Investment DAOs, in which crypto-rich purchasers band together to back startups or make investments, are governed by smart contracts that enforce governance rights.
Because blockchain, cryptocurrencies, and NFTs are surrounded by so much hype, it can be difficult to see the technology’s genuine benefit.
When the price of a crypto coin or an NFT is based largely on its worth as a speculative instrument, it is difficult to appreciate its fundamental value.
Despite the fact that the concept is still extremely new and has only been explored in a few distinct types of organizations thus far, understanding the utility of DAOs, or decentralized autonomous organizations, is a little easier.
So, let us look at the DAO concept in more detail.
Investment DAO
An investment DAO is a decentralized autonomous organization (DAO) that raises and invests cash in assets on behalf of its community. Web3 is used by investing DAOs in democratizing and making the investment process more inclusive.
The units of a DAO can be tokens that are traded on a cryptocurrency exchange. The community norms are agreed upon, and smart contracts are used to enforce governance. Governance (voting) rights can be prorated based on DAO holdings.
Traditional investment vehicles have many practical distinctions from a decentralized organization that invests in cryptocurrencies, real estate, nonfungible tokens (NFTs), or any other asset type.
This is especially true when the investment option is a cryptocurrency startup company. DAOs that invest in startups are fundamentally different from traditional venture capital firms (VC).
What is Traditional VC?
General partners (GPs) establish and administer a venture capital fund . GPs are responsible for identifying investment opportunities, conducting due diligence, and closing investments in their portfolio companies.
Venture capital is a component of the capital pyramid that serves as a channel for capital from major organizations such as pension funds and endowments to be deployed into portfolio companies.
Limited partners (LPs) are big institutions, family offices, and in some cases individuals who contribute funds to a venture capital firm .
The GPs’ job is to guarantee that they collect funds from LPs, find high-quality firms, conduct thorough due diligence, obtain investment committee approvals, and successfully deploy cash.
Why Do We Need DAO?
Because they are internet-native, DAOs offer significant benefits over traditional organizations. Due to the lack of confidence necessary between two parties, DAOs have a substantial advantage.
Traditional organizations require a significant level of faith in the people who run them, especially from investors, but DAOs just require trust in the code.
It is easier to trust the code because it is publicly available and can be thoroughly vetted before release. Every move a DAO does after the community must approve its inception and be entirely transparent and verifiable.
There is no hierarchical structure in such an organization. It is, nonetheless, capable of accomplishing tasks and expanding while under the control of stakeholders via its native token.
Because there is no hierarchy, any stakeholder can suggest an original concept, which the entire group will study and improve upon. Internal issues are typically handled quickly by employing the voting method in accordance with the pre-written norms of the smart contract.
DAOs let investors combine their money and invest in early-stage enterprises and decentralized projects while sharing the risk and potential gains.
How Does DAO Function?
Blockchain technology and smart contracts, which are code collections that operate on the blockchain, are used by the majority of DAOs.
A blockchain is a decentralized digital ledger. While blockchains are most known for publicly documenting transactions involving cryptocurrencies like bitcoin and other digital assets like NFTs, they can also be used for a variety of other purposes.
DAOs can use the blockchain as a backbone, keeping the structure and regulations of each on-chain. In the DAO, each action or vote is represented by a Blockchain transaction.
The members are represented by the address. A person, a robot, an IoT device, or even another DAO can own these addresses. As a result, a fully automated system to run the entire company is ideal.
Each member is given a token that symbolizes the DAO’s shares, and these tokens may also be used to vote in the DAO. The token is simply another sort of contract that runs on the Blockchain platform.
The greater an address’s authority over the DAO, the more tokens he has.
Investment DAOs’ Benefits
DAOs combine the Web3 ethos with the operational consistency of smart contracts. Investors that believe in a specific investing thesis can form a fund by pooling their cash.
Investors can contribute to the DAO in various amounts based on their risk tolerance, and their governance (voting) rights are prorated based on their contributions.
What are the advantages of investing DAOs over traditional venture capital? Let’s have a look at the functional differences.
Access for All
Accredited investors can make contributions of any level to investment DAOs. These investors have the ability to vote on important investment choices because of their contributions.
As a result, both the procedures of investing in the DAO and selecting on portfolio assets are more inclusive.
Deal sourcing, like government, can be decentralized. Imagine managing a technology-focused fund for coffee farmers all around the world.
It certainly helps to have community members from Nicaragua to Indonesia when looking for the greatest last-mile investment opportunities.
This permits investment vehicles to be more specialized, global, and local at the same time.
Because these DAOs can be tokenized, investors can contribute lesser amounts. This gives consumers the option of contributing to a variety of funds and diversifying their risks.
In addition, unlike traditional venture capital, DAOs are more accessible to receiving investments from all over the world (with a few exceptions).
Liquid Investments
In traditional venture capital, limited partners (LPs) are unable to liquidate their investments before the fund offers an exit. Tokenized investment DAOs are a solution to this problem.
A token that gets its value from the underlying portfolio can be used in investment DAOs. Investors who own these tokens can sell them on a cryptocurrency exchange at any moment.
Investment DAOs, by providing this feature, promise returns comparable to traditional VCs, but with lower liquidity risk. Simply based on the risk-return profile, this makes them a stronger investment vehicle.
Closing Lines
Every opportunity comes with its own set of hazards, and investment DAOs are no exception. Despite their structural advantages over typical VCs, there are still several unanswered questions.
Due to the anonymous nature of crypto investments, it is often difficult to determine the investor’s level of sophistication. As a result, protecting investors from taking huge risks on a volatile asset is more difficult.
Regulators are attempting to solve this issue by regulating how a DAO markets itself in order to attract investors.
There are also difficulties in establishing a DAO in which the legal language is programmed into smart contracts. Big legal teams in traditional markets generally create these investment entities. Using smart contracts to accomplish this efficiently is both legal and technologically risky.