DAO funds have been around for quite some time now but their popularity seemingly skyrocketed during the 2021 bull run. Some of them are only taking shape while others have been around for almost a decade. Let’s have a look at how they work.
What Is a DAO Fund?
DAO stands for Decentralized Autonomous Organization. You can think of it as a money management fund where everyone has a say in how the money will be invested as opposed to one person making all the calls.
DAO funds help groups of people execute their ideas more effectively by putting their capital in one place and funding ideas or projects using those funds. For example, ConstitutionDAO wanted to collect money and purchase the original copy of the US constitution while others like Maker DAO already created much-needed derivates like stablecoins.
There are instances where DAO funds will organize around building tools for crypto users. For example, Badger DAO was formed around the idea of making it easier for BTC holders to bridge their tokens over to DeFi. As an organization, they offer tools and farming strategies that generate yield with a very narrow focus on Bitcoin.
All of those examples should help you understand why a DAO fund would be formed in the first place, now let’s see how they work.
How Does a DAO Fund Work?
Most DAO funds have a token that represents their holdings. For Badger DAO it’s $BADGER, for Maker DAO it’s $MAKER and for the Decentralized Hive Fund, it is $HIVE. Some of the tokens are in the possession of DAO fund participants and some are sitting in the fund itself waiting to be invested in a project or simply to be used as payment for DAO contributors.
To move some tokens out of the fund one of the DAO members needs to draft up a proposal. This proposal would need to contain all of the relevant information like what the tokens will be spent on, how many tokens will be delegated to this project/individual, whether is it a one-time or recurring payment, and so on. The proposal is presented to the community and the voting starts.
In most cases voting lasts for a few days or a few hours depending on the nature of the proposal. During this period token holders can cast their votes and the final summary of all votes will determine if the proposal passes or not.
In a nutshell, the process from start to finish would look like this:
- You have an idea for a great DeFi protocol but have no funding.
- You draft a proposal and present your idea to the DAO that would benefit the most from it.
- The community either gives you the funds to work on it or they don't.
Or maybe your people simply need clean water to drink and you ask the Hive Decentralized Fund to fund the borehole water systems.
Individual votes don’t carry the same weight. The number of DAO tokens you hold in your wallet will determine the weight of your vote. A wallet with 100 tokens will have 10x more voting power than a wallet with just 10. Some would argue that this is an unfair system and every vote should count equally but there is a lot of logical reasoning behind this model.
Wallets holding large numbers of tokens take on the most risk in an event where the price of the token depreciates.
Large holders AKA whales also benefit the most from price appreciation so it is very unlikely for them to make a bad decision when casting their vote. It is in their interest that the DAO continues to thrive and expand.
Giving everyone the same voting rights would make it a lot easier for malicious proposals to pass.
Can Anyone Create a DAO Fund?
For the time being, the answer is yes but you should be familiar with your local laws before creating one. At its core, a DAO fund is a financial institution and some countries could consider the act of creating one a felony.