Investment DAOs—How Do They Work By Coinpalais
Investment DAOs—How Do They Work By Coinpalais. 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, enabling equitable opportunities for all investors.
The different value advantages of decentralized autonomous organizations or DAOs show how they can also revolutionize the investment sector. In the following discussion, Coinpalais briefly introduces an investment DAO and how it works. In addition, you can also reflect on a detailed overview of different types of investment DAO models to weigh their potential.
What is Investment DAO?
The obvious detail for beginning a discussion on investment DAO would be its definition. An investment DAO is a regular decentralized autonomous organization or DAO that works to raise and invest capital into different assets on behalf of community members. The interesting details in the answers to ‘What is investment DAO’ refer to how they can leverage the capabilities of web3 to introduce 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. 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 importantly, investment DAO presents a stark difference from conventional investment channels such as traditional venture capitalists or VCs.
Working with an Investment DAO
The next significant highlight about an investment DAO would be answers to the question, “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 restrictions for a DAO investment fund assure safety from spam. The restrictions would encourage only the high-stakes members to offer investment decisions on the DAO.
After the proposal is established before the DAO, users can opt to stake tokens or choose the snapshot mechanism to exercise their relevant voting rights. The snapshot mechanism reviews the count of governance tokens found in every wallet to ensure equitable distribution of voting rights.
Most importantly, the snapshot mechanism helps distribute 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.
Source of Funds for Investment DAO
The funding source is another crucial aspect when discussing an investment DAO example. A token sale is one of the most common funding sources for investment DAO. 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 DAO tokens. Investors can use the tokens for voting rights, speculative purposes, or both.
If an investment DAO has experienced investors as its founders and features a formidable investment strategy, 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 to facilitate future sales.
Another proven alternative for investment DAOs to raise funds would be issuing and selling NFTs or non-fungible tokens. The NFTs by the investment DAO could either serve as collectibles or 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 previously offered services. Now, the DAO for the DeFi project can decide to invest the profits earned from earlier applications.
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 example of an investment DAO would be a DAO working on coordinating 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 than 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 better support portfolio companies than lean venture capital fund managing teams.
On the other hand, implementing investment DAOs often encounters formidable complicacies. One of the significant complexities of an investment DAO focuses on legal compliance with security regulations. In addition, an investment DAO must ensure fair reward distribution 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 treasury management, 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 to avoid security law violations.
Types of Investment DAO Models
The question of “how to invest in DAO” can wait until you learn about different DAO structuring models. A detailed overview of the three noticeable types of investment DAO models could help understand 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 how it works 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 Fundstment 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. 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 benefit from the performance of the external VC fund, according to their DAO membership. DAO members supporting the fund operations could receive compensation for investing their efforts in the DAO.
One of the significant highlights of the DAO investment fund model is faster decision-making. The DAO allocates funding 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.
SetbFund of DAO + Fund Model
The DAO + Fund model also presents risks for creating investment-oriented decentralized autonomous organizations. First, 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 investment DAO example for the DAO + Fund Fund is the Orange DAO + Orange Fund.
Syndicate Model
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 develop 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 venture.
The answers to “How does an investment DAO work?” in the case of the syndicate model would also focus on how DAO members could choose specific investments. Member can direct capital towards their desired sub-DAOs, with individual execution of each investment. The su-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 the Syndicate Model
The biggest advantage of the syndicate model for setting up an investment DAO is 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 develop 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 is interested 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 importantly, a syndicate model investment DAO example like DuckDAO would call for members with substantial financial resources to invest in multiple sub-DAOs.
Services DAO
The final example of the types of investment in decentralized autonomous organizations is the services DAO model. The se vices DAO model works more like a Community-as-a-Service approach. In this case, the DAO does not call for direct venture investments. 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 incentivize the users supporting the client’s Fund, such as a specific refund fee collected for the community treasury.
Conclusion
The final impression regarding investment DAOs suggests they are a massive force within the Web3 revolution. Decentralized autonomous organizations have set unique precedents for improving conventional applications and introducing decentralization. Therefore, investment in DAO is an essential concept for the future. An investment in DAO brings opportunities for every type of investor to make the most of their money without losing control.
Compared to traditional venture capital funds, investment DAO funds offer exclusive avenues for investment with flexibility. However, the different types of investment-oriented DAOs also have some setbacks. Learn more bout each type of investment DAO model and pick the suitable choice for your requirements now.
