Existing DAOs can be roughly divided into three categories: protocol DAOs, work/social DAOs, and investment DAOs. Among them, we are more interested in investing in DAOs. First, because investing in DAOs is not technically complicated, the main difficulties are It is at the legal level; the second is that there are already many DAOs with sufficient liquid assets that have issued financial products, and we believe that more and more DAOs will participate in it in the future. In addition, if you want to understand the future portrait of Web3 native tools, researching and investing in DAO is also an essential part. The research object here is not only the current state of investing in DAOs, but also the top performers in the track, the tools and frameworks they use, and the current challenges they face.
The Origin and Current Situation of Investing in DAO
There are two main motivations for investing in the form of DAOs:
- Hope that collective intelligence can lead to more satisfying investment decisions;
- Gather collective strength to discover more project investment opportunities (Deal Flow)
In traditional finance, joint investment in the syndicate model (multiple investors are divided into lead investors and co-investors, investing in the same project to facilitate risk sharing) is difficult to carry out among multiple countries, mainly due to the following points. Inconvenience:
- The need for a complex legal system;
- Need to coordinate banks in various countries;
- Notarized documents need to be sent to various places;
- Unconventional assets such as virtual currencies are complex.
The DAO model has successfully eliminated such troubles caused by inconsistent national administrative systems, and participants can now invest funds to participate in joint investment with just a few clicks in their wallets. Under the DAO system, it is often easier to complete fundraising than to decide how to deploy funds, and the following two classic cases also perfectly demonstrate this:
- The DAO: As the largest crowdfunding project at the time, its contract loophole indirectly led to the hard fork of Ethereum into ETH and ETC;
- Constitution DAO: Raised nearly $50 million in an attempt to buy an official copy of the U.S. Constitution.
Recently, DAO tools and DAO frameworks have become a hot area of focus for many users. Some of these protocols/products have ready-made components, which can effectively enable security and improve the credibility of DAO fund pool contracts. Such excellent tools can help DAO’s investment decisions and the coordination of subsequent fund deployments become simpler and more efficient. Gnosis Safe multi-signature wallet is one of them. In theory, multi-signature wallets can replace legal contracts, banks, and other trivial matters. However, although DAO itself does not need a legal structure, it is still under the control of local laws and regulations. Therefore, DAOs usually need to be attached to legal entities in order to be bound by laws and regulations, and at the same time establish a channel with the off-chain world to conduct employees. Employment, taxation, etc.
Furthermore, a DAO without a legal structure often faces many risks:
- If the DAO has the purpose of making a profit, even if the members have never met, the court may judge the DAO as an “unincorporated organization composed of general partners” because the members have established a business relationship;
- In the absence of a corporate entity, each DAO member has unlimited potential liability;
- More difficult to meet KYC/AML regulatory requirements for compliance departments, investment DAOs typically only accept a small number of accredited investors (up to 99 in the US)
Pioneering the era invests in DAO
There have been many successful investment DAOs to date, and in this part of the article, we’ll take a look at the tools and mechanisms used by these pioneers.
As the first venture capital DAO, MetaCartel Ventures has invested in well-known projects such as Zapper and Rarible. It was established in 2018. Because it attaches great importance to the value-added effect of the organization on the investment results, its screening standards for members are very high, and as a result, many well-known veterans, project founders, investors, etc. have participated. At present, the DAO tools used by MetaCartel are open source, which is convenient for other DAOs to learn and follow.
Moloch DAO initially focused on funding public facilities (clients, wallets, etc.) on the Ethereum chain. The “RageQuit” mechanism it invented was subsequently used by many investment DAOs including Flamingo DAO. The principle of this mechanism is: after the investment decision is made and before the deployment of funds, a period of time is reserved, so that DAO members who are unwilling to participate in the investment can request a proportional share from the treasury and withdraw from the joint investment. This provides members with asset protection that has never existed in traditional finance. When the collective consensus conflicts with individual values, members have the right to opt out.
LAO is the first DAO focused on complying with U.S. law. It not only made a huge contribution to the passage of the DAO Act in Wyoming, but it is also no less in terms of investment. Well-known projects such as Zerion, Reflexer Labs, and Async Art have participated in it. cast. Founded by OpenLaw, it became the framework that many DAOs followed, making Wyoming the first jurisdiction to legally recognize DAOs as entities. It grants voting rights in proportion to the shares, and accredited investors can obtain shares, with a single-person share cap of 7.2%, and the price per share continues to increase with investment.
