Investment DAOs

2 August 2023

9m read

an expenditure A decentralized organization, or DAO, makes investments collectively. Anyone who holds the governance token for the investment DAO is eligible to vote. Your power to vote increases as you hold more tokens. Investment DAOs raise money for their treasury by holding token sales, issuing NFTs, and providing services that generate income. The legality of investment DAOs will be governed by local legal regulations.


Blockchain has surely changed the face of investing forever with its decentralized possibilities. Venture capital companies, seed rounds, and conventional fundraising techniques are no longer the only sources of funding for entrepreneurs and startups. It's not difficult to generate your own token and sell it via one of the several on-chain selling options.
Investors have also seen a major improvement, in addition to fundraisers. We now have a new method of project fundraising using investment DAOs that is simple to use for even the tiniest investors.

What is a DAO for investment?

an expenditure Members of the DAO are free to choose when and where to invest their funds. The DAO may decide to invest in real estate, DeFi investment vehicles, or any other asset. an expenditure The entire investment process is democratized and decentralized by DAO using the Decentralized Autonomous Organization (DAO) concept.
A relatively small number of money managers at hedge funds, family offices, and VC firms control the majority of the investment power under traditional structures. As an alternative, investment DAOs provide everyone in possession of their governance token control over their investments. This concept prioritizes the wisdom of the public when making investment decisions as opposed to relying on the knowledge of a select few people.

What exactly is a DAO?

A Decentralized Autonomous Organization (DAO) is a company administered by self-executing smart contracts that operate on a blockchain. The decisions made by DAO participants are then carried out by means of these smart contracts. In practice, a DAO can run continually and without human upkeep. Due to its immutable nature, the DAO's framework will continue to exist even if DAO members lose interest in or give up on the project.
Voting systems based on governance tokens are the most typical way that DAOs make decisions. You have more voting power the more of the governance token you own. Any member may submit a proposal in some DAOs, but this ability may only be granted to a select group in others. In the crypto industry, DAOs are frequently used to run DeFi (Decentralized Finance) initiatives, blockchains, and other protocols.

How do investment DAOs function?

An investing DAO often operates on a broad objective or guiding idea. Some invest in specialized business sectors, such as GameFi or DeFi protocols. Using a proposal procedure, investment decisions are made in accordance with these guidelines.
Proposals can be made by holders of the governance token for the investment DAO. Some DAOs will restrict this to token holders who own a specific threshold of tokens or to some other segment of the population. This may be done to prevent spam or to restrict the ability to advise investment decisions to members with sufficient stakes.
Users can use their voting rights after the proposition has been made by either staking their tokens or through a snapshot mechanism. Without locking the tokens, Snapshot divides voting rights based on the number of governance tokens in each wallet. This prevents users from influencing the vote by purchasing more tokens after seeing a proposal. After the voting is completed, the choice is made and put into effect.
Investment gains are dispersed to governance token holders either through airdrops or a staking mechanism. You can then obtain a portion of the earnings from the smart contract by staking your governance token.
To assist organize, inform, and promote their proposals, investment DAOs frequently maintain active community channels on Discord and Telegram. A DAO must have a strong and active membership since its community determines how successful it will be.

Where does a DAO for investments obtain its money from?

An investment DAO can increase its treasury in a number of different ways. A sale of governance tokens is the most typical strategy. A brand-new DAO will create its token and sell it on the market by utilizing one of the many potential sale mechanisms. Investors will buy it for speculative objectives, voting rights, or a combination of the two.
An established DAO with a sound investment plan would probably draw a sizable number of potential DAO members. The DAO would then have money in its treasury after exchanging its governance token for a cryptocurrency like ether (ETH), BUSD, or another stablecoin. Some governance tokens might be kept in the treasury for potential future sales.
The creation and exchange of non-fungible tokens, or NFTs, is another well-liked technique. These might have another use besides being just collectible. For instance, an NFT that grants additional governance privileges may be issued.
Furthermore, certain investing DAOs will already have digital assets and treasury monies from prior accomplishments. For instance, a DeFi project can already have income from the services it provides. The money might then be invested by its DAO. However, we typically refer to DAOs that only deal with investments when we talk about investment DAOs.

Are investment DAOs permitted?

Your jurisdiction will determine the appropriate response. Additionally, it's possible that the lack of precise legislation governing investment DAOs makes it difficult to verify their status. You should first check to see if the investment DAO's token is properly controlled to get a general notion. It can be regarded as security in your nation and require special licensing. It might possibly be covered by another cryptocurrency regulation.
The idea of pooling resources to invest is not new, and many nations already have laws governing investment clubs. For instance, the IRS has special guidelines for organizations that make joint investments and divide the proceeds. It is up to your local regulator to decide whether or not an investment DAO would be subject to the same regulations.

What are the dangers of investing in DAOs?

Investment DAOs successfully distribute power among token owners, but there are still concerns. Remember that there are dangers involved in holding any cryptocurrency, and investment DAOs have additional risks unique to them:

  1. Smart contract failure - A hack, an exploit, or bad code might cause the smart contracts powering the DAO to crash. The systems required to operate effectively and manage the DAO's funds might be damaged as a result of this.
  2. Making poor investment choices - The investment DAO can fund initiatives that have a poor return on investment. After all, there is no assurance that a decision made by the majority will always be the best one.
  3. Fund mismanagement - Investment DAOs must keep their treasury in good condition. The DAO's investment funds could be in high danger if they don't diversify or manage their portfolio efficiently.

Investment DAOs vs. conventional VCs

When comparing VCs and investment DAOs side by side, there are several benefits and drawbacks. Although an investment DAO has allowed for the opening of a previously closed sector, its "gray" status makes it challenging for investors and projects seeking funding to cooperate with it. The majority of investment DAOs would only be allowed to collaborate with other cryptocurrency initiatives in reality due to the strict constraints in traditional investments.
Investment DAOs do have some important advantages in Web3, though. The promise of Web3 has attracted the attention of traditional VC firms, however, these companies often expect high fees in exchange for their knowledge and investment. However, VCs frequently lack the decentralized counterparts' level of expertise when it comes to Web3 and blockchain technology. In light of this, funding from an investment DAO might offer the same concept, crowdsourced knowledge, and a more fair arrangement.
A VC can significantly add value to more conventional enterprises. These businesses frequently have developed networks and a variety of auxiliary services. In addition, they have the support from laws and regulations needed to operate worry-free.

Concluding remarks

Since the latest cryptocurrency surge in 2020–2021, investment DAOs have gained a lot of attention. Small investors and proponents of blockchain technology are drawn to the concept that the traditional VC model can be changed. Given that the idea is still in its infancy, we have yet to see how the two categories of gamers will interact. As always, be sure to thoroughly grasp the risks and how they relate to your portfolio strategy before deciding to experiment with investment DAOs.

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