The decentralization capabilities of blockchain have introduced formidable changes in many sectors, such as investing and other financial services. Now, startups and entrepreneurs don’t have to wait for venture capital firms, conventional fundraising models, and seed rounds to obtain investment for their business venture. On the contrary, investment DAOs can offer a significantly new approach to funding projects, which can enable equitable opportunities for all investors.
The different value advantages of decentralized autonomous organizations or DAOs show how they can also revolutionize the investment sector. The following discussion aims to offer a detailed introduction to an investment DAO and how they work. In addition, you can also reflect on a detailed overview of different types of investment DAO models to weigh their potential.
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What is Investment DAO?
The obvious detail for beginning a discussion on investment DAO would point at its definition. An investment DAO is a regular decentralized autonomous organization or DAO, which works to raise and invest capital into different assets on behalf of community members. The interesting detail in answers to ‘what is investment DAO’ would refer to how they can leverage the capabilities of web3 for introducing equitability and democracy in the investment process. As a result, an investment DAO could make the investment process more inclusive.
Such type of DAOs could also have their units in tokens, eligible for listing on crypto exchanges. Just like regular DAOs, the community agrees upon specific rules according to smart contracts. Smart contracts also play a vital role in enforcing the implications for governance in the DAO. Users can exercise their governance rights in the investment DAO according to the share of their assets on the DAO.
You can notice how investment DAO could open up the scope for investments in cryptocurrencies, NFTs, virtual real estate, and other asset classes. Most important of all, investment DAO presents a stark difference from the working of conventional investment channels such as traditional venture capitalists or VCs.
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Working of an Investment DAO
The next significant highlight about an investment DAO would refer to answers for “How does an investment DAO work?” and the source of funds. Every investment DAO would follow a specific general principle or goal. For example, some DAOs prefer investments in particular industry segments such as DeFi or GameFi protocols. The investment decisions in these DAOs depend on the supported principles, verified through a proposed mechanism.
Users with the governance token of the investment DAO could make necessary investment proposals. Generally, investment-oriented DAOs restrict the ability to make investment proposals to a few selected members. For example, an investment DAO could allow a specific subsection of the community with a specific amount of governance tokens. Such type of restrictions for a DAO investment fund offers the assurance of safety from spam. The restrictions would encourage only the high-stake members to offer investment decisions on the DAO.
After the institution of the proposal before the DAO, users can opt for staking tokens or choose the snapshot mechanism for exercising the relevant voting rights. The snapshot mechanism reviews the count of governance tokens found in every wallet to ensure equitable distribution of voting rights.
Most important of all, the snapshot mechanism helps in distributing voting rights without locking up your tokens, as in staking. Therefore, users would not deviate from their votes by purchasing more tokens after reviewing a specific proposal. Once the voting process concludes, the final decision depends on the approved proposals.
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Source of Funds for Investment DAO
Another crucial aspect in a discussion about an investment DAO example would refer to the source of funding. How does an investment DAO obtain the treasury required for making investment decisions on behalf of the community? One of the most common sources of funding for investment DAO would refer to a token sale.
In such cases, the DAO would mint a new native token and put it up for sale through their preferred channel. Investors can get in on the new investment DAO project by purchasing the native tokens of the DAO. The investors can use the tokens for voting rights, speculative purposes, or both of them.
If an investment DAO has experienced investors as its founders and features a formidable investment strategy, then it can attract many other DAO members. Upon selling the governance tokens, the investment DAO could garner the necessary funds for the DAO treasury. The investment DAO could also reserve a share of governance tokens in its treasury for facilitating sales in the future.
Another proven alternative for investment DAOs to raise funds would refer to issuing and selling NFTs or non-fungible tokens. The NFTs by the investment DAO could either serve as collectibles or also feature specific utilities. For instance, NFTs issued on the investment DAO could also feature additional governance rights.
Certain examples of ‘how to invest in DAO’ would also showcase how DAOs can obtain funds from their previous projects. For example, a DeFi project with a specific share of the revenue from the services it had offered previously. Now, the DAO for the DeFi project can decide to invest the profits earned from earlier applications.
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Examples and Use Cases of Investment DAO
The examples for investment DAO projects and illustration of use cases of an investment DAO could shed further light on how DAOs revolutionize investing. The best investment DAO example would refer to a DAO working on the coordination of capital among big groups of people. Decentralized autonomous organizations deliver the flexibility required for managing investment capital alongside leveraging DAO membership. As a result, an investment DAO can offer better strategic advantages in comparison to centralized venture capital funding.
An investment DAO could also offer credible advantages over traditional venture capital funding in use cases before and after funding. Before investment, the members of the DAO could use the networks to develop a massive and diverse transaction pipeline. After the investment, such DAOs could provide better support to portfolio companies when compared to lean venture capital fund managing teams.
On the other hand, the implementation of investment DAOs often encounters formidable complicacies. One of the significant complexities of an investment DAO focuses on issues of legal compliance with security regulations. In addition, an investment DAO has to ensure fair distribution of rewards to DAO members for their efforts and investments.
The earliest investment DAO example in first generation DAOs for investing, like LAO and Meta Cartel Ventures, followed simpler designs. Such DAOs focused on collective management of treasury, with all DAO members exercising their votes for all the investment decisions. Even though the early examples provided alluring prospects, they limited the member strength to 99 for avoiding security law violations.
