Blockchain has disrupted a plethora of industries, changing the face of sectors like banking and finance, entertainment, governance, and intellectual property, amongst others. Its decentralized capabilities are powering a new wave of innovation across many sectors.
Venture capitalists (VCs) have long dominated the market for start-up funding. But the status quo is being challenged by the innovative crypto industry. A new approach in the form of Investment DAOs have opened the doors for everyone to get in on the action and potentially reap profits.
In this guide, we explore one of the latest trends in decentralized finance (DeFi) – Investment DAOs. Read on to learn about investment DAOs; what they are, how they work, and how to get started.
1. Introduction to Investment DAOs
What is an Investment DAO?
Short for Decentralized Autonomous Organization, a DAO is a community-led entity with no central authority. Activities within a DAO are fully autonomous and transparent, and decisions are made from the bottom up.
As the name suggests, an investment DAO is a decentralized organization that allows its members to decide how to invest their funds. While traditional investment vehicles put the investment power in the hands of a relatively small group of wealthy individuals and VCs, investment DAOs open access to anyone with their governance token. Members of the DAO have the freedom to decide when and where to invest raised funds. This could be anything from real estate, an offline business, or any other asset the DAO chooses to invest in.
Why Investment DAOs are gaining popularity
Investment DAOs are gaining popularity on two fronts – startups and investors. On the startup front, entrepreneurs no longer need to solely rely on VC funding, seed rounds, or other traditional fundraising models. Raising capital for a project has become as easy as creating and selling a token. This has led to the proliferation of investment DAOs.
Speaking of investors, this decentralized economy has created opportunities for even the smallest of investors to join potentially life-changing investment vehicles.
2. How Investment DAOs Work
How Investment DAOs use smart contracts to manage investments
Behind the scenes, every investment DAO is powered by smart contracts. Like any contract, smart contracts establish the terms of an agreement. However, they are self-executing and cannot be changed once live, except by vote. They trigger predefined actions when specific predefined conditions are met.
The rules and logic of the investment DAO are programmed into the smart contract, which will fail if someone tries to do something outside the coded rules. Smart contracts are designed to execute a logic based on a triggering event, such as the availability of a particular token. For example, a smart contract may be programmed to allow only members with 10 units of a token to create proposals. The possibilities are quite boundless.
The role of community governance in Investment DAOs
As already mentioned, DAOs are governed and managed by the community. Members are saddled with the responsibility of deciding what to invest in.
Users who hold a specified number of the governance tokens of the investment DAO are allowed to create investment proposals. This restriction is often in place to prevent spam and encourage investment decisions from only high-stake members.
Once an investment proposal is presented to the community, members can then choose a snapshot mechanism to enforce the relevant voting rights. Voting is typically open to every member of the community.
3. Benefits of Investing in Investment DAOs
Access to new and emerging markets
In the past, major investment opportunities have been reserved for heavy hitters. Investment DAOs are, however, changing the narrative. Virtually anyone can access new and emerging markets from anywhere in the world. All they need is a crypto wallet.
Increased security and transparency
Investment DAOs offer a certain level of risk diversification by allowing investors to spread their risks across multiple projects. Members of the DAO can decide where and how their capital is spent. Furthermore, every transaction to and from the treasury is available on the blockchain and can be accessed by every member of the DAO.
Potential for higher returns compared to traditional investments
Cryptocurrency investments are generally quite volatile. Although the industry is still nascent, there is a higher potential for 10x or 100x an investment compared to traditional investments.
Community decision-making and involvement
Members of the DAO are more involved in the decision-making process. Unlike traditional models where decisions are made from top-to-bottom, investment DAOs prioritize a bottom-top approach. This democratized aspect of investment DAOs is decentralizing fundraising.
