Blockchain continues to evolve and change the investment narrative through its decentralized capabilities.
One of the major problems faced by entrepreneurs and businesses is the unavailability of capital to grow. Though many usually seek funds from traditional financial systems like investment banks, they always face the challenge of high-interest rates which further discourages them from taking the funds.
Instead of entrepreneurs, investors and small businesses relying on venture capital firms and traditional fundraising standards, they can create their tokens and sell their tokens using any on-chain method.
Fundraisers can now invest funds as a group through the decentralised autonomous organization (DAOs) and participate fully in the decision-making process through the ownership of the governance token.
Token holders have the voting power on decisions and the more tokens you have, the more your voting power.
With this innovation of DAOs, projects can be funded and funds can be easily accessed by small investors and businesses.
Table of Contents
What Is An Investment DAO?
Investment DAO is the decentralized way of raising funds for investment and placing the investment decision power on the major governance token holders of the organisation.
The decision-making and process of investment in the Decentralized Autonomous Organization (DAO) model are decentralized and democratized.
Unlike traditional models where investment power is given to a small group of Venture Capital funds managers and hedge funds managers, investment DAOs rather leave the investment decision-making ability in the hands of the governance token holders.
The more tokens one has, the more the voting power of the individual on decisions. The DAO model places a priority on the decision of the larger audience more than that of a small group of individuals.
Investment DAOs are funded through the issuance of NFTs, token sales and service rendering for revenue.
Investment DAOs, however, may not be legal everywhere, it largely depends on the jurisdiction.
How Does Investment DAOs Work?
Investment DAO is usually guided by some principles, like the industry segment the investment will be made, such as GameFi or DeFi protocols using a proposal mechanism.
Proposals on the investment DAOs are made by the token holders, while some DAOs allow only those with a certain amount of tokens to make proposals. Most times, this is done to limit spam or just to give preferential treatment to those with a higher stake.
After the proposal, users can use a snapshot mechanism or staking mechanism to vote.
Snapshots review the number of governance tokens on each wallet and award voting rights accordingly without locking the tokens. This will prevent any distortion of the vote like users buying more tokens after they’ve seen the proposal.
Finally, decisions are made according to the voting result.
Airdrops and staking mechanisms are deployed to distribute profits from the investments.
Staking your governance token offers you a commensurate share of rewards which can be withdrawn from the smart contract.
Investment DAOs communities are commonly run on Discord and Telegram to help organize, inform and facilitate proposals.
Advantages Of Investment DAOs
Unlike traditional models where the decision-making and operations are hidden from the public, the investment DAOs are operated on a decentralized public blockchain network. All operations, transactions and data storage on the blockchain network are transparent and can be viewed by the public.
Just like in a democratic society, the decision-making process is dependent on the members of a DAO. Everyone in the system has the right to vote, though the level of voting power depends on the number of tokens held.
This encourages accountability, transparency and critical thinking among the members. It also promotes an equal ground organisation without hierarchy.
DAO operations are purely automatic and as the program runs, the rules and codes in the blockchain are enforced without errors, manipulation, discrimination or human intervention.
4. Elimination Of Third Party Institutions:
One of the main features of any blockchain program is the absence of third parties like banks, regulatory bodies and other middlemen.
Members of DAO can transact on the system without the intervention or extra cost from any third-party institution.
In the case where members want to change the program code or invest in a start-up, it can be done via voting, eliminating the need for banks, legal counsels, financial counsels etc.
Disadvantages Of Investment DAOs
1. Slow Decision Making:
An organisation which considers the collective opinion of the members to make a decision will likely not make fast progress and developments because members will take a longer time to understand the project and make an unbiased decision.
This implies that the DAO will have to explain a project to some of its members who may not understand the project and further give them some time to understand and decide on the project.
Sometimes the fraction of members who don’t understand the project will create a bottleneck that may cause the DAO to lose the project because of their indecisiveness.
2. Majority Wins:
Even though DAOs are decentralized and democratic which makes it easy for members to make decisions and vote for their choice proposals, members will still abide by the voting result of the majority members. This may eliminate the tendency of manipulating the decision process but there’s still a risk of conspiracy among members.
The bedrock of the DAO is the code on which the program is built. Most times, developers may not be able to ensure the perfection and security of the code, making it very vulnerable to hackers.
A good example is an incident which happened in 2016 in Germany. There was a sudden disappearance of a DAO of a German startup stock, further investigation proved thathe t code had some loopholes kn it which some hackers leveraged to steal $50 million out of the accumulated $150 million funds for the creation of a decentralized version of Airbnb.
However, events like this have caused improvements in security protocols and auditing standards of DAOs.
Since the last crypto boom of 2021, investment DAOs have become a very interesting topic of discourse.
A new hope has been ignited in small investors and blockchain enthusiasts, knowing that the funds can be accumulated in a more transparent and decentralized manner.
However, DAOs have their risks, so you should understand them fully before venturing into one.