What is an investment DAO?

Investment DAO is a decentralized organization that invests in groups. Governance token holders of any investment DAO can participate in the investment decision-making process. The more governance tokens a user holds, the greater the voting power they have. Investment DAOs fund their coffers through token sales, issuing non-fungible tokens (NFTs), and offering revenue-generating services. The legality of an investment DAO will depend on the laws of your jurisdiction.

Blockchain, with its ability to decentralize, has undoubtedly revolutionized the face of investing. Entrepreneurs and start-ups no longer need to rely solely on venture capital firms, seed rounds, and traditional funding models. They can choose a relatively simple financing model, which is to create their own project tokens, and then use an on-chain method to sell them to obtain funds.

It's not just fundraisers that have undergone major changes, but investors too. Investment DAO has given birth to a new way of project financing, which can be easily invested even by investors with minimal funds.

What is an investment DAO?

Investment DAO allows its members to decide the timing and target of investment. These investments could be real estate, decentralized finance (DeFi) investment vehicles, or any other asset that the DAO chooses to invest in. The investment DAO adopts the decentralized autonomous organization (DAO) model to democratize and decentralize the entire investment process.

In the traditional investment model, investment rights are often in the hands of a small number of money managers of venture capital (VC) funds, family offices and hedge funds. In addition, an investment DAO empowers all its governance token holders with investment decision-making capabilities. Instead of leveraging the expertise of a small group of people, the model prioritizes the wisdom of the crowd when making investment decisions.

What are DAOs?

Decentralized Autonomous Organizations (DAOs) are governed by smart contracts, which are self-executing pieces of code that run on the blockchain. DAO members make deliberate investment decisions, which are then executed using these smart contracts. In fact, DAO can continue to operate normally without human maintenance. Even if DAO members lose interest or abandon the project, the DAO framework will continue to exist due to its immutability.

DAOs usually use a voting mechanism based on governance tokens to make decisions. The more governance tokens a DAO member owns, the greater their voting power. Some DAOs grant proposal rights to all of their members, while others may only grant this power to specific groups. DAOs are often used to manage decentralized finance (DeFi) projects, blockchain and other protocols in the cryptocurrency space.

How does an investment DAO work?

Investment DAOs usually have a common operating goal or principle. Some investment DAOs invest in specific industry sectors, such as GameFi or DeFi protocols. According to these principles, the investment DAO adopts the proposal mechanism to make investment decisions.

Governance token holders of investment DAOs can make proposals. Some DAOs limit such proposal rights to members who hold a certain amount of tokens or to some other members of the organization. This move may be to prevent the flood of proposals, or it may simply be to give investment decision-making advice to members who hold sufficient tokens.

After the proposal is made, users will exercise their voting rights by staking tokens or using the snapshot mechanism. The snapshot mechanism looks at the amount of governance tokens in each wallet and allocates voting power based on that amount without locking up tokens. This helps prevent users from influencing votes by buying more tokens after seeing the content of the proposal. After the voting is over, the investment DAO will execute decisions based on the voting results.

Investment profits will be distributed to governance token holders through airdrops, or through a staking mechanism. Users can participate in sharing rewards by staking governance tokens, which can then be withdrawn from the smart contract.

Investing DAOs tend to actively run community channels on Discord and Telegram platforms to help organize, inform and facilitate proposals from their members. Since the success of a DAO is fundamentally dependent on its community, maintaining a healthy and active community environment is critical to a DAO.

Where does the capital of investment DAO come from?

There are several ways for investment-type DAOs to obtain funds. The most common method is selling governance tokens. The new DAO would mint its own tokens and choose one of the available sale mechanisms to sell them to the market to obtain the required funding. Investors buy these tokens for speculation, to gain voting rights, or both.

A DAO established by experienced investors with a solid investment strategy may attract a large number of potential DAO members to form a DAO community. The required funds are obtained when the DAO sells its own governance tokens in exchange for cryptocurrencies such as Bitcoin (BTC), Ether (ETH), BUSD or other stablecoins. They may also keep some governance tokens in the vault for future sale.

Another mainstream method for DAOs to obtain funds is to issue and sell non-fungible tokens (NFT). These NFTs can be pure collectibles or provide some other utility. For example, an NFT could be issued that provides additional governance rights.

Finally, some investment DAOs earn capital and digital assets from previously successful businesses. For example, a DeFi project may have earned income from the services it provides, and its DAO may then decide to invest that income. However, when we refer to investment DAOs, we usually refer to DAOs that only involve investments.

Are investment DAOs legal?

Whether an investment DAO is legal will depend on your jurisdiction. You may also find that there are currently no specific regulations regarding investment DAOs, making it difficult to determine their legal status. Roughly speaking, the first thing to look at is whether the tokens of investment DAOs are adequately regulated. In your country, tokens may be classified as a security, require specific licensing, and may also be subject to some other cryptocurrency regulations.

The concept of collective investing is not new and many countries have regulations for investment clubs. For example, the IRS has established specific requirements for groups investing collectively to share profits. Whether investment DAOs will be regulated in the same way depends on your local regulator.

What are the risks of investment DAO?

While investment DAOs successfully decentralize power based on token ownership, there are still risks. Always keep in mind that holding any cryptocurrency has risks, and investing in DAOs is no exception and there are specific risks associated with it:

1. Smart contract failure: The smart contract that runs the DAO may fail due to hacking, bugs, or wrong code. This could disrupt the mechanisms needed to efficiently run and manage DAO funds.

2. Wrong investment decisions: Investment DAOs may invest in projects with a negative return on investment (ROI). After all, group decisions are not always the best decisions.

3. Poor fund management: Investment DAOs need to properly manage their own funds. If a DAO does not diversify its portfolio or mismanages its portfolio, its invested funds may be at high risk.

Comparison between traditional venture capital companies and investment DAOs

Compared with venture capital companies, investment DAOs have many advantages and disadvantages. Although investment-oriented DAOs have opened up a relatively closed industry in the traditional sense, their "grey" status makes it difficult for investors and fund-raising projects to reach cooperation. Due to the strict requirements of traditional investment, most investment DAOs can only cooperate with other cryptocurrency projects.

However, investment DAOs have some significant advantages in the Web3 space. While traditional VCs have shown great interest in the potential of Web3, the rate of return is usually high due to their investment and expertise. However, when it comes to Web3 and blockchain technology, VC firms are often not as knowledgeable as decentralized investment DAOs. Funding for investment DAOs can thus offer the same principles, expertise in pooling collective wisdom, and fairer deals.

For more traditional industries, venture capital firms can bring huge added value. These companies usually have a mature system and provide a series of support services. On top of that, VCs also have the legal and regulatory backing that is essential for their peace of mind to operate.

Summarize

Investment DAOs have become a hot topic since the last cryptocurrency boom in 2020/2021. The idea that investment-based DAOs could upend the long-standing VC model has sparked a lot of interest from small investors and blockchain enthusiasts alike. Since investment DAOs are still an emerging concept, we do not yet know how the relationship between these two investment models will develop. Always keep in mind that if you decide to try an investment DAO, please fully understand the above risks and judge whether these risks are compatible with your portfolio strategy.