Building Optimal Specialized DAO Archetypes: A New Investment DAO Model for Web3 by@isharif

Building Optimal Specialized DAO Archetypes: A New Investment DAO Model for Web3

For most of history, humanity has struggled against the environment it inhabits to carve out a better existence for itself. The Internet, machine learning and artificial intelligence, the blockchain and others in this basket collectively have the power to negate and transform the very limits of our individual existence. But until recently the technological primitives needed for the construction of this decentralized infrastructure still lacked the most critical component: governance. The advent of DAOs has the potential to fill this last remaining piece of the infrastructure layer for society, but the potential for decentralized governance using DAOs remains troublingly unfulfilled.
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Imran Sharif Rizvi HackerNoon profile picture

Imran Sharif Rizvi

Hobbyist everything. But actually a coder. No really...

Until recently the technological primitives needed for the construction of a decentralized infrastructure still lacked the most critical component: governance. The advent of DAOs has the potential to fill this last remaining piece.


However, an overview of the DAO landscape shows that the potential for decentralized governance using DAOs remains troublingly unfulfilled. While there has been an explosion of DAO organizations, the traditional DAO model remains ineffective. Most organizations that brand themselves as DAOs leave much of the mediums potential unutilized. Several troubling patterns can be observed:


  • While most use the common pattern of a token managed treasury, actual participation in the governance process is extremely lacking. Even the largest and most well distributed DAOs rarely see participation approaching even a fraction of traditional real-world elections. Case in point being the ENS DAO where many of the largest delegates have below 50% participation rates, even though the DAO is quite conservative on new governance initiatives and has had very few, but very significant, proposals voted on.

  • Often general directional questions are put to vote, but the operational details of how things are to be conducted or even the deliberation process for what options are considered is opaque and lacking participation. In the absence of effective utilization of decentralized governance processes, actual operational control and oversight is often even more centralized than was the case in traditional organizations.

  • Often DAO branding is adopted simply as a marketing gimmick. Given the massive recent hype for the DAO concept, the return on investment in marketing as a DAO far outweighs the possible competitive advantages in terms of sustainability, talent/profit generation and efficiency that a proper investment in trying to utilize the medium could give.

  • Even where the DAO team wishes to properly utilize decentralized governance, the tooling for fully decentralizing operational governance is critically lacking. Current tooling only supports simplistic yes/no decision making. There is hardly any tooling that successfully(if at all) navigates the tradeoff between participation and complex decision making.


If DAOs are to survive long-term and if the promise of the decentralized decision making is to be realized, these issues must be resolved. In the long run the hype cycle will die down, and only DAOs that offer real competitive advantages over centralized traditional organization structures will survive. Further, the crypto industry as a whole, and DAOs in particular, threaten the status quo political and social organizations, and therefore these status quo institutions will be pressured to limit the existence of DAOs as much possible. When that point is reached DAOs must have a proven track record of offering real and tangible competitive advantages over traditional organizations to be allowed to exist.


In order to understand how we may structure better governance primitives we have to identify what competitive advantages DAOs could possibly have. We may then try to formulate how a DAO’s governance, tokenomics, coordination structures etc. can be structured to capture the highest degree of this available value. One key thing to understand here is that not all DAOs will be structured the same. Each structural design decision carries within itself certain tradeoffs e.g. consensus thresholds vs ability to quickly respond to market, governance complexity vs participation, ease-of-participation vs quality of participation etc. Therefore, just as different organizational structures in the traditional economy are suitable for different market segments/environments, archetypes will emerge for different near-optimal DAO structures for different market segments, types, goals etc. Already this can be seen in the different DAO types emerging e.g., Service DAOs, Investment DAOs, Protocol DAOs, Social DAOs, Meta DAOs etc.


This evolution of optimal Dao archetypes is critical for the ecosystem’s maturation into a space that can out-compete traditional structures. In the context of these considerations, I propose a new investment-DAO model. Hopefully, this model represents a slight nudge towards a near-optimal archetype for investment DAOs. Of course, further revised forks of this model will emerge that might be suitable for specific niches of the investment ecosystem e.g., long-term investment, day-trading, risk-averse etc.


The main structure:

Investment structure: All investment actions executed fully on-chain by integrating with on-chain decentralized exchanges.


Decision structure: There is no ICO/token airdrop. Instead, tokens are minted from the DAO smart-contract, and funds deposited into the treasury. A token holder’s share of the tokens represents their stake in the treasury. The investor is free to make investment decisions with their treasury stake. These investment decisions go through the treasury contract. The treasury contract keeps track of these investments. The performance of these investments is then used to calculate a governance multiplier for the investor’s token share. The performance of their investments is measured relative to the rest of the participants. Their governance share increases/decreases over time. The governance-multiplier*token-share determines what percentage of the treasury they can make investment decisions with. Over time, if they perform well, the investment pool they can utilize may be much larger than their share of the governance token supply. In return, the profits from their investments are split between themselves and the rest of the Dao in a manner that is advantageous for both. They get to profit from a much larger investment pool and the Dao gets to benefit from their ability.


Competitive Advantages over existing DAO structures:

  • One of the most glaring problems with the current DAO structures that I identified was their inability to harness what I consider to be one of the primary value additions of DAOs: The community. Most current DAOs operate in a manner where there is a break between users of the DAOs products and those invested in the DAOs governance. This is due to several reasons. The wealth landscape in the ecosystem lends itself to inequitable token distributions. Many individuals in the community who could perhaps offer the most for the DAO are simply not incentivized enough to be involved in the governance process because they don’t have enough of a token stake to meaningfully benefit from a better functioning DAO or because the link between better decentralized decision making and token appreciation is tenuous at best. Therefore, most DAO governance tokens are bought and kept as speculative investments, with the holders not incentivized strongly enough to participate. Our rewards mechanism incentivizes those best suited to contribute to participate and make better decisions on behalf of the DAO, while those with larger token holdings but perhaps less domain knowledge are incentivized to encourage meritocratic decision making as it directly benefits the DAO, their holdings, and the rewards generated from their token holdings.
  • Most governance token holdings are stagnant with very little incentive to buy or sell other than speculative trading. However, our governance model is unique in that it utilizes semi-fungible tokens rather than truly fungible ones. Each token also carries with it a unique governance multiplier which qualifies rewards/share-of-treasury-control that each token can generate. We can foresee secondary markets for these tokens developing that set-up a incentivized flow of bad talent exiting and better talent entering the DAO through the trading of these SFT tokens. Compare this to other existent DAOs whose governance tokens are bought primarily as a speculative asset, or in case of DEFI DAOs to manipulate/influence rewards distribution from the protocol. In our opinion those are bad zero-sum incentives that don’t benefit the space. Further, they miss out on what in our opinion is maybe the most important value-proposition for DAOs: attracting the best talent possible, incentivizing them to give the best of their ability, resources, ideas to the DAO, and allowing the best of these resources to flow bottom-up.


While evaluating the possible performance of our DAO model would require thorough mathematical modeling of its incentive structures and game theoretic simulations of the different internal and external actors in the ecosystem, such a thorough examination is beyond the scope of this introductory article. I hope I was able to articulate my understanding of the current DAO landscape, its potential and my take on a possible way forward well enough to serve as a starting point for further exploration of ideas touched upon.

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