We often read news articles about startups being funded by angel investors and venture capitalists. While venture capitalists are great enablers of economic prosperity, only a handful have the power to make decisions, making them highly centralized. Since the inception of blockchain technology, new methods have been created to fund new ideas. This article will explain what Decentralized Autonomous Organizations, or DAOs, are. This article will also examine the traditional funding systems and investment DAOs.
What is a DAO?
The Decentralized Autonomous Organization or DAO is an organisation controlled by all its members, each having a voting right and equal status.
What is the investment DAO?
Contrary to traditional organizations, no single group of people makes all the decisions in a crypto DAO. Users who own governance tokens of the DAO are eligible to participate in its decision-making process. Investment DAOs are based on this concept. DAOs allow their users to invest funds based on democratic governance and voting.
How does an investment DAO work?
An investment DAO operates on certain principles to help in its decision-making process. For example, some DAOs will only invest in crypto startups others may invest in NFTs. These investment guiding principles help to attract users with similar financial goals.
Proposals are used to make all decisions in a DAO. Users can submit proposals if they own a governance token of the DAO. Once the proposal is submitted, all governance token holders have a chance to vote, approve, or reject the investment proposal.
Voting takes place using two methods. Some DAOs may require users to stake their crypto tokens to vote. Other DAOs follow a snapshot method. The first method involves locking in users’ tokens for a specific period. This method ensures there is no manipulation in voting.
Meanwhile, snapshot voting registers the value of users’ holdings before the investment proposal is submitted. In this method, users do not have the option to purchase more tokens to influence the voting process. Investors receive their returns on investment through airdrops.
Investment DAOs vs. Traditional VCs
Drawbacks of Venture Capital (VCs)
Highly centralized
An investment committee makes all the decisions in a VC firm. This committee has experience in limited investments outside their area of expertise. This lack of varied experience restricts their ability to select the best investments as they may not be aware of opportunities and information across the globe.
Low Liquidity
Due to the long lock-in periods, VC funds are highly illiquid. Investments cannot be withdrawn until there is an opportunity to exit for the VC fund. Exit opportunities could be when the firm is being acquired by another or a portfolio firm makes a public offering.
Large capital requirements
Retail investors find it hard to be a part of venture capital funds. This issue is because fund partners only invite big institutional investors and firms to be a part of it, and the initial investment is too high.
Benefits of Investment DAOs
Decentralization
All members of a DAO make investment decisions. The decision process is highly democratized and enables every member to have a say on where their money will be invested. DAO has access to a wide range of investment opportunities. Also, members will have better knowledge and information about the global landscape as they are from around the world.
Liquidity
Users’ money is highly liquid in an investment DAO, contrary to venture capital. Users can sell their crypto tokens on an exchange at any time. Users’ crypto holdings determine both their share of profit and voting power. Hence, selling crypto tokens is the same as selling shares in the DAO.
Suitable for retail investors
Unlike venture capital funds, investment DAOs do not require high investment capital. Users can gain access to many new investment fields and can invest any amount.
Final Thoughts
It can be tricky to navigate the venture capital space. Users must have in-depth knowledge of the investment landscape, high investment capital, and connections in the crypto space. Investment DAOs using blockchain technology have brought these features into the hands of ordinary retail investors. Investment DAOs introduce normal users to new asset classes such as digital real estate, startups, and expensive NFTs.
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