Crypto 101: Difference Between Investment DAOs And Traditional VCs

The same investment for the development of Crypto, but have you distinguished the difference between investment DAOs and VCs? Today’s article will help you understand these two concepts and recognize their differences.

What are Investment DAOs?

A decentralized autonomous organization (DAO) that raises funds and invests capital in assets on behalf of the community is an investment DAO. Investment DAOs harness the power of Web3 to democratize the investment process and make it more inclusive.

DAOs may have their units in tokens listed on a cryptocurrency exchange. Community rules are agreed upon, and governance is enforced through smart contracts. Control (voting) rights can be prorated based on the number of holdings in the DAO.

A decentralized organization that invests in cryptocurrencies, real estate, non-usable tokens (NFTs), or any other asset class has some functional differences from further investment means traditional private. This is especially true when the underlying investment opportunity is a crypto startup. DAOs investing in startups fundamentally differ from traditional venture capital (VC).

What is a traditional VC?

Venture capital funds are established and managed by general partners (GPs). GPs are responsible for finding investment opportunities, performing due diligence, and closing investments in a portfolio company.

Venture capital is part of the capital pyramid. It effectively acts as a conduit for funding from large institutions such as pension funds and endowments and deploying that capital into a venture’s portfolio company. Large institutions, family offices, and sometimes individuals providing capital to VC funds are known as limited partners (LPs).

The role of GPs is to ensure they raise capital from LPs, and high-quality source startups, perform due diligence, get investment committee approvals, and deploy thriving capital-labor. As the startups grow and bring profits to the VC, the VC passes the profits to the LP.

Traditional venture capital is a successful model that has fueled the growth of the internet, social media, and many Web2 giants over the past three decades. However, it is not without its contradictions, which is what the Web3 model promises to solve.

Difference

Make decisions

If participation as an LP is exclusive, even investment decisions are often made by a small group of people on the VC fund’s investment committee. As a result, most investment decisions are highly centralized.

Investment DAOs allow accredited investors to contribute of any size. Thanks to their contributions, these investors can vote on important investment decisions. As a result, the processes for investing in a DAO and making investment decisions in a portfolio are more inclusive.

Credential

Another key issue with traditional VCs is an illiquid asset class. Capital deployed into these funds is typically locked in for many years. Only when the VC fund exits, in the form of a portfolio company being acquired or listed on a stock exchange, do LPs see some of their capital returned.

In a traditional VC, LPs cannot liquidate their positions in the fund before the fund issues a withdrawal order. Crypto investment DAOs solve that problem. Investment DAOs can have the token derive its value from the underlying portfolio. At any given time, investors who own these tokens can sell them on a cryptocurrency exchange.

Legal

Large legal teams often handcraft these investment vehicles in traditional markets. Relying on smart contracts to do that effectively poses legal and technological risks.

Summary

The VC model is not as inclusive as possible. Due to the amount of capital involved and the risk profile of the asset class, it is usually only viable for connoisseurs of investors. It is essential to ensure that investors appreciate the risk-return profile of their investments. This is because proven GPs are often difficult to access for retail investors, or the minimum investment in these funds is several million dollars.

Every opportunity has risks and vice versa; Investment DAOs are no exception. Despite the structural advantage over traditional VCs, there are still areas that remain unclear. There are also challenges in setting up a DAO where the legal language is programmed into smart contracts.

Investment DAOs are still underway. However, the model shows promise. Once legal and regulatory risks are eliminated, investment DAOs could be the traditional model VCs adopt.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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