The Complete Guide to Investment DAOs

The Complete Guide to Investment DAOs

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minute read time
Upside Staff
Upside Staff
The Team at Large
Upside Staff
Published:
October 27, 2022
Last Updated:
October 28, 2022

What Is An Investment DAO

Investment DAOs are creating a seismic shift in how investment vehicles are perceived.

An Investment DAO, or Decentralized Autonomous Organization, is a digital investment vehicle that raises investment capital and invests it based on the voting majority of the DAOs members. Using blockchain technology, an Investment DAO emanates from code. This code can represent investment structures like those represented in a paper contract or they can be as informal as an investment club. Its structure, its rules for governing, and its ownership rights are all built into smart contracts that are deployed to a blockchain for all members to see and interact with.

How Do Investment DAOs Work?

The smart contract deployment creates for the DAO its own token, a.k.a Governance Token, which is native to the DAO. Typically, investors in a DAO will deposit some crypto into the DAO's treasury. This will be in the form of $ETH when on Ethereum, $MATIC when on Polygon, and $SOL when on Solana. Once the investors in the DAO deposit their funds into the treasury , these tokens are granted to the investors in the DAO which affords them voting rights. When they vote, it is done "on-chain", meaning it is recorded to the blockchain. These decisions cannot be ignored or altered, and the results of these decisions are programmatically enforced.

How Is An Investment DAO Different From Other Types of Investment Structures?

Investment DAOs are different from traditional ways of raising and funding investments in a few key ways: 

  • They are decentralized, meaning there is no central authority controlling them.
  • They are autonomous, meaning that the rules and investment decisions about how the capital is managed are made by the investors themselves.
  • They are organized programmatically, meaning the code can be easily audited for compliance with various financial regulations.

Why Investing DAOs Are So Important

Traditionally, every member of an Investment DAO votes, and based on the rules of the DAO, most or all members can submit proposals that detail how the capital within the DAO treasury is deployed. These proposals are voted on by the members, and approvals or rejections are decided by the DAO at large. Several tools make this a simple process (Upside offers a tool for this). This process is known as Community Voting, and it is the vital difference DAOs offer versus other types of investment vehicles.

Community Voting allows for a much more democratic and participatory investment process than is possible with traditional investment firms. Members' voting rights and voting power are usually represented by a governance token. As mentioned above, these governance tokens are received based on the investments made into the DAO.

The Benefits of Investment DAOs

  1. Transparency: In Investment DAOs, every transaction to and from the treasury is recorded to a blockchain that is viewable by every member of the DAO, providing complete transparency. Hidden fees, fuzzy accounting, and honest mistakes are often not visible to those participating in a venture capital entity as an LP (Limited Partner, e.g. investor in the VC itself).
  1. Democratization: The democratized aspect of Investment DAOs can help to decentralize fundraising. With the traditional investor landscape, most of the funding for projects comes from a small number of sources. This can lead to unhealthy concentrations of power and can make it difficult for projects from underserved communities or regions to raise funds. 
With an Investment DAO, on the other hand, funding is spread out among many different sources. Often, Investment DAOs will carry a very specific charter on the types of unique projects, founders, or industries that they want to concentrate their investments towards.
  1. Virtuous Cycles: Because Investment DAOs democratize access to being an investor, this can create a virtuous cycle where usually under-represented investors now have a chance to invest in under-represented people, businesses, communities, and regions.
  1. Less Risk, Less Fees: Finally, Investment DAOs offer other benefits such as risk diversification and lower fees. By investing in an Investment DAO, investors can spread their risk across many asset classes and varying projects, reducing their exposure to any one project going bad. Additionally, because Investment DAOs are decentralized and autonomous, they typically have lower fees than traditional investments, which in theory can drive higher profits.

What Are The Risks of Investment DAOs?

While DAO investments can efficiently transfer ownership to tokens, they are still prone to some dangers. The smart contracts that the Investment DAO is founded upon may have faulty code that can be hacked, which can lead directly to the treasury being drained, or simply breaking the mechanisms necessary to efficiently manage the DAO's funding.

As in any investment vehicle, bad investment decisions will always be a risk. A DAO might invest in projects which have a negative return on investment, with some potentially becoming completely insolvent.

5 Investment DAO Examples

There’s a number of real-world verticals where Investment DAOs are already being used to interesting ends. Here are a few examples:

