Investment Daos and How They Could Challenge the Venture Capital Industry

By STI (Update)


In this article, we learn about investment DAOs, their advantages over traditional venture capital, and the challenges they would need to overcome to gain mainstream popularity. However, before that, we must first understand what DAOs are and how they work.

If anyone is looking for blockchain use cases beyond cryptocurrency and NFTs, Decentralized Autonomous Organizations (DAOs) could be a fascinating find. They bring the power of blockchain technology to the real world, perhaps in the most convenient way possible.

In this article, we learn about investment DAOs, their advantages over traditional venture capital, and the challenges they would need to overcome to gain mainstream popularity. However, before that, we must first understand what DAOs are and how they work.

What is a DAO?

A Decentralized Autonomous Organization (DAO) is a new way of governing an entity. It has no central authority or administrative body to make a decision. Instead, a collective group of leaders and participants acts as the governing body. Simply put, DAOs are an organizational framework where decisions are made using a bottom-up management approach.

DAOs work through votes and smart contracts. These organizations have their own tokens, which are listed on popular crypto exchanges. Users can purchase these tokens and then use them to vote on all proposals presented to the DAO. The number of tokens you have determines your voting power.

For example, a user with 10 DAO tokens will have ten times more voting power than a user with 1 DAO token. DAOs also work with smart contracts. These coded agreements carry out actions depending on the result of the vote. Therefore, the whole process of approval and implementation of proposals can be done without any central authority.

What is an investment DAO?

DAOs usually have a single goal, with all members working toward that goal. For example, a DAO can be configured to manage the operation of a blockchain network. In the case of investment DAOs, that singular purpose is to raise and invest capital in various assets on behalf of its community.

All DAO users can vote on the assets they wish to invest in. If others vote in favor, the funds are allocated to the target asset. Then, all profits from the investment will be distributed to token holders in proportion to the number of tokens they own.

Advantages of investment DAOs over venture capital

Investment DAOs and venture capital perform the same function but differently. The function invests in asset classes that can bring them increasing profits in a few years. So how exactly do investment DAOs and traditional venture capital differ?

Open to everyone

Investment DAOs are open to everyone. There is no minimum threshold to enter such an organization. Even though you have a governance token, you still have a say in the decision-making process. In contrast, the minimum investment to enter traditional venture capital firms is often several million dollars.


With an investment DAO, your tokens are not locked into the target asset. Therefore, users can sell their tokens and leave the DAO at any time. On the other hand, venture capitalists have to wait for the fund to offer an exit.

No centralization

Traditional venture capital firms are usually run by a group of individuals. These people usually have sole authority to select the target assets. In such a configuration, individual investors rarely have a say. Investment DAOs, on the other hand, place all decision-making power in the hands of their members. They can vote for or against asset classes.

Disadvantages of Investment DAOs

Everything has positives and negatives; the same goes for investment DAOs.

Here are some risks to be aware of when dealing with these organizations.

Lack of regulation

DAOs are an impressive use of blockchain technology. However, they still lack a uniform regulatory framework that is advanced enough for everyone to trust. In the case of IPOs and traditional VCs, we know that the contracts are legally linked and in the event of a breach of trust, the authorities always look out for the interest of the people. This is not the case with DAOs.

Laws regarding investment DAOs differ from country to country and no concrete regulations have yet been developed. This gray status makes it difficult for investment DAOs to work with traditional investments, limiting their scope primarily to crypto projects.


A single bug in an investment DAO’s smart contract could cause all of its cash to run out. The DAO project is a classic example of a DAO investment brought to its knees due to smart contract vulnerabilities.

In 2016, the DAO launched on the Ethereum blockchain and quickly became one of the biggest crowdfunding campaigns in history, amassing over $100 million in its treasury. However, less than a month after its launch, the DAO was hit by an attack that targeted smart contract bugs, allowing miscreants to get away with 1.5 million Ether, then valued at around 50 million. of dollars.

Poor portfolio management

Just because a majority votes in favor of an asset or project doesn’t mean it’s a good choice. Often, ordinary investors lack the understanding and expertise of seasoned market analysts who typically run traditional venture capital firms. This lack of knowledge and ideas can cause DAO users to make poor investment choices.


DAOs are a big step in the right direction. They offer small investors a viable alternative to the traditional venture capital industry. However, until the technology is refined and regulations are streamlined, DAOs will see limited widespread adoption. Perhaps a summary that brings together the positives of DAOs and VCs is something that could move things forward.

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