How DAOs are Funded
Decentralized autonomous organizations (DAOs) are communities incentivized to govern, coordinate, and co-own a shared pool of value. This value can be determined in two ways: what DAO members find valuable but may not have much value in terms of liquidity, eg. governance tokens or DAO shares; or treasury or assets under management which can be liquid in terms of fiat or crypto tokens. Funding your DAO means keeping a healthy treasury, running operations, and making sure these communities are fulfilling the goals that their DAO was spun up for.
Depending on the design and the purpose of a DAO, the funding strategies will be different: it could be raising capital from the DAO members, by launching a token, through venture financing, revenue from decentralized finance (DeFi) protocols, or sales of non-fungible tokens (NFTs). While we go through various ways of raising funds at the DAO level here, it’s important to remember that Guilds (or subDAOs) can propose initiatives that feed back into the treasury as well.
Let’s explore different fundraising strategies
One of the most common ways DAOs raise funds is by issuing a governance token, which can be purchased by or distributed to members who actively contribute to the DAO.
Issuing a token is the typical first step to raise funds and fill the DAO treasury. Tokens distribute voting power and ownership across members. These issuances are done in several ways:
- Initial DEX Offerings (IDOs) – These are similar to an initial coin offering (ICO), and are essentially a crowdfunding campaign where a project’s native token or coin can be launched through a decentralized exchange (DEX).
- Decentralized Autonomous Initial Coin Offerings (DAICOs) – The concept of DAICOs was initially introduced by Vitalik in January 2018. Aimed at funding specific projects, DAICOs are designed to protect token holders and give them the option to vote for the return of funds if investors are unsatisfied with the project progress or direction.
Some DAOs raise capital from venture capital (VC) funds. A notable example would be Syndicate DAO, which raised funds this year from Andreessen Horowitz and Carta. But it’s key that DAOs do not allow VCs to own more than 10% of the community or governance token. Giving away too much governance power to VCs could threaten a DAOs decentralized structure, which is key to their functioning.
Another way to fund your DAO is to receive funding from an investment DAOs. Similar to how DAOs are a new form of a company structure, investment DAOs are a new way of running VCs. Some of the most famous examples include Moloch DAO, Metacartel, Raid Guild or DAOHaus. These organizations raise and invest capital into different protocols on behalf of the DAO members. So, while normally, a VC would raise capital for investment either from rich founders or just bigger VCs, investment DAOs work more like crowdfunding – anyone can buy the tokens, that then get distributed into projects that the community chooses. Returns from these protocols are used to fill the DAO treasuries. DAOs seeking investment from venture DAOs may also benefit from the guidance and connections like in the traditional venture funding model.
There are two major types of investment DAOs:
- DAO + fund – Here, a DAO would set up an external sister VC fund. Through this external fund, the investment DAO could garner more members. The VC would focus on getting external financing from limited partners. In addition, it would also ensure legal compliance, making investment decisions, and execution of contracts.
- Syndicate – The main DAO would come up with different sub-DAOs for every investment. At the same time, members in the main DAO could have the chance to join the sub-DAOs and work on every individual investment.
As investment DAOs are evolving, the structure and frameworks for engaging with them is changing. The most important aspect to consider when engaging with investment DAOs is that the whole space is still unregulated. So, you are building a project that has a vague legal structure and receiving funding from another, not well regulated organization. However, it is probably the most web3 native way to fund a DAO.
One way that NFTs can be incorporated into DAOs is as an investment asset. In addition, DAOs can raise funds by launching a collection of NFTs, collecting NFTs, and IPNFTs.
Whether it’s launching a collection of NFTs or issuing a NFT for sale for particular usage, these methods allow DAOs to easily raise funds without trading off on governance. NFT sales can be used to fund a project’s operations with benefits given to buyers such as Gen.Art’s membership passes, or to fund a specific cause like in the case of UkraineDAO.
Of course, there are DAOs that collect NFTs as part of their portfolio. Collecting alone isn’t necessarily a way of raising funds, but if the price of the NFT goes up, this increases the value of a DAO’s treasury.
Another way of using NFTs to fund a DAO is through IPNFTs – minting and selling an NFT on IP rights. This can continuously fund a DAO through royalties and is popular with DAOs created for scientific research, such as VitaDAO.
Grants and Crowdfunding
Many public goods DAOs use grants and crowdfunding as a way to raise funds. These may include Gitcoin grants, grant proposals, or protocols that allow for crowdfunding. One notable example of this is Constitution DAO, which was spun up for one purpose, and used a protocol – in this case Juicebox, to raise funds. It is worth saying though, that with grants and crowdfunding, DAOs need a project members are passionate about and work towards.
Other instances have seen communities mobilize around specific causes, such as donating to non-profit organizations. For these, what is clear is that to be able to raise funds through grants or crowdfunding, the community needs the right project or cause to support.
DAOs are also using real-world assets, or traditional assets, to diversify their treasuries. One major case this year was MakerDAO investing $500M worth of DAI into real estate, US treasury and corporate bonds, invoices, receivables and recently commercial mortgages and business loans.
The adoption of real-world assets present opportunities to generate yield, and diversify counterparty risks. We believe that we are really beginning to see the bridging of real-world assets and the DeFi ecosystem as more DAOs are expected to invest in these assets.
Understanding what you want out of the DAO or the type of DAO it is will change how you may choose to fund it. Is it an investment DAO or a social DAO? Or, is it single-purpose like Constitution DAO? Raising funds and maintaining a healthy treasury will require a combination of methods, and finding what works best for your projects. At the end of the day, community matters. DAOs are built around communities who come together for a common purpose, project, or interest. And it is from there, that treasuries can be raised, and value coordinated between members.
What are some new ways of funding that you’ve seen? Let us know!