  1. Real Estate: An Investment DAO can be used for real estate in a few different ways. The first is by utilizing it to fund a real estate project. This could be a new development or an existing property that needs renovations. The DAO members can vote on which projects they want to fund and then the proceeds from the investment are used to purchase the property, to fund the development, or to bankroll renovations as decided upon by the community, utilizing their governance tokens to vote on the proposals. Another real estate DAO use-case is for property investment and building a real estate portfolio. Investors can buy tokens that represent ownership of the portfolio. These can then be traded on a secondary market and investors can earn profit from any appreciation in the property value.
  1. Crypto Projects: The most typical use-case for Investment DAOs is the funding of crypto projects. Often, these projects are themselves decentralized organizations that are building Web3 properties and infrastructure. This is a space where the DAO members choose to invest as they are usually well-aligned (and well-networked) with the space they are investing in.
  1. Entertainment Industry: A fascinating and focused use case is for micro-investments within the entertainment space. Musicians often have great ideas for new albums or tours, but don't have the capital to fund them. An Investment DAO could allow fans of the music to invest in the album or tour, and then share in the profits once they are released. This would give musicians a way to raise money for their projects, while also giving fans a chance to support their favorite artists.
  1. Startup Funding: Another exciting application for Investment DAOs is their potential to democratize startup funding. Traditionally, startups have had to go through a centralized authority, such as a venture capitalist, to get funding for their project. This can often be difficult and time-consuming and can lead to a high failure rate for startups. On the other hand, startups can simply post their proposal on the DAO's website and receive funding from anonymous investors all over the world. This allows for a much more democratic process where anyone with a good idea can get funding, regardless of their location or social status. And individuals around the world can invest in early-stage companies they traditionally don't have access to.
For example, a traditional venture capital firm might not invest in a renewable energy project because the financial return might not be as high as it would like. However, the members could fund the project anyway because they believe in its social impact and are willing to take on the additional risk, and feel it fits their portfolio.
  1. Intellectual Property Rights Management: As a practical matter, the management of intellectual property rights and licensing arrangements is a time-consuming and labor intensive matter. For creators without the resources of Taylor Swift, this is not a problem. However, for the vast majority of people grinding to produce and, ideally, commercialize their creations, Investment DAOs can help streamline payment mechanics and reduce operational expenses for collectives of individuals.

How to Participate In Most Investment DAOs

When it comes to Investment DAOs, there are a few different ways in which people can become DAO participants. The most common way is by contributing ether (the currency of the Ethereum blockchain) to a DAO, deposited into its treasury, to receive voting rights and shares (represented by tokens and governance tokens) in the DAO.

This allows people to have a say in how the DAO is run and what projects it funds. To do this, people usually need to own or be granted tokens from the DAO. These tokens give people voting rights and allow them to contribute to proposals that will be voted on by the DAO's members. The more they have invested, the more tokens they receive.

Another way people can participate in Investment DAOs is by pledging Ether towards a proposal. This allows people to support a proposal without having to own any tokens from the DAO. If the proposal is successful, then the pledged ether will be transferred to the project's funders. In this case, people might make their pitch to the community in hopes they will follow suit.

Finally, people can participate in an Investment DAO by creating a proposal themselves. This provides people the ability to pitch their own project ideas to the DAO and receive funding from its members if their proposal is approved.

Limitations of an Investment DAO

While the flight toward digital assets and digital investment vehicles offers a new way to invest, it also comes with risks. SEC regulations still persist in the world of DAOs, and therefore many are wary of accepting money from United States residents that are not accredited investors.

With this in mind, some might be wondering "Are Investment DAOs legal?" The answer is yes. But they still must hew to the same regulatory standards other investment vehicles follow within the United States.

Just because the DAO is decentralized does not mean you should abdicate your responsibility for doing your own due diligence when it comes to drafting proposals and voting on crypto projects or any other projects that are brought up for selection.

How to Launch Your Own Investment DAO

If you're interested in creating your own Investment DAO, there are a few things you need to know, especially if this is your first DAO.

  1. Encode a smart contract (often on the Ethereum blockchain): The coding of a smart contract will act as the foundation for your DAO. This smart contract will contain the rules for how your DAO will operate. 
  1. Get your smart contract audited: Any smart contracts should be audited by third-party entities focused on shoring up any security issues that may leave the DAO subject to hacks. Most Investment DAOs pay for this audit out of the investor funds. This process is highly technical and can be very expensive. Luckily, this is what we specialize in at Upside. Our clients save 10's of thousands of dollars utilizing our services as we include the auditing fees in our smart contracts).
  1. Determine the rules for governance: It is necessary to draw up the DAO's rules for governance, and how community members interact with the DAO. This could include the process for making investment decisions, the manner of utilizing the governance token, and ensuring that the entire structure remains decentralized autonomous; e.g. no one person or entity can overrule the community of token holders.
  1. Spread the word: Once you have deployed your smart contract to the blockchain and launched your tokens, you'll need to build a website or platform where Members and prospective Members can learn about your DAO and submit proposals. It is also a good idea to create social media accounts to promote your DAO and attract new members; likely through Twitter, Discord, and Telegram.
  1. Raise funds through a token sale: Finally, you'll need to launch a private sale, based on the token, to raise funds for your DAO. During this private sale, you will sell governance tokens to investors in exchange for $ETH, $MATIC, or $SOL. These tokens will give investors voting rights and access to the projects that are funded by your DAO.

How We Can Help

If you are curious about launching an Investment DAO, Upside offers enterprise-grade tools and security that sets up projects for long-term success. Feel free to reach out to discuss your plans.

We offer smart contract development, token design, and auditing services to ensure your DAO is successful. Plus, our team of experts can show you the ropes and provide guidance every step of the way. Contact us today to learn more!

This article does not constitute investment and/or legal advice, and is strictly for education purposes only. Upside is not an SEC registered investment advisor, practicing legal entity or any other type of licensed body that can legally provide investment and legal advice. Upside is not responsible for any errors or omissions in this article, due to the changing nature of laws, rules and regulations or otherwise, or for results obtained from use of the information it contains.

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