Brief content

An investment DAO is a decentralized organization that invests funds collectively. Anyone who owns the management token of the investment DAO can participate in the decision-making process. The more tokens you have, the greater the power of your vote. Investment DAOs replenish their coffers by selling tokens, issuing NFTs, and providing revenue-generating services. The legality of investment DAOs will depend on the legal framework of the jurisdiction in which you are located.

Introduction

Thanks to blockchain, and more precisely thanks to the decentralization that came along with it, the world of investments has changed. Entrepreneurs and startups no longer need to rely solely on venture capital companies, seed rounds of investment, and traditional fundraising models. Creating your own token and using one of the various on-chain methods of project token sales is quite simple.

Significant changes were felt not only by fundraisers, but also by investors. Thanks to investment DAOs, we now have a new approach to financing projects, and even the smallest investors can get involved.

What is an investment DAO?

Thanks to an investment DAO, its members can decide when and where to invest their funds. This could be real estate, DeFi investment instruments, or any other asset the DAO chooses to invest in. The investment DAO uses the Decentralized Autonomous Organization (DAO) model to democratize and decentralize the entire investment process.

In traditional models, decision-making power rests in the hands of a relatively small group of CFOs at venture capital funds, family offices and hedge funds. And in investment DAOs, the ability to make investment decisions is in the hands of everyone who has management tokens. In such a model, when making decisions, the experience of a narrow group of people is not used, but the so-called "wisdom of the crowd".

What is a DAO?

A Decentralized Autonomous Organization (DAO) is an organization that is governed through smart contracts, pieces of code on the blockchain that execute independently. The members of the DAO discuss and make decisions, which are then implemented using these smart contracts. Essentially, the DAO can function stably without human support. Even if DAO members lose interest or leave the project, the DAO structure will still exist because it is immutable.

The most common way to make DAO decisions is through voting mechanisms among governance token holders. The more tokens you have, the more voting power you have. Some DAOs allow any participant to make proposals, while others may only have this right for a certain group. DAOs are commonly used to manage DeFi (decentralized finance) projects, blockchains, and other protocols in the crypto world.

How do investment DAOs work?

An investment DAO usually has a general purpose or principle by which it operates. Some invest in specific segments of the industry, such as GameFi or DeFi protocols. Investment decisions are made in accordance with these principles using the supply mechanism.

DAO management token holders can make offers. In some DAOs, this can be done by the owners of a certain number of tokens, in others - by a defined group of people. This is to avoid spam or to allow only members with a sufficient share of tokens to make investment offers.

After receiving an offer to exercise their right to vote, users will either have to stake their tokens, or a snapshot mechanism will be used. According to this mechanism, the number of management tokens in each wallet is analyzed, and voting rights are distributed based on the number of tokens in each owner. At the same time, tokens are not blocked. This helps avoid users influencing the vote by buying more tokens after receiving the offer. The decision is implemented based on the voting results.

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

Investment DAOs often create Discord and Telegram channels for the community to help organize, inform, and facilitate the process of making and reviewing proposals. A DAO is only as successful as its community, so it must support the healthy and active interaction of all its members.

Where does an investment DAO get its funds from?

There are several ways in which an investment DAO can replenish its coffers. The most common method is the sale of control tokens. The new DAO will mint its token and offer it to the market through one of the various sales mechanisms available. Investors will buy it either for speculative purposes, or for voting rights, or both.

If a DAO is created by experienced investors with a solid investment strategy, it is more likely to attract a large community of potential members. After selling its governance token for cryptocurrency such as Bitcoin (BTC), Ether (ETH), BUSD or other stablecoins, the DAO will have funds in its coffers. They can also keep some amount of control tokens in the treasury for future sales.

Another popular method is the issue and sale of non-fungible tokens - NFTs. These can be both exclusively collectible items and those that have a practical application. For example, an NFT can be issued, thanks to which the owner will have additional management rights.

Additionally, some investment DAOs will already have some funds and digital assets in their coffers from previous sales or projects. For example, a DeFi project may already have revenue from its services. His DAO can then decide to invest those funds. However, when we talk about investment DAOs, we usually mean those that only deal with investments.

The answer here will depend on your jurisdiction. You can see that there are no special rules for investment DAOs, which makes it difficult to determine their status. To have at least a rough idea, you should first check if the investment DAO token is properly regulated. For example, it may fall into the category of securities in your country, in which case it needs a separate license. It may also be subject to some other cryptocurrency regulation.

The concept of collective investment is not new, and many countries already have rules for investment clubs. The US Internal Revenue Service, for example, has special requirements for groups that invest collectively for profit-sharing purposes. Regardless of whether an investment DAO will be regulated, the issue will need to be resolved with the local regulator.

What are the risks associated with investment DAOs

Although investment DAOs have successfully implemented the decentralization of power based on the number of tokens an owner has, risks are still present. Do not forget that owning any cryptocurrency has risks, investment DAOs are no exception:

1. Smart contract failure – Smart contracts running the DAO can fail due to a hack, exploit, or faulty code. This could disrupt the mechanisms necessary for the efficient operation and management of DAO funds.

2. Bad investment decisions – An investment DAO may invest in projects that will have a negative ROI (return on investment). After all, there is no guarantee that the majority decision is always the best.

3. Inefficient Fund Management – ​​Investment DAOs must properly maintain their treasury. If they do not diversify their portfolio or manage it properly, the funds may be at high risk.

Traditional venture capital firms vs. investment DAOs

If you compare venture capital companies and investment DAOs, you can find a number of advantages and disadvantages of both. Although the investment DAO has made a traditionally closed industry open, its "grey" status makes it difficult to work with investors and fundraising projects. Due to the strict requirements for traditional investments, most investment DAOs can actually only work with other crypto projects.

However, when it comes to Web3, investment DAOs have some significant advantages. Traditional venture capital firms have shown great interest in Web3's potential, but they typically demand a lot in return for their investment and expertise. However, when it comes to Web3 and blockchain technology, VCs often don't know as much as their decentralized counterparts. Therefore, funding from an investment DAO has the same principle, the use of crowdsourcing is preserved, and in addition, it is possible to conclude an agreement equal to all parties.

For more traditional industries, the added value that a venture capital investment can bring is enormous. These companies often have an established network and provide a range of support services. Above all, they also have the legal and regulatory support necessary for investors to sleep soundly.

Results

Investment DAOs have been the talk of the town since the last cryptocurrency boom of 2020-2021. The idea that a venture capital model that has existed for many years can be improved is attractive to small investors and blockchain enthusiasts. Since the concept of investment DAOs is still quite young, we have yet to see how the relationship between these two types of players will develop. As always, if you decide to experiment with investment DAOs, do a full risk assessment and analyze how it fits into your investment strategy.