Funds raised for a decentralized autonomous organization or DAO are stored in a treasury that is managed by its members. The treasury can be in the form of a multisig wallet that requires the private key of two or more members.
But how do you raise funds for this treasury?
How to Raise Funds For a DAO
1). Through funding from Investment DAOs:
Investment DAOs are decentralized organizations with the core purpose of investing funds in blockchain projects that can yield profits for its members. The funds that are invested are pooled together by its members by buying a governance token or pledging an amount to receive shares.
Like other decentralized organizations, investment DAOs follow the rules that are coded in its smart contract. These rules dictate the type of project the DAO invests in, how the funds in the treasury are distributed during investment, and how the dividend from the investments is shared.
New DAOs can request for funding from investment DAOs by submitting proposals that state their operation and how it will be profitable for the members of the investment DAO. For instance, in BitDAO, community members who do not hold its governance token ($BIT) can submit soft proposals to the community forum for discussion. This proposal can be used as a poll and adopted for official voting on the DAO. To vote for a funding proposal, each member has to delegate their tokens to another address; this could be to a community leader, a core contributor, or the member’s own address. Delegation helps to adjust the vote weight to ensure that the decentralized structure of the DAO is not altered during voting. Also, delegation does not lock or transfer the tokens in the delegated address. The tokens can be delegated to another address if the first address is compromised.
Types of Investment DAOs and How It Affects Funding
i). DAO + Venture Capital (VC) Fund Model
Some Investment DAOs set up an external Venture Capital Fund which is made up of Limited Partners to oversee funding of blockchain projects. To get funding from this type of a DAO, you need to submit your proposal to the DAO members who would evaluate and vote on it. If the proposal passes the voting stage, the DAO will refer it to the VC fund. Since they are Limited Partners, findings from the VC fund will give the partners shares of the project but with restricted rights to its governance.
ii). Syndicate DAO Model
Instead of setting up a separate VC fund, some Investment DAOs set up sub-DAOs that act as investment clubs. This enables members to find projects that interest them. Proposals are submitted to the Main DAO, but instead of voting on them, the DAO allows members who believe in the proposal to form a subgroup that will fund the proposal. Examples of this model include DuckDAO and SyndicateDAO.
iii). Service Model
This DAO does not offer funds to winning proposals. Instead, its members render services in exchange for shares in the project. These services could be in the form of technical skills, legal advice, or even auditing. Examples of Service DAO include LexDAO, MarcoDAO, and VectorDAO.
2). Selling NFTs
Another way to raise funds for a new DAO is by selling NFTs. These NFTs can represent shares or exclusive rights to shares in the DAO. In 2021, LinkDAO used this method to raise $10.4 Million for its treasury. The DAO was formed by golf enthusiasts who wanted to build a golf course with a democratic membership. The NFTs that were sold did not grant holders membership to the golf course but allowed them to buy membership once the golf was available. Funding through NFT sales also allows the DAO to receive royalties from secondary sales.
3). Selling Tokens
Another way of raising funds for a DAO is by selling tokens. These tokens can represent membership rights where holders can participate in governance (holders of UNI tokens in Uniswap DAO) or the tokens can represent shares in the DAO (like holders of LAND in Decentraland). DAO tokens can be sold on decentralized exchanges or distributed as reward for contributing to the protocol (like providing liquidity to its liquidity pools).
Another popular way to secure funds is through crowdfunding from an Investment DAO, venture capitalist, or crypto investors with common interests. For instance, in 2021, ConstitutionDAO raised $47 Million for its treasury by accepting contributions from crypto investors who wanted to buy an original copy of the U.S. Constitution together.
How to Manage DAO Treasury
For most DAOs, funds are received in the native cryptocurrency of the blockchain its smart contract is built on. The problem with this is that cryptocurrency is volatile and there is a probability that the value of the treasury funds stored as cryptocurrency may depreciate over time. To prevent this, you can diversify the treasury by converting the funds to stablecoins. This will help protect its value from volatility.
2). Using Multisig Wallets
Multisig wallets require the signature of at least two private keys to authorize any transaction. Implementing this wallet in a DAO treasury will ensure that the members are in complete control of the funds. The rules that dictate how the wallet will operate should also be coded into the smart contract so that it can only be changed after a voting process by the DAO members.
Another way to manage DAO funds is by allowing a specialized team to oversee the management of the treasury. This team will also give reports to members on how funds are spent. This method will help keep the DAO transparent.
Any method you choose to raise or manage funds in a DAO should be submitted to the members and voted upon. This will help maintain the decentralized structure of the organization.