Decentralized Autonomous Organizations (DAOs) are governance systems built on blockchain technology that empower communities to manage and make decisions regarding cryptocurrency projects collectively. Their goal is to ensure that every member has a voice in the decision-making process, with decisions executed automatically by smart contracts.

The decentralized structure of DAOs allows them to function across various sectors, including protocol governance and philanthropy. However, a new type of DAO worthy of note are Investment DAOs, and they allow different investors and users to come together and contribute funds to support startup crypto projects.

What are Investment DAOs?

Source: https://www.linkedin.com/pulse/what-investment-daos-bloomrewards/

An Investment DAO (or Venture DAO) is an organization that enables its members to contribute their funds and participate in collective investment decisions, thereby eliminating the need for external institutions. All of the rules and operations of an Investment DAO are written and enforced by blockchain smart contracts, instead of being managed by a single person or institution. This ensures that all investment decisions are made with full transparency, including which projects to invest in or how funds will be distributed.

The primary concept behind Investment DAOs is to utilize blockchain technology to establish a more democratic investment process. As such, members can contribute funds in the form of cryptocurrencies or tokens, and in return, they will receive tokens that represent their share in the DAO. The tokens also give each member voting rights, meaning that all decisions are made collectively.

Investment DAOs often focus on specific sectors, including DeFi, NFTs, and emerging blockchain technologies, allowing investors to easily align with projects that align with their personal interests. Their transparency reduces the risk of mismanagement and fraud, as all transactions and decisions are recorded on the blockchain, thus allowing members to track performance and ensure funds are managed by the DAO’s rules.

How do Investment DAOs Work?

Investment DAOs are governed by smart contracts that enforce the rules and structure of the DAO, which creates a more decentralized decision-making process. As stated earlier, DAO funds typically originate from members who contribute tokens, such as ETH, BTC, or BNB, which are then converted and held in the DAO’s treasury. In return, they receive governance tokens that represent their voting power within the organization, allowing them to freely contribute to the direction of the DAO’s investment strategies.

While these native governance tokens run the DAO’s everyday operations and grant voting rights, buying them also serves as a speculative asset for investors. When an Investment DAO launches, it may mint a new token and sell it to raise funds. This method, combined with contributions from early investors, helps build up the treasury, which the DAO then uses to invest in other projects according to its members’ preferences.

To ensure that the decision-making process remains efficient and free from spam, many Investment DAOs prefer to restrict proposal submissions to high-stake members or those who hold a certain percentage of the total governance tokens. As such, when a proposal is submitted, a snapshot mechanism is used to count the tokens held in each member’s wallet, allowing for a free and fair voting process.

The proposals that receive the majority of votes are then executed automatically by the DAO’s smart contracts. Each step of the process is also permanently recorded on the blockchain, thus improving accountability and transparency.

How to Join an Investment DAO

To join an Investment DAO, you must first become a member of the community by buying the DAO’s native tokens or a membership NFT. These tokens/NFTs serve as proof of membership and grant you the right to vote and participate on the platform. However, depending on the DAO, membership can be open to the public or restricted to only those who can meet certain financial benchmarks or have specific expertise related to the DAO.

After buying the token/NFT, you may need to deposit funds into the DAO’s treasury or simply hold the DAO tokens in your wallet. Most Investment DAOs use on-chain voting systems to make decisions, and they are handled by platforms like Snapshot.

Asides buying tokens, active participation in the community is important. Investment DAOs have dedicated communication channels like Discord and Telegram where members can share deals and discuss proposals. This is where you can learn more about the DAO’s operations, contribute insights, and even perform specialized roles like research or deal sourcing, which can further boost your influence within the organization.

Types of Investment DAO Models

Investment DAO models include:

DAO+Fund Model

With the DAO + Fund model, the DAO creates a sister venture capital fund that’s in charge of getting more capital. The VC fund is usually managed by a special team who is also responsible for researching and executing investments, while the wider community can vote over major decisions. As such, this model combines community input with professional investment management.

However, while this model provides faster decision-making and external funding, it is also more expensive to maintain, as it incurs additional management fees. As such, using this model may require careful balancing of incentives among members to avoid issues.

Syndicate Model

The syndicate model works by dividing the main investment DAO into smaller sub-DAOs. With this approach, members can opt to join specific sub-DAOs that offer individual investment opportunities. As such, there is closer involvement from participants, as each sub-DAO is responsible for sourcing its own deals, analyzing proposals, and distributing funds.

Although this model supports active participation and enhanced analysis of potential investment options, it also requires a significant amount of time and resources from members. As such, members might have contributed more funds for the DAO to stay competitive.

Services DAO

A Services DAO operates more like a Community-as-a-Service (CaaS) platform. A CaaS model refers to a business strategy that builds a community around a product or service so that clients can give their customers the best experience. As such, a Services DAO provides specialized tools, frameworks, and technical expertise to other DAOs, rather than just providing funds.