4. Examples of top Investment DAOs
There are possibly hundreds or thousands of investment DAOs. Investment DAOs, as a class of DAOs, can be further broken down into broad subcategories, depending on what the group invests in and how they go about it. Broadly speaking, all investment DAOs fall into one of the following subcategories – utility DAOs, venture DAOs, service DAOs, and collector DAOs. That said, here’s a brief list of some notable investment DAOs.
- DAOVentures: A multi-chain web3 venture studio that focuses on DeFi, Metaverses, and NFTs.
- DAO.vc: Automated venture investment aggregator that helps users invest in IT startups and blockchain projects. Offers a robust ecosystem to investors, featuring a startup incubator, tokenized community pool, crowdfunding service, and a marketplace for freelancers and headhunters.
- Orange DAO: A founder DAO of over 1400 members exploring and advancing web3 through investing in and supporting founders. To join the group, applicants must be alumni of the Y Combinator accelerator.
- BitDAO: Backed by PayPal co-founder Peter Thiel, BitDAO is one of the largest DAOs in the space. I was created to allow anyone to buy a stake in web3 and de-fi startups and initiatives.
- Syndicate DAO: Uses a sub-DAO model that allows users to create investment clubs and legal entities for their investment clubs. These clubs can invest in a range of crypto assets and startup equity off-chain.
- LAO: Touted as “the DAO of DAOs,” LAO is resurrecting The DAO as a limited liability entity organized in the US. The for-profit organization will have up to 99 initial members, who will pool their capital to make investments. Each member can purchase 1% blocks of The LAO units for 375 ETH (up to 4% for 1,500 ETH).
- 8Ventures: A membership-based web3 community that invests in early to mid-stage web3 projects on behalf of its members.
- Pleasr: A collective of art lovers that invest in NFT artwork and other digital collectibles. The DAO experiments with the idea of “fractional” ownership of art, giving its members a share in the growing list of collections.
5. Choosing an Investment DAO
When it comes to choosing the right investment DAO, there are a number of factors to consider. Some of the criteria for evaluating an Investment DAO include: the DAO’s past performance, investment strategy, and governance structure
Research and analyze the Investment DAO's past performance
Numbers don’t lie. Before choosing an investment DAO, it is important to scrutinize its past performance. Try to find answers to questions like who is behind the project, when it was formed, and past success records (if any). A good place to start is the DAO’s official social media channels. There are also tools like Messari and DeepDAO that provides some insights into the activities of the DAO.
Evaluate the investment strategy
What is the investment strategy of the investment DAO – are they focused on new and emerging markets or already established markets? For instance, a DAO that decides to invest in real estate may provide better stability than one that decides to invest in blue-chip NFTs. On the flip side, investing in blue-chip NFTs could offer more gains in the short term than real estate.
Try to find out what the game plan of the DAO is. Are they going all in on a single business idea? Is there a timeline for the investment? What are the risks associated with the approach?
Examine the Investment DAO's community and governance structure
Whether you like it or not, governance is a major component of every investment DAO. Although a few DAOs are already experimenting on other models of governance, the one-token-one-vote structure is still widely used. What this means is that large holders could sway the decisions of the DAO in their favor.
As a rule of thumb, examine the level of participation in the Investment DAO and take a look at previous governance data before joining.
6. Final Thoughts
Investment DAOs appear to be the latest trend in the DAO space. Their popularity has grown in the past few months because they somewhat level the investment playing field. With as little as a crypto wallet and a member token, anyone can have access to unique investment opportunities from across the globe.
Like every other investment opportunity, investment DAOs carry their own risks. To begin with, they rely on smart contracts to execute the decisions of the group. A smart contract can be compromised due to human error. Furthermore, the treasury of the DAO could be hacked. There is also the risk of investing in a project led by malicious actors. This is why it is important to conduct your own research before investing in any DAO.
The concept of investment DAOs is still relatively new. However, given its rapid growth and adoption, the future is looking bright for the industry. More importantly, some countries have taken the initiative to provide some clarity on DAOs and how they can operate as legal entities.