Currently, there are many projects trying to productize the core mechanism of DAO, and Syndicate Protocol is one of them. It is trying to build a DAO joint investment framework to help members choose the right person to join investment in each transaction. (DAO-based AngelList)
The quietly emerging NFT collection/investment DAO
In 2021, with the surge in popularity of NFT, NFT investment DAO came into being. As one of the most successful cases, I have to mention Flamingo DAO, which was spun off from the LAO mentioned above and focused on NFT projects, covering OpenSea, Fractional, Upshot, YieldGuild and many independent NFTs. In addition, NFT funds It is also worth mentioning OneOf, which is trying to improve the DAO tool so that investors can share the utility of their NFTs in the community. Based on this, Mesha firmly believes that when investing in NFTs, the model of investing in DAOs is more attractive than individual investments. The goal is to allow relatives and friends to easily form DAOs and realize the collective purchase and management of NFTs.
In fact, there is a slight difference between investing in NFTs and DAOs investing in FTs:
- The unique motivation of NFT investing in DAOs: reducing investment risk and capital provision, this motivation stems from the fact that blue-chip NFTs are priced at tens of thousands or even hundreds of thousands of dollars;
- By pooling funds into trusted groups, retail investors can make a common investment portfolio cover more and more expensive NFTs without increasing their personal budgets;
- In addition to financial value, NFTs also have artistic value and may also have other utility (such as obtaining a physical version of the asset, or as a ticket to join a group or participate in an event)
Essential tools for investing in DAOs
In this section, we will discuss together the key tools available for investing in DAOs. These tools and mechanisms have been verified by the pioneers through their own practice, and can be reused in future DAO governance.
Investing in a DAO requires a sound framework for addressing legal compliance issues to help DAO members avoid risks. The MolochDAO and LAO frameworks mentioned above are currently widely used here. In the ZeroLaw framework established by OpenLaw, not only the DAO itself, but also a Delaware limited liability company is included. Although the company will appear as a legal entity, its bylaws are controlled by the DAO, ensuring that all decisions are made within the DAO, on-chain. This framework only supports a maximum of 99 accredited investors (due to US law). In addition to the more well-known Delaware and Wyoming LLCs, there are many entities that can provide legal reliance, providing DAOs with the status of independent legal persons, limited liability of members, and a more flexible governance framework .
Tools to raise, deploy and redeem capital
Investing in DAOs uses such tools to facilitate the flow of capital for simple and powerful functional integration.
1. Raising capital (Ethereum/stablecoins): Usually done using Gnosis Safe multi-signature, and later linked to the governance of the DAO. Under the legal framework mentioned above, recruitment can only be made from a maximum of 99 addresses (management coordination through whitelisting and other means);
2. Selection of investment targets: usually done using governance token voting. Governance tokens will be distributed in proportion to the capital contribution of members, and token holders can propose potential investment projects and participate in voting. Voting results are determined by a majority system;
3. Redemption of capital: A certain period is usually set during which governance token holders are allowed to burn tokens and redeem the same proportion of assets from the treasury. As mentioned above, some investment DAOs have introduced the “RageQuit” function, which allows investors to redeem assets after making investment decisions and before deploying funds.
Since most of the current investment DAOs are still under the scale limit of “99 people”, their innovation motivation for DAO tools is insufficient, resulting in the current tools are still very rough, which also happens to provide great development for the latecomers space and potential to improve this situation.
Future prospects: Condensing collective wisdom and subverting traditional VC
So far, the pioneers of investing in DAOs have come a long way. The capital collected and deployed using the Web3 native architecture has reached billions of dollars (BitDAO alone has deployed more than 500 million US dollars), but this track still has sufficient development potential. First, many existing tools (such as RageQuit) are not fully compatible with the current legal framework; second, the current majority decision-making mechanism promotes consensus convergence, which can lead to missed asymmetric opportunities in the market and secondary voting Existing mechanisms, such as measuring the strength of belief about a goal, are expected to solve this problem; in addition, mechanisms to support participation of more than 100 people need to be built without reducing the efficiency of decision-making.
In the future, these issues will surely be resolved. When the mechanism design breaks through the bottleneck, investing in DAO will be able to gather collective wisdom on a large scale, and its impact on the future of the venture capital industry is beyond doubt.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/outlier-ventures-how-to-invest-in-daos/
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