We have seen strong adoption of crypto-based systems this year, including decentralized finance applications (DeFi), non-fungible tokens (NFTs) such as digital art, crypto-centric gaming, and adoption. Greater use of cryptocurrencies as investment and payment. instruments. One of the most recent developments is the emergence of decentralized autonomous organizations (DAO).
DAOs have been around since 2016, when the DAO organization, a new form of investment vehicle that attracted a significant portion of Ethereum (ETH) tokens, raised more than $ 150 million at the time. DAO was seen by many as the ultimate form of human coordination. However, due to a reentry exploit, hackers stole $ 50 million of the organization’s funds.
Despite the initial setback, DAO has had a second birth in recent months. This was made possible primarily through more mature frameworks and tools, as well as reduced friction when setting up a DAO and when interacting with DAOs. Some of the early experiments like DXdao, DAOStack’s Genesis DAO, or MolochDAO paved the way for a new wave of decentralized organizations. Today DAOs exist in various forms, from large to small, that are used to manage ecosystems, collectively buy NFT or contribute to causes or social movements.
Beyond that, DAOs will likely be the most transformative change in how venture capital (VC) funds work. Venture capital funds will need to change the way they invest in projects, how they relate to them, and how they add value. However, at the same time, DAOs can alter their own business model, which in turn become investment vehicles. But Web 3.0 will also fundamentally change access to investment opportunities and provide democratic means to invest without having to be an accredited investor or without restrictions on net worth.
How Venture Capitalists Invest in Web 3.0
It is no longer an anomaly that venture capital funds are investing in Web 3.0. These investments range from the creation of specialized crypto funds to more traditional (institutional) funds that see the potential of blockchain-based ecosystems. However, the investment approach differs from traditional venture capital.
In particular, the widespread adoption of public sales (such as initial coin offerings, initial decentralized exchange offerings, and initial exchange offerings). The objective is to democratize access to investment agreements, allowing a greater number of investors to participate in an investment cycle with entry barriers and lower coordination costs. Many Web 3.0 projects are also primarily driven by a community-managed DAO, with investment decisions verified by a community vote, probably the most iconic example being the strategic fundraiser SushiSwap.
Therefore, while investment deals are traditionally done behind closed doors with little or no stakeholder involvement, Web 3.0 venture capital funds must participate much more publicly to gain traction. However, Web 3.0 projects still sometimes participate in a small private fundraiser before a public token sale. This often involves a SAFT agreement (or a SAFE plus token options agreement) with the party planning to issue a new token. However, this often means committing to longer periods of granting or blocking.
But, particularly in the NFT space, it remains to be seen how venture capital funds can somehow gain an edge over retail investors, as NFT collections are generally sold publicly immediately, eliminating the possibility of participating in. private presales.
Airdrops, DAO, token issuance, and public domains are the next frontier for NFTs
How VC can add value to Web 3.0 projects
There is a wide range of services and support that VC provides to startups, beyond capital. Venture capital funds regularly support their portfolio companies with recruitment, marketing, mentoring, legal advice, or other services. After all, they have a vested interest in these startups being successful and they want to do everything they can to support them.
However, Web 3.0 will fundamentally change what “smart money” means for projects. DAOs often do not have a central entity to which these additional services can be provided. Instead, venture capital funds that support projects often do so primarily through community involvement. This includes community advocacy or direct participation in community governance processes. But it also involves lobbying and other forms of interaction with stakeholders outside of the immediate ecosystem or even Web 3.0, as these discussions are often challenging for organizations without legal personality.
Andreessen Horowitz (a16z) is an excellent example of a venture capital fund looking at this new way of contributing to value. With the Crypto Fund III of $ 2.2 billion, a16z does not hesitate to actively participate in the governance of its portfolio projects, such as Uniswap.
Venture capital financing has been around since the 1940s and was used primarily by the wealthy. Since DAOs represent the next generation of venture capital financing, venture capital funds not only invest and participate in DAOs, they also become DAOs. Stacker Ventures is an example of a venture capital fund going DAO, trying to democratize early-stage investments in emerging assets. BitDAO, which is a protocol governed by BIT token holders, is one of the largest DAOs in the world focused on providing open finance and a decentralized and tokenized economy.
By partnering with major protocols, BitDAO is building a future of finance that hopes to support DeFi, DAO, gaming, and NFT. PleasrDAO, an art acquisition and investment platform, collects digital art that represents and funds important ideas and movements grounded in the chain like NFT. By experimenting with digital and artistic property, PleasrDAO is helping to change the way people can invest in art.
DAOs will be the future of online communities in five years
Venture capital is above all a social investment tool to coordinate resources around a shared investment thesis. And Web 3.0 will enable new and innovative ways that people can come together to pool capital and other resources that go far beyond the rigid structures we see in today’s venture capital landscape.
Venture capital in an identity crisis
Traditional venture capital funds should observe these developments and get a clearer picture of their own value proposition when it comes to Web 3.0 projects. More importantly, venture capital must show how its added value differs from community-driven investment DAOs. Over time, some traditional venture capital funds may well decide to adopt a DAO structure to make their investment activities more accessible, transparent, and community-focused.
What is clear is that venture capital cannot just stick with its existing structures and processes if it wants to remain relevant in this new era of Web 3.0.
This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research before making a decision.
The views, thoughts and opinions expressed here belong solely to the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Lukas Schor is the Product Manager at Gnosis Safe, a multi-signature wallet and platform for managing digital assets on Ethereum. Lukas has held product-related positions in the blockchain industry for the past four years. He joined Gnosis in early 2019 to take on the role of Product Manager for the Gnosis Safe project.
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