A deep dive into the DAO that is disrupting venture capital by backing Investment DAOs.

On one hand, DAOs feel seemingly obvious to many: blockchain-based organisations which are becoming an important piece of how communities can coordinate on the web. On the other hand, we’re nowhere close to the depth of what DAOs are capable of.

For all we know, DAOs are important & they’re here not just to stay but to grow. Chances are that many of us want to understand it better, as a cryptonative or a cryptocurious person. Top100DAOs is the beginning of an exploration into the world of DAOs where we put the spotlight on the best blockchain-based organisations via case studies for you. We look forward to your thoughts and feedback — let’s dive right into it.

What are investment DAOs?

Traditional equity organisations are the most commonly used structures for investment groups today, but they often involve time-consuming processes such as incorporation and setting up bank accounts, which can take weeks.

A fundamental advantage cryptonative organisations like DAOs enable for such investment collectives is an ideally flat non-hierarchical structure to recognise an opportunity, pool capital and vote on decisions devoid of central actors and intermediaries within minutes via an organisational stack for - treasury, governance & coordination.

Pet3rpan (also a member at Hydra) explains this using an image in one of his articles:

“35% of US employment is to establish trust (legal contracts, law enforcement, auditors), this is reflected in the administrative processes needed to set up and operate an equity company — it takes weeks as opposed to potentially minutes via a smart contract enabled organisational stack.”

Essentially a DAO is a company one can spin up on blockchain in minutes where some normal processes of a traditional company are carried out using automatically enforceable smart contracts. This enables internet communities to structure as cryptonative investment organisations & start coordinating money in minutes.

• Individuals/entities can recognise an opportunity, pool capital and own proportional shares

• No need to know, trust, or even to have met each other because of the nature of blockchain

• All decision-making is carried out by voting on decisions that are transparent, auditable and highly efficient among members

Each Investment DAO is as value-generative as:

• its curation of members and strength of relationships in the community

• access to investments that may not otherwise be available

• DAO’s timing - how early is it in its vertical?

• the deal flow they attract

• the strength of the DAO’s reputation

• the signal-to-noise ratio of its filtered information — also known as “alpha”

What is Hydra Ventures?

Hydra is the world’s first fund of funds investment DAO, a community-run investment organisation focused on investing in other investment DAOs.

In March, Hydra announced their $10M fund to be deployed in communities that are both legally wrapped and cryptonative investment organisations. They’re going to invest 20-30 investment DAOs with check sizes up to $500k over the next three years, and additionally expect to help incubate another 7-8+ DAOs as a day one partner, which spans in the following areas:

• Domain-specific focuses such as P2E, DeFi, cross-chain, web3, music, metaverse, virtual beings, DeSci, and social - ideally in emerging markets to become the first community investment organisation in those ecosystems.

• Operational expertise such as service DAOs: legal, auditing, engineering, design,
  recruiting and talent, or other professional expertise.

• Emerging social networks that have unique deal flow and talent access such as
  company/school/org alumni networks, novel social graphs, or other affinity
  communities.

• Technology ecosystems such as L1s and L2 Ethereum scaling protocols.

Arise, Hydra.

Summoned by 1kx, MetaCartel & Thing3, Hydra is itself a community structured as an investment DAO where the entire entity is legally owned & fully operated by its 70+ members, people & entities coming from across the Web3 landscape.

Hydra carefully curated its members from DAOs, angels/funds & sector experts to hold entry into the DAO to the highest standards. The capital contributions received from members are locked in a three-year fixed investment lifetime period in which the DAO will make investments. After the three-year investment period, investments will no longer be possible and there will be a fund admin that distributes profits to DAO members after this period.

How does Hydra operate & reward contributors?

All initial capital raised from contributors is diluted at the start by 31% (23+8), which forms the contributor's incentive pool & covering the operational responsibilities of the DAO.

1. 23% shares: contributor’s incentive pool

2. 8% shares: ops & back-office

Contributor rewards

As shown in the image, 23% of these DAO shares is set aside for a contributors incentive pool which will be distributed on a quarterly basis towards the highest value contributors via a democratized, merit based process. This work takes place alongside community grants and spending proposals.

Service DAO (Operations)

Instead of a traditional bill-by-hour model, Hydra aligned a Service DAO to execute mission-critical services by giving them ownership in the DAO. This ensures that Hydra rewards efficiency over anything else.

