Investment DAO: How financial democratization is transforming venture capital

An investment DAO represents a fundamental evolution in the way groups collectively invest capital. Unlike traditional funds controlled by a small circle of managers, these decentralized organizations allow any governance token holder to actively participate in every investment decision.

The model that is changing the game rules

For decades, the venture capital ecosystem was dominated by a hierarchical structure: wealth managers and venture capital funds decided where the money went. Blockchain transformed this landscape. Nowadays, thanks to smart contracts that run on the blockchain, it is possible to create transparent and autonomous investment structures that do not rely on traditional intermediaries.

The DAO (Decentralized Autonomous Organizations) operate through self-executing code that ensures all decisions are enforced according to what the community votes. Even if members leave the project, the DAO framework remains operational indefinitely due to its immutable architecture.

How members of a DAO make decisions

The voting system in investment DAOs is based on governance tokens. The more tokens you have in your wallet, the greater your voting power will be on proposals. This creates a meritocratic structure where influence is directly linked to financial commitment.

When someone wants to propose an investment, the community examines the proposal and casts its vote. To avoid last-minute manipulations, many DAOs use snapshots that record the number of tokens each user had at a specific moment, without the need to lock funds.

Once the voting concludes, the smart contracts automatically execute the decision. If the investment generates profits, these are distributed among the holders through airdrops or staking mechanisms, where you can receive periodic rewards.

Funding Sources for DAO Treasuries

Decentralized investment organizations generate resources in multiple ways:

Governance Token Sale: A newly created DAO mints its tokens and offers them for sale. Investors acquire them with the expectation of participating in future decisions or price speculation. If the DAO has a solid investment strategy, it can attract a broad community willing to acquire these tokens.

NFT Issuance: Some DAOs issue collections of non-fungible tokens with collectible value or that grant additional rights, such as greater governance power or access to privileged information.

Operational income: A DAO originating from a DeFi protocol could use previous earnings generated by services to capitalize its investment treasury.

Specific risks that every investor should consider

Although DAOs decentralize power, this does not eliminate exposure to risk. There are technical and decision-making vulnerabilities that require attention:

Vulnerabilities in smart contracts: A coding error, a security exploit, or a hack can compromise the fund management mechanisms. These failures can completely paralyze the operations of the DAO.

Suboptimal investment decisions: The wisdom of the crowd does not guarantee positive returns. It is possible that the majority votes for investments that generate significant losses or negative ROI.

Poor treasury management: Without adequate asset diversification or continuous oversight, the DAO's funds may suffer considerable deterioration.

The legal framework remains a gray area

The regulation of investment DAOs varies radically by jurisdiction. In many countries, there are no specific regulations for these entities, which creates legal ambiguity.

Before participating, check if the token is classified as a security in your country, as this could imply licensing requirements. Some governments already have frameworks for traditional “investment clubs” that could apply to DAOs, but this requires confirmation with local authorities.

Investment DAO versus traditional venture capital

Both models have differentiated strengths. Traditional venture capital firms have established networks, specialized support services, and established legal backing. However, they tend to be demanding in terms of equity participation and require a significant share of the profits.

Investment DAOs offer more equitable conditions and leverage the collective intelligence of communities specialized in Web3. Their downside is that they operate in an ambiguous regulatory zone and, in practice, are limited to primarily funding cryptocurrency projects.

For completely traditional sectors, venture capital firms remain superior due to their credibility and legal capacity. But in the Web3 and blockchain universe, DAOs represent a competitive alternative with greater inclusion.

Current Perspective

Since the boom of 2020 and 2021, investment DAOs have gained massive relevance among small investors and blockchain enthusiasts. Their potential to revolutionize a century-old financial model is undeniable, although the concept is still young and its evolution remains uncertain.

If you are considering participating in an investment DAO, take the time to fully understand the technical, regulatory, and market risks, and ensure that it aligns with your overall portfolio strategy.