on that without locking the tokens. This helps prevent users from influencing the vote by purchasing more tokens once they have seen a proposal. Once voting is completed, the decision is made based on the results.

Investment profits are distributed via airdrops to governance token holders or via a staking mechanism. By staking your governance tokens, you will receive a share of rewards that you can withdraw from the smart contract.

Investment DAOs often run active community channels on Discord and Telegram to help organize, inform, and facilitate their proposals. A DAO is only as good as its community, so it must maintain a healthy and active membership.

Where do the funds for an investment DAO come from?

There are several ways for an investment DAO to build up its cash flow. The most common method is a governance token sale. A new DAO will issue its token and offer it to the market using one of the different sales mechanisms available. Investors will buy it for speculative purposes, with voting rights or both.

A DAO set up by experienced investors with a solid investment strategy would likely attract a large community of potential members. Once they sell their governance tokens for a cryptocurrency like bitcoin (BTC), ether (ETH), BUSD or other stablecoins, the DAO has funds in its treasury. It is also possible to hold governance tokens in cash for future sales.

Another popular method is the issuance and sale of non-fungible tokens, or NFTs. These may be collectibles only or provide some other utility. For example, an NFT could provide additional governance rights.

Finally, some investment DAOs will already have cash funds and digital assets from previous successes. For example, a DeFi project may already have disposable income from the services it offers. Its DAO could then decide to invest the money. However, when we talk about investment DAOs, we usually think of those that only invest.

The answer here will depend on your jurisdiction. You may also find that there are no specific regulations regarding investment DAOs, making their status difficult to determine. To get a rough idea, you first need to check whether the investment DAO token is properly regulated. It may be classified as a financial asset in your country and require specific licenses. It may also fall under another crypto regulation.

The concept of collective investment is not new, and many countries already have regulations for investment clubs. The IRS, for example, has specific requirements for groups that invest collectively to share profits. It is up to your local regulator to decide whether an investment DAO should be subject to these same regulations.

What are the risks of investment DAOs

While investment DAOs successfully decentralize power based on token ownership, risks still exist. Remember that holding cryptocurrencies carries risks, and investment DAOs also have specific risks associated with them:

1. Smart contract failure: smart contracts that operate the DAO can fail due to hacking, or faulty code. This could disrupt the mechanisms necessary for effective execution and management of DAO funds.

2.Poor investment decision: The investment DAO might invest in projects that provide a negative ROI (return on investment). After all, there is no guarantee that a decision made by the majority is the best.

3. Poor fund management: Investment DAOs must manage their cash flow properly. If they do not diversify their portfolio or manage it well, DAO investment funds could be at risk.

Traditional venture capital and investment DAOs

There are many pros and cons when comparing venture capital and investment DAOs. While investment DAOs open up a traditionally closed industry, its unclear status makes it difficult to collaborate with investors and raise fundraising projects. Due to the strict requirements for traditional investments, most investment DAOs would only be able to work with other crypto projects.

However, when it comes to Web3, investment DAOs have significant advantages. Traditional venture capital firms have shown great interest in the potential of Web3, but generally demand a lot in return for their investment and expertise. But when it comes to Web3 and blockchain technology, venture capital firms often don't know as much as their decentralized counterparts. Therefore, financing an investment DAO could offer the same principle, participatory expertise and a fairer transaction.

For more traditional industries, the added value of a venture capital firm is enormous. These businesses often have established networks and a range of support services. Above all, they also have the legal and regulatory support necessary to operate with peace of mind.

To conclude

Investment DAOs have become a major topic since the last cryptocurrency boom in 2020/2021. The idea that the traditional venture capital model could be disrupted is appealing to small investors and blockchain fans. We have not yet seen how the relationship between the two types of models will develop because the concept is still young. As always, if you decide to experiment with DAO investing, make sure you fully understand the risks and how it fits into your portfolio strategy.