Types of Investment DAO Models
The question of “how to invest in DAO” can wait for some time before you learn about different DAO structuring models. A detailed overview of the three noticeable types of investment DAO models could help in understanding the potential of DAOs for investing. At the same time, you can also notice the setbacks associated with each model of investment DAO. Let us reflect on each investment DAO model and its working in detail to know more about the value of an investment DAO.
DAO + Fund Model
The first entry among second-generation venture DAOs would refer to the DAO + Fund model. According to this model, the DAO would set up an external sister venture capital fund, thereby enabling the expansion of the DAO’s strength. With the help of the external sister VC fund, the investment DAO could garner more members. The external venture capital fund focuses on fuelling external financing by leveraging the support of Limited Partners. In addition, it would also ensure legal compliance, making investment decisions, and execution of contracts.
The explanation for “How does an investment DAO work?” in this model would also draw the DAO members into the equation. DAO members have to support the external venture capital fund for the DAO by offering networks to portfolio companies, referring deals, or conducting due diligence activities. Just like the traditional VC funds, the external VC fund for such an investment DAO would impose a management fee alongside rewarding the DAO with a major share of the profits. The General Partners in the treasury could receive benefits from the performance of the external VC fund, according to their DAO membership. DAO members supporting the operations of the fund could receive the necessary compensation for investing their efforts in the DAO.
One of the significant highlights of the DAO investment fund model refers to faster decision-making. The DAO allocates investment decisions for the external VC fund to General Partners, who have adequate time to investigate all proposals. On the other hand, all the other DAO members have voting rights over the utilization of funds within the DAO treasury.
Advantages of DAO + Fund Model
The advantages of the DAO + Fund model focus primarily on faster decision-making and limited regulatory limits on DAO membership. All the members of the DAO receive equitable incentives for supporting portfolio investments. The DAO + Fund model also enables facilities to raise external funds by leveraging General Partners. On top of it, such models for investment DAOs involve considerably simple legal and contracting structures.
Setbacks of DAO + Fund Model
The DAO + Fund model also presents certain risks for the creation of investment-oriented decentralized autonomous organizations. First of all, it is expensive and time-consuming as you need to raise external capital. On top of it, DAO members do not have to invest any effort in investment decisions, thereby creating questions about the distribution of incentives. In addition, the General Partners involved in the DAO can demand additional incentives for their efforts. The best investment DAO example for the DAO + Fund model would refer to the Orange DAO + Orange Fund.
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Another notable model in the examples for ‘what is investment DAO’ would refer to the syndicate model. According to the syndicate model, the main DAO would come up with different sub-DAOs for every investment. At the same time, members in the main DAO could have the chance to join the sub-DAOs and work on every individual investment.
It is also important to note that the syndicate model restricts the number of members in sub-DAOs to 99. As a result, the sub-DAOs can serve as Investment Clubs, which are free from the restrictions of strict securities regulations. In addition, the main DAO also presents a brief investment memo associated with every investment opportunity to help members decide on the investment they want to participate in. After the investment, every sub-DAO would showcase direct support for the concerned venture.
The answers for “How does an investment DAO work?” in the case of the syndicate model would also focus on how DAO members could choose specific investments. Members can direct capital towards their desired sub-DAOs, with individual execution of each investment. The sub-DAO receives all the returns obtained over the investment, and the main DAO could charge a fee for facilitating sourcing alongside due diligence for the investment.
Advantages of Syndicate Model
The biggest advantage of the syndicate model for setting up an investment DAO would refer to the ease of the process. With the facility of platforms such as Syndicate offering automation of all processes in setting up syndicate model DAOs, you have to do little to come up with an investment DAO. In addition, members are more likely to showcase more involvement in a DAO investment fund dictated by the syndicate model. As each member takes an interest in individual investments through sub-DAOs, they are more likely to monitor their investments closely.
Setbacks of Syndicate Model
The syndicate model for creating an investment DAO would also focus on the time required from DAO members for a personal evaluation of every investment. Most important of all, a syndicate model investment DAO example like DuckDAO would call for members with substantial financial resources for investments in multiple sub-DAOs.
The final example among the types of investment in decentralized autonomous organizations would refer to the services DAO model. The services DAO model works more like a Community-as-a-Service approach. In this case, the DAO does not call for direct investments in the ventures. On the contrary, it provides the necessary infrastructure or strength for other interested investors.
The services DAO model for an investment DAO would involve an assortment of DAO members with technical skills and investment expertise. The experts could deliver their services for investment funds in return for an equity stake or a flat fee. Such DAOs can provide incentives to the users supporting the fund of the client, alongside keeping a specific share of the fees collected for the community treasury.
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The final impression regarding investment DAOs suggests that they are a massive force to reckon with in the web3 revolution. Decentralized autonomous organizations have set some unique precedents for improving conventional applications and introducing decentralization. Therefore, investment DAO is an essential concept for the future. An investment DAO brings opportunities for every type of investor to make the most of their money without losing control.
In comparison to traditional venture capital funds, investment DAO funds offer exclusive avenues for investment with flexibility. However, the different types of investment-oriented DAOs also feature some setbacks. Learn more about each type of investment DAO model and pick the suitable choice for your requirements now.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!