TL;DR

Two years since Jesse Walden from a16z published Progressive Decentralization: A Playbook for Building Crypto Applications, decentralized communities not only built Web3 software applications, but are now investing capital and contributing labor in exchange for ownership.

Decentralized capital allocation and perfecting associated governance practices scale investment DAOs and improve decision making, leading to higher returns.

As ideas become proposals, which successfully become investments, more specialization is required for functional experts to stress-test the DAO hivemind to source, pick, win and support the portfolio.

Note: compensation was received for this post from BitDAO - AEmbassy.

Investment DAOs: Cascading Decisions

An almost impossible to reverse decision is called a one-way door. Once you walk through the door, you cannot exit. 

For example, if a seed phrase is not written down during wallet creation, it cannot be recovered.

Said differently, economic value is created at a specific point in time. When a deal is closed, or an investment is made, or a customer signs an agreement for future services, there is a snapshot of an exchange of funds for value. 

Olaf Carlson-Wee mentioned to Jason Yanowitz on Blockworks’ Empire podcast: 

“Conceptually, DAOs need to only get one thing right, which is capital allocation and the governance around that capital allocation.

DAOs should serve as limited partners in funds or investors in startups. They should do nothing other than allocate capital, and perfect the governance process of investing capital.”

Capital allocation is the process of maximizing shareholder returns through deciding which operating initiatives to fund. In Web3 this includes projects, products, features, and public goods.

Capital allocation is inherently risky, ambiguous and requires high judgment. 

For an investment DAO, capital allocation is an improvement on the classic 2-and-20 to maximize incentives for ongoing operations and potential profits. 

In Practice

Investment DAOs seek to generate returns for tokenholders through backing companies / projects, versus Service DAOs which incentivize labor participation, or grants which are asymmetric bets on individuals / teams building in an ecosystem (Polygon, Binance, Uniswap). 

Investment DAOs like BitDAO leverage the wisdom (and relationships) of crowds through a governance proposal process to finance and fund thematic subDAOs (known as Autonomous Entities or AEs) across security, infrastructure, media, arts, and culture to achieve a return for tokenholders.  

Proposal authors may be doxxed or pseudonymous, where publicly verifiable data sources like past projects, github participation, on-chain history are paramount. 

While early BitDAO proposals included a $500M commitment into a Web3 gaming AE (proposal and vote), new proposals are venturing outside of crypto-native use cases like climate and farming or funding telecommunications infrastructure in developing economies. 

Capital can be sourced through community members, partners (VCs), or in the case of BitDAO, a recurring capital commitment from crypto exchange Bybit (2.5 bps of daily trading volume, or $2M+ per day split through 50% in ETH and the remainder in USDC and USDT).

Proposal teams are composed of subject matter experts on each asset class, and tokenholders jointly participate in upside/downside. Proposal authoring continues to evolve (see What Can’t DAOs Do? and my prior post on treasury diversification governance initiatives).

Investment DAOs like Chainforest are built on top of Syndicate where top-tier venture capital general partners are tokenizing carry to support a Web3 community. Syndicate counts more than 1.1K investment clubs using its product.    

New projects like Hydra are elevating the fund-of-funds model to back the best investment DAOs with trusted capital sources:

While not an Investment DAO, Global Coin Research is a token gated and incentivized community investing multi-stage, multi-sector in Web3. DAO onboarding tactics (leveling up) can be applied to the traditional end-to-end experience of running an investment firm:

In 2021, GCR completed 30 deals and invested $25M, with a valued return of 40x according to Coindesk.

Generalists vs. Specialists (or how to ship at a DAO)

If capital allocation is the art of selecting which markets to fund, capital deployment is the required grind (via labor) to generate output to maximize value.

This includes the operations and practices that are generally best bottom-up. Collaboration is separate from hierarchy. 

Functional leads (Marketing, Community) and subject matter experts simplify finance concepts and jargon to communicate investment merits. 

Forced documentation via roadmaps, Notion page tracking, and community call recaps facilitate alignment of Engineers, Community Builders, and thematic AE audiences. 

Inclusive tactics (i.e., removing silos via private channels) to publicly respond to questions may attract the “loudest” voices in the room, but can also increase voter participation and turnout. 

And all contributors benefit from potential token upside. 

Operational decision making at DAOs (voting for a marketing initiative or product feature) is fraught with sybil resistance, and new tools are being built to combat malicious actors.

Prioritized voting maintains a high bar on resource allocation: energy is only spent on the most important, which is capital allocation:

Moving Forward

Ultimately, investment DAOs become an exercise of standardization in decentralization, where contributors specialize in key investment functions like sourcing deals, vetting opportunities, managing portfolios, and implementing tooling, versus the traditional limited partner / general partner fee structure model. 

While deal sourcing and proposal approval processes may be decentralized, one-token-one-vote based mechanisms dictate capital is invested based on the interests of the largest institutional holders or the earliest of contributors which hold the highest volume of tokens. 

For example, BitDAO has a delegated voting system where Bybit has delegated voting power to Autonomous Entities, Labs, Ventures, and Growth Teams. Delegates include active participants in governance and proposal contributors like Windranger Labs, Jonathan Allen, and SHL0MS.

Feedback loops are longer in earlier stage investing as teams are assembled, products are built, and adoption curves drawn, and the largest tokenholders who dictate go-forward decisions may not be as “close to the action” to make an informed bet on project success.

Strategies from Optimism’s recent Airdrop could be used in investment DAOs to push forward decentralization, like granting additional votes to wallets who contributed most to a proposal, most engaged with diligence, or demonstrated relevant expertise in a functional area. 

Attempts to democratize one-vote-one-token date back to 2020, but with crypto-native contributors investing crypto-native assets into crypto-native projects, building infrastructure in today’s bear market ahead of the next wave of demand will be critical.  

In a crypto market which has abruptly shifted from hype-and-delight to useful-and-productive, consistent effort to increase broader tokenholder education is imperative.

Ping me at @kishandao in case I can help. 

About author:

@kishandao has 15 years of experience building billion dollar technology companies as a COO/CFO and was previously a growth equity investor at Goldman Sachs.

Thank you to LBrian, Drea Burbank, Irina, Kevin, and Muk for reviewing drafts of this post.