Investment DAOs are like investment clubs where members jointly decide where to invest the organization's funds. Investment DAOs offer the ability to make investment decisions to any member who holds governance tokens and, in some cases, an NFT evidencing membership. Let's see what investment DAOs are and everything we need to know about these revolutionary organizations.
What is a DAO?
First of all, let's put into context what DAOs are. DAOs are Decentralized Autonomous Organizations, which are purely decentralized organizations powered by smart contracts running on a blockchain. Within these organizations members debate and make decisions together that are executed by the smart contract. One of the main characteristics of DAOs is that they can function without the need for maintenance by humans. The decisions made in this type of organizations are made through governance token-based voting mechanisms. In some of these DAOs, proposals are allowed to any member and in others they are limited to certain members. Governance tokens grant voting power on proposals, which means that the more tokens you have, the more power we will have within these proposals. DAOs are mostly used to manage projects in the decentralized finance sector and the crypto ecosystem.
Example of the timeline of a DAO governance proposal. Source: Outlier Ventures.
What about an investment DAO?
Investment DAOs are like investment clubs where members jointly decide where to invest the organization's funds. Investment DAOs offer the ability to make investment decisions to any member who holds governance tokens and, in some cases, an NFT evidencing membership. These DAOs are characterized by allowing carry out investment proposals jointly. The decisions that are made can be discussed in group video calls and through chat platforms such as Discord, and Your access may be limited to certain parameters. Within Spain, the first investor DAO that was established was FiLAO, the investor club founded by Investment Training. These can focus their investment criteria on different asset classes or focus on a specific sector. Investment DAOs They work through multisig wallets, which allow members' funds to be protected to prevent anyone from using them without the signature of different members of the organization. Roles are also usually established to manage it among the members.
FiLAO DAO members discussing a proposal in Discord. Source: Discord.
How do investment DAOs work?
As we have commented in the previous paragraphs, investment DAOs are managed through the use of governance tokens so that members can carry out and participate in its governance. Some limit the voting power granted by governance tokens to prevent decision-making voting power from being concentrated in the hands of investors with greater ownership of tokens. In order to propose a proposal, It must first be debated in community and then propose it as a proposal on platforms like Snapshot that facilitate the entire process. In order to vote on governance proposals, members must lock your tokens for a limited period in order to vote on said proposals.
Governance proposal voted on in the FiLAO investors DAO. Source: Snapshot.
Then, when the voting period ends, A snapshot is automatically taken showing the number of governance tokens that the members had granted in order to ensure that the results are not manipulated later. Once the proposal has been voted on, the proposal is carried out according to the results. Profits generated in the DAO are distributed to members who hold governance tokens through a staking or airdrop mechanism. The success of an investment DAO is governed by several factors ranging from good judgment in choosing assets when investing, but above all by the community. The participation of all members is important for the community to prosper. and all members are participants in the decisions that are carried out together.
How are investment DAOs funded?
There are different ways to finance an investment DAO in order to develop its treasury. The most popular is the DAO governance token sale, which can be purchased for vote on proposals or simply to speculate on the value of the token. The DAOs that prosper the most are those that are created by investors with extensive demonstrable experience, who carry out efficient and intelligent investment strategies for the community. This allows the DAO to gain popularity and therefore gain the adoption of new members in the organization. The DAO governance tokens are exchanged for the assets granted upon acquisition, which are incorporated into the DAO's treasury. Within the DAO you can also incorporate the issuance and sale of NFTs to add exclusivity of access to the DAO or additional benefits. For example, the Investor Training DAO, FiLAO, requires holding an NFT token that certifies its membership to be able to access the Discord community where proposals are debated before being voted on in Snapshot.
How a governance token works. Source: Medium.
What risks do investment DAOs have?
As in many cases within the cryptocurrency ecosystem, there are also certain risks to take into account when investing in investment DAOs. These risks can range from:
- Poor choice of assets to invest: Not all investments can be successful, which means that in some cases the investments made in the community are not the right ones and may offer negative investment returns.
- Poor treasury management: It is also important that the funds present in the DAO's treasury be efficiently managed, given that if the portfolio is not diversified, investment opportunities may be lost or even see its profitability decline.
- Failures in the contract smart: Another factor to take into account is the possible failures that may arise in the DAO smart contract. This is because the smart contract can suffer a hack, an exploitation of a code vulnerability or even poorly programmed code.
Are investment DAOs legal?
The regulatory framework for investment DAOs may vary depending on the jurisdiction of each region. There are currently no specific regulations for investment DAOs. One of the first things to check is that the DAO governance token is properly regulated, given that in certain regions it can be categorized as a value, which requires specific regulation. Investment DAOs have similar characteristics to traditional investor clubs, which In certain regions they do have regulation which has requirements on how funds are invested jointly and how profits are distributed.