In a Services DAO, members offer their skills and technical resources and get equity stakes or negotiated fees in return. This model is best suited for those who wish to support the investment process without committing their own capital, thereby creating a system that leverages the collective experience of the community.

Investment DAOs vs Traditional VC

The primary difference between investment DAOs and traditional venture capital solutions lies in their ability to simplify the investment process and provide capital for a broader range of projects. While traditional VC tends to fund projects in a certain geographic region, investment DAOs allow investors and businesses familiar with crypto to tap from a bigger liquidity pool. This ensures that new projects can secure the funding they need without being constrained by regional factors or the narrow focus of traditional investors.

Another advantage of Investment DAOs is that when projects raise funds through a DAO, they also gain a dedicated community of supporters. These members often provide helpful feedback and resources, help promote the project, and even become early adopters, causing faster growth. This community-driven model differs from traditional VC, where investors usually play a purely financial role.

Investment DAOs also offer more incentives than traditional venture capital, as investors benefit from incentives that combine rewards with the project’s success. Popular incentives include revenue sharing, exclusive access to products/services, and enhanced governance rights. These incentives encourage members not just to contribute capital but also to be active participants in the projects they invest in.

Finally, Investment DAOs offer lower fees and risks than traditional investment channels. It simplifies the investment process by removing intermediaries and spreading risk across various assets and projects. This typically leads to increased profits for investors, making Investment DAOs a favorable choice for those seeking a more inclusive investment ecosystem.

Limitations of Investment DAOs

Investment DAOs represent a new approach to collective investment, but, like any new financial model, they have limitations that users should be aware of before getting involved. One of these limitations is regulatory uncertainty. Although Investment DAOs are legal, they must still comply with existing regulations, particularly those related to Virtual Asset Service Providers (VASPs) and asset management.

For example, in the United States, Investment DAOs can only allow accredited investors to participate, and they must also obtain a VASP Authorization and a Collective Investment Scheme License before operating. This regulatory requirement makes the investment process a bit more complex and can limit everyday investors.

There is also the problem of security in Investment DAOs. While the smart contracts created for these organizations are designed to be transparent and secure, they are not immune to bugs or hackers. As such, any vulnerability in a smart contract could be exploited, leading to significant losses for the entire DAO.

Scalability also poses another challenge. As more members join and the treasury grows, managing the decision-making process, ensuring timely voting, and maintaining efficient governance can become increasingly complex. The decentralized structure can sometimes slow down the process of executing investment decisions, especially when urgent market opportunities come up.

Additionally, as Investment DAOs scale up and start managing larger pools of capital, the risk of security breaches and operational failures may increase, thus requiring consistent security audits and monitoring.

Examples of Investment DAOs

Popular Investment DAOs include:

Orange DAO

Source: https://www.orangedao.xyz/

Orange DAO is a crypto community made up entirely of Y Combinator (YC) alumni. It focuses on utilizing Web3 to drive innovation by supporting various types of cryptocurrency startups. The group’s vision is to create the most valuable and sought-after crypto community by investing experience, capital, and attention into projects that share its forward-thinking disposition.

Orange DAO was founded in 2021 by Ben Huh, a Northwestern graduate and YC alumnus from 2017. Since its inception, the DAO has made over 250 investments, while also growing its membership from 1,000 to 1,300 members, making it the largest community of crypto founders. It also received strategic funding from major institutions like the NEAR Foundation and Algorand to the tune of $95 million across two rounds.

Prospective members of Orange DAO must first verify their identity as YC alumni by posting their YC-linked HackerNews profile’s crypto wallet address. Afterwards, they must mint a non-transferable NFT that confirms their membership status.

Orange DAO also uses an interesting investment strategy to differentiate itself from traditional venture capital funds. The DAO invests in a broad range of Web3 startups across sectors like crypto payments, cap table management, and credit solutions with a standard investment of around $100,000.

Due to the large network of YC alumni, Orange DAO screens more deals than a traditional VC fund would, and as such, only the most promising opportunities are pursued. The General Partners within the DAO also reinvest their profit interest back into the fund, thus reinforcing the community’s shared vision and expanding the investment pool.

Meta Cartel

Sources: https://www.metacartel.org/

MetaCartel was created to support and promote the development of user-focused Web3 dApps on the Ethereum network. It was born out of a community of developers and investors who recognized the need for a shared space where fresh projects could receive funding, mentorship, and operational support without the limitations of traditional venture capital.

MetaCartel was developed in September 2018 as discussions about solving meta transaction challenges on Ethereum led to the formation of a dedicated community. The group eventually formalized their efforts into a DAO and officially launched MetaCartel in 2019. Since then, the DAO has grown to include more than 800 participants in its decentralized and community-driven structure.