Hydra <> Thing3 partnership frees up members who do not have this competency and whose time and contributions are best spent focused on investment.

Out of the 31% shares diluted initially, 8% is vested for a period of 5 years towards Thing3, an integrated service DAO focused on covering all operations related responsibilities like:

• Entity formation

• Subscription document preparation and formation

• Internal fund administration, including investment tracking, performance reporting, harvesting, and profit distribution

• Compliance (e.g. regulatory filings, KYC/AML)

• Tax liaison (e.g. K1 & annual tax forms)

• Outside counsel liaison

• Accounting

• Coordination with other service providers as needed

• Post-investment period fund administration

What is Hydra’s onchain architecture like?

Hydra Ventures plans to utilize Moloch v3 or 'Baal', the first implementation of a smart contract architecture that uses Gnosis Safe as its asset management foundation. This new architecture is more versatile than Moloch v2, which was initially created to establish a basic investment DAO. Moloch v3 allows for a more adaptable DAO that can evolve and grow without requiring a complete smart contract fund migration. While Hydra waits for audits to be done before implementing this architecture, these are subject to change.

Funds are managed in Gnosis Safe Treasury

The Gnosis safe treasury is the core executor for all DAO asset management transactions. This main treasury owns two additional Gnosis safes.

• Harvest wallet: The account in which profits from investments will be funnelled during and after the investment period. Hydra will only be distributing the liquid profits of the harvest account after the three-year investment period of Hydra.

• Hot wallet: The account to which the DAO will initially transfer assets after a successful investment or expense proposal for a temporary holding period before investment documents are signed and a destination asset for funds is clear

Voting & decision-making

While Hydra hasn’t implemented this yet & these are subject to change, the DAO directionally plans to utilize a voting module that lets members execute DAO asset management proposals through Moloch's voting and grace periods. They can configure these periods through community votes and use ERC-20 compatibility for Gnosis safe multisend module. This allows them to send bundled transactions to multiple addresses at once through a single proposal (e.g. a multi-send transaction to 20+ addresses via a single proposal).

Share accounting

The share accounting module enables ERC-20 tokens accounting for all voting and non-voting DAO shares while also managing minting and burning shares via proposals. This module also manages transferability for all DAO shares.

Exit investment position using “Ragequit” module

The ragequit module enables permissionless pro-rata distribution of DAO funds based on voting & non-voting DAO shares.

Profit distribution

In the current form of Hydra’s architecture, after the 3 years investment period is over - a DAO member’s pro-rata profit and asset distribution rights are represented by a non-transferrable claim token NFT (optionality to be represented as ERC-20s).

The member will use the NFT to claim their share of profits from the DAO’s investments.

Hydra’s legal wrapper works together with its onchain architecture

Hydra has modernized and digitized the concept of community-investing, incorporating many of the traits that make the blockchain so potent. By using tokens on the blockchain, Hydra efficiently allows coordination & empowers profit sharing in the verticals they invest in. The key document for Hydra with these operating agreements for both legal entities works together with the on-chain tools to allow members to coordinate and collaborate within an understood legal organisational structure.

Hydra is a legally wrapped investment DAO, assets fully owned & controlled by its members. The structure includes:

1. A Delaware Limited Liability Company (DELLC) for Non-US investors

2. A Cayman Islands Limited Liability Corporation (LLC) for US participants.

Through these entities, Hydra is able to enter into legal contracts and engage in investment opportunities without the risk of individual personal liability beyond the capital in the DAO. It will also allow registered legal entities to participate in the DAO’s membership as well as the issuance of securities to the DAO.

Big moves in an early sector often make a market

Community-first & crypto-native organisation stacks like DAOs are increasingly being recognised in the same way that corporations are from an organisational perspective; a legally separate and distinct entity from its “owners”. Hydra has formed a community of experts and investors to explore an emerging use case of community-first investing.

By investing in investment DAOs of emerging markets -

• Members have asymmetric returns as those investment areas mature

• Hydra becomes a thought leader and pioneer within the emerging ecosystem and cements a strong reputation

• Hydra’s high Reputation = high deal flow = high participation

• Scale community-first investing across web3

These early investments can result in feedforward loops for Hydra that create a flywheel of attention from the broader market.

Thanks to Danny, who is a member at Hydra Ventures & core contributor at Thing3 for helping us with his insights & reviewing this case study.

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Thanks for reading,

Team StationX