Three DAO types are most active today: Protocol DAOs, Investment DAOs, and Work/Social DAOs. To understand the future of Web3 native tools, we need to consider the future of DAOs, and who the most prominent players are and what tools and frameworks they use. So, in this article, we will discuss in depth the use cases of investing in DAOs.
The state of investing in DAOs
A key motivation for investing in DAOs is “to make better investment decisions as a group and gain access to more transaction flows”. In traditional finance, it is often difficult to make joint investments in multiple countries due to a number of issues:
- Create complex legal structures;
- coordinating banks;
- Send notarized documents around the world;
- The complexity of unconventional assets, such as blockchain-based tokens.
Arguably the biggest advantage of investing in DAOs is the removal of administrative friction on a global scale. Participants can join and contribute funds with a few clicks in the Web3 wallet. Collecting funds into a DAO is often much easier than figuring out what to do with the funds in question, as demonstrated by the following examples:
- Original DAO: Error code split ETH community;
- Constitution DAO: Raised nearly $50 million in an attempt to buy an official copy of the U.S. Constitution.
Naturally, there has been a surge in interest in DAO tools and frameworks, where secure and off-the-shelf components add credibility to smart contracts that hold pooled funds. The best tools should make the coordination of investment decisions and deployments relatively simple and efficient.
In theory, trusted smart contracts like Gnosis Safe multi-signature replace the need for legal contracts and banking and other red tape. However, while investing in a DAO itself does not require a legal structure, it is still subject to local laws and regulations. DAOs typically require a legal entity in order to comply with laws and regulations and interact with the off-chain world to do things like hire employees and pay taxes.
A DAO without a legal structure will face many risks:
- If the DAO is for profit, the court can consider it an “unincorporated general partnership”. Because it means that two or more people are engaged in a business relationship – even if those people have never met.
- The potential liability of each member in a DAO is unlimited, so investment DAOs are often launched as “wrapped DAOs”, i.e. under the umbrella of a legal entity.
- Under the existing legal framework, further refinement is required to include KYC/AML requirements, and investing in DAOs generally limits the number of accredited investors to a very small number (e.g., a maximum of 99 in the US).
Invest in DAO pioneers and their innovations
Let’s take a look at some of the most high-profile investment DAOs to date, and some of the tools and mechanisms they use.
MetaCartel Ventures, the first venture/investment DAO launched in 2018, now includes an impressive number of Web3 pioneers, founders and investors. MetaCartel selects their members very carefully as they are very focused on generating value for their investments from an organizational basis. MetaCartel’s tools are open source, which allows many others to follow suit. Notable investment cases include Zapper and Rarible.
Moloch DAO initially focused on funding public goods (e.g. clients, wallets) on Ethereum. MolochDAO invented the “RageQuit” mechanism, which was subsequently used by many other investment DAOs, such as the Flamingo DAO. The mechanism introduces a time delay between investment decisions and the deployment of funds, giving each member the option to withdraw their proportional share of assets in the treasury before investing. RageQuit offers members of an investment collective a whole new guarantee that was previously impossible in traditional finance. The right to opt out of an investment when a joint decision does not reflect an individual’s values or goals.
The LAO is another notable player, acting as a bridge between Web3 and the US legal system. Founded by OpenLaw, it was the first DAO focused on compliance with US law and played a major role in the passage of the Wyoming DAO Act. Not only has the LAO been used as the framework for many subsequent DAOs, but Wyoming has become the first jurisdiction to legally recognize a DAO as an entity. LAO shares have a certain percentage of voting rights and can be purchased by accredited investors, but each member is capped at 7.2%, and the price per share rises with each investment. Notable investment cases include Zerion, Reflexer Labs and Async Art.
There have also been multiple attempts to productize these core mechanisms and specifically projects to build infrastructure for investing in DAOs. One of them is Syndicate Protocol, which is building a framework for DAOs to invest in Syndicate. The framework supports investing DAOs to collaborate with investors on a single transaction basis.
The rise of NFT collector/investor DAOs
In 2021, the rising popularity of NFTs has spawned a new investment DAO, a DAO that collectively buys NFTs.
