The DAOs (Decentralized Autonomous Organization) are known as the epicenter of the revolution in the field of Decentralized Finance. The features of decentralization let blockchain change the traditional system of investment. Startups and entrepreneurs do not have to completely rely on seed rounds, venture capital firms and fundraising models any longer. Today, organizations can opt for their own tokens and use any on-chain method to sell them.
Investment DAOs have provided a new outlook to the investment industry. Now, it is now easier for project owners to gather their funding, especially for the small investors.
In simple terms, the investment DAO helps customers find when and where to make their investments. There are several options available, such as DeFi investment vehicles, real estate, or any other asset. The Decentralized Autonomous Organization (DAO) model is used by an investment DAO to decentralize and democratize the entire investment process.
Traditional investment models usually provide power to smaller groups of people, such as the money managers of hedge funds, family offices, VC funds, etc., whereas the investment DAO allows everyone holding the governance token the right to participate in its decision making process. This model gives priority to the decisions of the majority of members taking part in the investment rather than depending on the wisdom of a few people.
A DAO (Decentralized Autonomous Organization) is governed by smart contracts. A smart contract is defined as an automated computer-generated program that is self-executed when run on blockchain. DAO members are allowed to make decisions that are executed using these smart contracts. In fact, an executed DAO can run continuously without any human maintenance. This means that the DAO framework will still exist even if its members decide to abandon the project one day.
DAOs mainly use voting consensus based on governance tokens in order to come up with the community’s decisions. The more tokens you own, the more power you possess. Some DAOs allow any member to make a proposal, whereas some have some conditions in place. These DAOs are mainly used to manage DeFi blockchains, projects, and protocols around the globe.
An investment DAO usually works on a set principle. Now, some people put their money into specific areas, like GameFi, while others put their money into DeFi protocols. A proposal mechanism is used to make the investment decisions.
People who own the governance token of the investment DAO are allowed to make proposals. Depending on the DAOs, some limit the holders according to a specific number of tokens and some divide their members into various groups. This is done to prevent any kind of spam.
Once the proposal is in place, it is suggested that people either use a snapshot mechanism to exercise their voting rights or stake their tokens. A snapshot is used to distribute the voting rights among the members based on the number of tokens without locking them. Once the voting process is over, the decision according to the consensus is announced and implemented.
Profits are delivered through a staking mechanism or through airdrops to the members. Investment DAOs also run their community channels actively on Telegram and Discord. It is necessary for a DAO to have a healthy relationship with its community in order to be successful.
Liquid investment: When it comes to Traditional Venture Capitals, Liquidity Providers LPs in traditional venture capital, cannot liquidate their positions in the fund before the fund offers an exit. DAOs with tokenized investments address this issue. Investment DAOs may issue a token whose value is determined from the portfolio underlying the DAO. Investors who own these tokens can sell them on a cryptocurrency exchange at any time. Investment DAOs, by providing this functionality, provide returns comparable to those of traditional VCs, albeit with less liquidity risk. Simply based on the risk-return profile, they are a better investment vehicle.
Inclusive access: accredited investors can contribute any amount through investment DAOs. These investors have the ability to vote on key investment decisions as a result of their contributions. As a result, both the processes of investing in the DAO and deciding on portfolio investments are more inclusive.
It is not necessary that the majority decision is always the best one. Hence, there is a risk of investing in a project that can provide negative ROI. DAOs use smart contracts, and they can be vulnerable to hacks, scams, and exploits if not coded properly. It is necessary for DAOs to manage their funds properly. Diversification of a portfolio is important as a lack of it will result in high risk for the funds.
Work on investment DAO is still in progress, but it does show promising potential. Traditional venture capital will soon embrace this technology once the regulatory risks are ruled out.
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