Similar to other investment DAOs, MetaCartel members join by minting non-transferable membership NFTs and contributing funds to a shared treasury. This treasury is then used to issue grants to promising projects, which are selected through an on-chain voting process. MetaCartel also organizes events and podcasts to help members work together and share ideas.

The DAO’s structure also includes MetaCartel Ventures, a separate arm that focuses on providing capital and logistical support to entrepreneurs and developers. This venture side of the organization helps projects raise funds through pre-seed, Series A, or other funding rounds, thus enabling startups to enjoy the financial resources and shared knowledge of the community.

Bit DAO

Source: https://www.globenewswire.com/news-release/2022/06/30/2472185/0/en/MetaMask-Lead-of-Operations-Joins-the-BitDAO-and-Game7-ecosystems.html

BitDAO is one of the largest DAOs in crypto today, and it is dedicated to building an accessible tokenized economy. BitDAO was founded by Bybit in August 2021, but operates independently. The community is governed by the BIT token, and allows its holders to propose, vote on, and execute decisions. It also received backing from early investors of up to $620 million from investors including Kronos, Pantera Capital, Dragonfly Capital, Sushiswap, and Polygon.

BIT holders can vote on proposals that affect key areas such as treasury management, deployment of funds, and the development of new on and off-chain governance tools. To participate in this process, BIT holders delegate their voting rights to an address, which is protected by smart contracts that ensure that their tokens are not locked or transferred during delegation. This allows the community to decide on the direction of the DAO without risking their assets.

Token holders own a proportionate share of the BitDAO treasury based on their total holdings on the platform. This encourages them to participate through governance and proposal submissions and also ensures that enough resources are available to support growth.

Seed Club

Source: https://www.seedclub.xyz/

Seed Club was founded in 2020 and specializes in building tokenized communities centered around social tokens. Essentially, it works as an experimental incubator for social tokens and DAOs, helping creators conceptualize and launch projects in Web3. Seed Club supports these ventures by offering advice, mentorship, and access to a network of influential figures and investors.

Seed Club has built a strong reputation, as reflected in the investment it has gotten from notable venture capitalists. The project was able to raise $17 million across two funding rounds from investors like Blockchain Capital, Multicoin Capital, Framework Ventures, and Union Square Ventures (USV).

The DAO is designed to fasten the growth of social token projects through its accelerator program, which combines workshops, interactive sessions, and fireside chats over a 12-week period. This program uses workshops, interactive sessions, and fireside chats to cover the main elements of building a successful DAO, such as membership frameworks, tokenomics, governance structures, legal aspects, and media strategies. This helps startups build their products and prepares them for expansion.

To join Seed Club, investors must hold at least 10 $CLUB tokens. This requirement gives members access to its Discord channel, private events, and exclusive educational content. They can also earn more tokens by completing tasks and being active in the community.

VitaDAO

Source: https://www.vitadao.com/#

VitaDAO is a decentralized organization created to support research and development in extending human life and health span. It was launched in 2021 and operates on the Ethereum blockchain, allowing the public to join by contributing funds and buying its native token VITA.

Since its launch, VitaDAO has gained massive support from the crypto community. The DAO is backed by reputable medical organizations such as Pfizer Ventures, Molecule, Shine Capital, and PrimeDAO. This level of support has helped position the project as a leading innovator in the field of decentralized research, as it has gone on to fund over 24 projects with over $4 million.

VITA holders use the token to vote on which research projects receive funding, allowing the community to decide the direction of longevity research. This promotes investment in healthy aging and allows members to pick only the most promising projects to fund.

Additionally, VitaDAO provides IP-NFTs that represent the intellectual property related to longevity research. These NFTs serve as digital certificates for research output, thus creating a new way to establish ownership over scientific work. The DAO also uses automated market makers (AMMs) to support fundraising efforts and facilitate token liquidity, ensuring that the VitaDAO ecosystem remains efficient while withstanding volatile market conditions.

HairDAO

Source: https://www.hairdao.xyz/hair-token

HairDAO is dedicated to addressing the issue of hair loss through collaborative research. It offers an open platform where researchers, investors, and community members can come together to share knowledge, propose new ideas, and fund studies related to hair loss, hair regeneration, and scalp health.

HairDAO operates around the HAIR token, which serves as the primary governing mechanism for the project’s governance and funding. Similar to VitaDAO, HAIR token holders can propose, discuss, and vote on research initiatives, ensuring that only the most promising projects get funding. The project has accumulated up to $48 million in its treasury for funding, and it has disbursed over $660,000, with majority of the funds going into research and development.

Conclusion

Investment DAOs are rapidly emerging as a trusted alternative to traditional venture capital organizations. They utilize key blockchain principles of decentralization and security to ensure that all decisions contribute to improving the DAO and the cryptocurrency in general. However, investors are advised to do their due diligence to ensure that they invest in DAOs that share the same goals as them, in order to bring about positive change and growth in the crypto industry.