The most high-profile success stories in this space include the Flamingo DAO, an NFT-focused investment DAO spun off from the LAO. The Flamingo DAO has an impressive operation including investments in OpenSea, Fractional, Upshot, YieldGuild and many individual NFTs. An NFT fund, OneOf, is connecting the investing DAO suite of tools with a process that allows the investor community to share the utility of its NFTs. Their goal is to make it easy for a group of friends to build a DAO to collectively buy and manage NFTs.
There are many differences between DAOs that focus on investing in FT and DAOs that focus on investing in NFTs:
- The motivation to reduce risk and capital requirements is unique to (“blue-chip”) NFTs, which are often priced in the tens or hundreds of thousands of dollars.
- By pooling funds in a trusted group, a shared portfolio can hold larger and more diverse sets of expensive NFTs.
- Then there’s the utility of NFTs, which FTs don’t have (unless we count governance): they have artistic or aesthetic value (as opposed to “unique” financial value), sometimes with other utility (like in-kind rewards, Can enter groups or events).
Current Toolkit for Investing in DAOs
The early pioneers of investing in DAOs have validated the underlying mechanisms that can be exploited by the next wave, and now let’s turn our attention to some of the key tools that investing in DAOs proposes.
This is an important framework for answering legal compliance questions and protecting members from liability. Notably, the LAO’s legal framework has been used as a framework for subsequent investments in DAOs. The ZeroLaw framework (formalized by OpenLaw) includes a “legal wrapper” in the form of an LLC (legally based in the US) that is linked to the DAO’s decisions through its articles of incorporation, ensuring that decisions can be made on-chain , but legally represented by an LLC. Within this framework, a maximum of 99 accredited investors are allowed. In addition, there are many more legal wrappers available for DAOs, of which the Delaware and Wyoming LLCs are the best known. These entities provide separate legal personality, limited liability for members, and a relatively flexible governance framework.
Tools to raise, deploy and redeem capital
The goal of many investment DAOs is a simple but powerful feature set, often combined with the tools described here, which we can think of as being deployed along the three processes of investing in DAOs: capital raising, deployment, and redemption.
- The vehicle used to raise capital, typically ether or a dollar-backed stablecoin, is at the heart of any investment DAO. Typically, this is done through a multi-signature, which is then linked to the governance of the DAO. Pooling funds will be limited to a maximum of 99 addresses (e.g. managed through a whitelist).
- The second tool involves decisions about investment allocation. Mostly, this is done through governance tokens, which are distributed in proportion to each member’s capital contribution. From there, token holders can propose potential investment projects and vote on the results. Generally speaking, voting power is proportional to the number of tokens held, and decisions are made based on the majority of the minority.
- Finally, there needs to be a mechanism or instrument for capital redemption. The easiest way is to allow token holders to redeem their corresponding amount of assets from the treasury, at which point the governance tokens are burned. In practice, this is often only possible during special periods when there needs to be a clear net asset value for all assets in the treasury. As mentioned, some investment DAOs utilize the “RageQuit” feature, which allows investors to withdraw their assets from the treasury on a pro rata basis prior to an investment decision they disagree with.
When it comes to the allocation of capital in investing in DAOs today, the tools currently in use still seem very sketchy, and there is plenty of room for innovators to improve this status quo. Probably because most investing DAOs are still limited to a manageable size of 99 members, there is little incentive to innovate in these tools.
Outlook: Collective Wisdom
Summarizing the current state of affairs, we can conclude that the progress made by the pioneers of investing in DAOs has been enormous. The infrastructure to raise and deploy capital in a Web3-native way has successfully deployed billions of dollars.
However, there is still a long way to go before investing in DAOs to reach their full potential. First, many of the tools used (such as RageQuit) are not fully compatible with existing legal frameworks, and existing decision-making mechanisms seem unsuitable for investment purposes because they disguise incentives for convergence toward a common goal (while missing out on a few opportunities). Existing mechanisms in Web3 may provide an important foundation for this – for example, quadratic voting allows us to measure belief and strength, not just direction. We also need mechanisms that can scale beyond 100 people without compromising the quality of results.
In the long run, Web3, the innovation engine, will undoubtedly provide relevant solutions to most of these obstacles. Once the mechanism design is in place, investing in DAOs will be able to dig deeper and leverage collective intelligence. Even if this potential for collective intelligence is only partially realized, it will bring surprising evolution to the venture capital industry.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/venture-capital-history-and-future-of-investing-in-daos/
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