May 18, 2022

DAO: a bold new social investment model

Try to imagine a world in which your neighborhood McDonald’s or Domino’s franchise is run by a faceless entity and backed by a global community of crypto owners. Depending on how much digital assets these members own, they can have a say in how the fast food chain uses and allocates their funds. This is not some utopian fantasy but a social experiment that is happening right now in our time, thanks to the advent of the DAO.      

What is a DAO? 

A DAO (Decentralized Autonomous Organization) is based on a community governance model that is most widely applied in Web3. Many startup projects around the world have raised funds via DAOs by issuing tokens or NFTs that give buyers membership status. These members are able to participate in DAO governance activities such as proposals, voting, treasury management, or multi-signature transactions. All of these activities occur on the chain, making them unchangeable and enabling full public transparency. 

According to data, approximately 4,800 DAOs have already been established – their total vault value broke $10 billion USD at its peak in May, with 16.4% of DAO vaults exceeding 1 million in funds. 

Lowering the barrier for investment

The DAO model – which is becoming one of the fastest growing investment types – disrupts traditional financial practices by allowing startup teams to transparently raise funds and manage those funds in a decentralized entity.     

With $20 million USD in capital from VC a16z, Syndicate is a startup helping to lower the barrier to investment. The company’s DAO management tools assist entrepreneurs to bypass the slow and exhausting traditional fund raising process by setting up a mechanism on the chain, which is much faster and carries low fees. In less than a year’s time, Syndicate has already assisted in the establishment of 450 investment DAOs. 

An alternative channel for crypto-native VCs 

Investment DAOs are also a means for non-traditional venture capitalists to build community-based funds as a new fundraising channel for their Web3 startup teams, and I expect to see more of this practice. 

Unlike traditional VC funds, investment DAOs are not subject to an upper limit on the ratio of funds in cryptocurrency (because members are crypto users to begin with). Overall use of funds is also more flexible. 

A crypto model for real-world businesses

The virtual-born DAO is slowly being applied in the real-life investment world. Before, an individual buying a stake in a business had to go through a large financial institution such as a private equity fund. Investment DAOs are changing all that by giving individuals the opportunity to participate and even take on a management role in investment projects that would have never been available to them before.  

Let’s look at the unique example of FriesDAO, which has raised over $5.4 million for investment in leading fast food franchises through the issuing of $FRIES tokens. The plan is to covert the profits from these franchises into cryptocurrencies and deposit them into a multi-sig vault governed by the global FriesDAO community. Members who accumulate enough tokens can make proposals and vote on governance policies for the DAO and its franchise stores.    

The real-world challenges to DAOs

Though DOAs have really taken off in the last two years, there are still a lot of hurdles to overcome to make them the mainstream. At the moment, tax regulations and laws around DAOs are still quite hazy, so meeting regulatory demands is a big issue. Also, the DAO’s community voting model takes more time to achieve consensus on governance issues, requiring the design of incentives to achieve a balance between decentralization and efficiency.  

I think that truly achieving the DAO model of decentralized community governance will require more exploring and experimentation. We are also still lacking many yet-to-be-realized tools and mechanisms to bring DAOs into the mainstream, but these pain points can serve as an opportunity for great creativity and innovation in the industry.    

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