Summary

Investment-type DAO is a decentralized organization that invests in the form of a group. Any governance token holder of an investment DAO can participate in the investment decision-making process. The more governance tokens a user holds, the greater their voting rights. Investment DAOs fund their treasury through token sales, issuing non-fungible tokens (NFTs) and providing revenue-generating services. The legality of an investment DAO will depend on the laws of your jurisdiction.

Introduction

Blockchain has undoubtedly revolutionized the face of investing with its decentralization capabilities. 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 sell them using an on-chain method to obtain funds.

It is not only fundraisers but also investors who have experienced major changes. Investment DAO has given rise to a new method of project financing that allows even investors with minimal funds to invest easily.

What is an investment DAO?

The investment DAO allows its members to decide investment timing and investment targets. These investments can be real estate, decentralized finance (DeFi) investment vehicles, or any other asset in which the DAO chooses to invest. 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 controlled by venture capital (VC) funds, family offices and hedge funds. In the hands of a few money managers. In addition, the investment DAO gives all its governance token holders the ability to make investment decisions. Rather than leveraging the expertise of a small group of people when making investment decisions, this model prioritizes the wisdom of the group.

What is DAO?

Decentralized Autonomous Organizations (DAOs) are managed by smart contracts, which are automated systems running on the blockchain. Execute the code snippet. DAO members make investment decisions after careful consideration and then execute them using these smart contracts. In fact, DAO can continue to operate normally without manual maintenance. Even if DAO members lose interest or abandon the project, the DAO framework will continue to exist due to its immutability.

DAO usually uses 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 their members, while others may only grant this power to specific groups. DAOs are commonly used to manage decentralized finance (DeFi) projects, blockchains, and other protocols in the cryptocurrency space.

How does the investment DAO work?

Investment-type DAOs usually have a general operating goal or principle. Some investment DAOs invest in specific industry areas, such as GameFi or DeFi protocols, etc. The investment DAO uses a proposal mechanism to make investment decisions based on these principles.

Governance token holders of the investment DAO can submit proposals. Some DAOs will limit such proposal rights to members holding a certain number of tokens or to some other members of the organization. This move may be to prevent the proliferation of proposals, or it may simply be to give the right to make investment decisions to members who hold sufficient tokens.

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

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

Investment-based DAOs tend to actively operate community channels on Discord and Telegram platforms to help organize, inform, and promote their members’ proposals proposal. Since the success of a DAO fundamentally depends on its community, maintaining a healthy and active community environment is crucial for the DAO.

Where do the funds for investment DAO come from?

There are several ways for investment DAO to obtain funds. The most common method is to sell governance tokens. The new DAO will mint its own tokens and choose one of the available sales mechanisms to sell them to the market to obtain the required funds. Investors buy these tokens for the purpose of 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, thus Form a DAO community. When the DAO sells its own governance tokens in exchange for cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), BUSD or other stable coins, it obtains the required funds. They may also keep some governance tokens in the vault for future sale.

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

Finally, some investment DAOs will earn funds and digital assets from previously successful businesses. For example, a DeFi project may have generated revenue from the services it provides, and its DAO may subsequently decide to invest that revenue. However, when we refer to investment DAOs, we usually refer to DAOs that only involve investment.

Is the investment DAO legal?

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

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

What are the risks of investment DAO?

While investment-based DAOs have successfully decentralized power based on token ownership, there are still risks. Always keep in mind that holding any cryptocurrency carries risks, and investment DAOs are no exception and have specific risks associated with them:

1.Smart contract failure: The smart contract running the DAO may fail due to hacker attacks, vulnerabilities, or incorrect code. This could disrupt the mechanisms needed to effectively run and manage DAO funds.

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

3.Poor fund management: Investment DAOs need to properly manage their own funds. If the DAO does not diversify its portfolio or mismanage its portfolio, its investment funds may be exposed to high risks.

Comparison between traditional venture capital companies and investment-based DAO

Compared to venture capital companies, investment DAOs have many advantages and disadvantages. Although investment-based DAOs have opened up a traditionally closed industry, their “grey” status makes it difficult for investors and projects to raise funds to cooperate. Due to the strict requirements of traditional investment, most investment DAOs can actually only work with other cryptocurrency projects.

However, investment DAO has some significant advantages in the Web3 field. Although traditional venture capital firms have shown great interest in the potential of Web3, they often require high rates of return due to their investment and expertise. However, when it comes to Web3 and blockchain technology, venture capital firms often have less knowledge than decentralized investment DAOs. Therefore, investment DAO funds can provide the same principles, expertise pooled from the wisdom of the crowd, and fairer transactions.

For traditional industries, venture capital companies can bring huge added value. These companies usually have a mature system and provide a range of support services. On top of that, VCs also receive legal and regulatory support, which is essential for them to operate with peace of mind.

Summary

Investment-based DAOs have become a hot topic since the last cryptocurrency boom in 2020/2021. The idea that investment DAOs could upend the long-standing venture capital model has generated significant interest among small investors and blockchain enthusiasts. Since investment DAOs are still an emerging concept, we still don’t know how the relationship between these two investment models will develop. Always keep in mind that if you decide to try an investment-based DAO, fully understand the above risks and judge whether they are compatible with your portfolio strategy.