What are DAOs and what are their types?

If you are learning about the term DAO for the first time, there’s no need to worry. Let's initially understand what are Decentralized Autonomous Organizations or DAOs?

In a nutshell, a DAO is an internet company owned and managed by a group of owners known as its members. These members are responsible for carrying out all the minor and major decisions, implementing new rules, and taking any action on behalf of the DAO. All the members have to unanimously vote in order to make it happen.

What are the types of DAOs

DAOs are of multiple categories. Some of their objectives are

1. To perform Charity

2. For investment purposes

3. To buy NFTs

4. Engage in Fundraiser events, etc

To get a more thorough understanding of DAOs, you can consider DAOs as decentralized mutual funds, that collect funds from the investors and invest them on their behalf. Similar to the various types of mutual funds out there (For example Debt, Equity, GILT, Small Cap, Large Cap, Overseas, etc.), DAOs also function in a relatively similar fashion.

The only major difference is that the organization works on smart contracts and blockchain technology which makes it decentralized, transparent, trackable, tamper-proof, and unhackable.

How to invest in DAOs?

In order to invest in DAOs, you will have to select a worthy project, connect your blockchain wallet to it, transfer the required cryptocurrencies, and invest in it. After you invest in a particular project, you can track the performance of your investment in real-time. After you have successfully invested in a DAO, your tokens are frozen for a fixed tenure, and only after the completion of the time period, you will receive the initial investment along with the additional returns.

For example, trading platforms utilize your tokens into liquidity pools which ensure adequate liquidity on the exchange. In return for your investment, you receive a percentage of the total commissions generated from your capital. Some projects provide other features such as commission-free trades, additional benefits on yield farming, etc. These returns can be extremely high ranging from a couple of hundred percentages (100-200%) to all the way up to thousands of percent, APY (1000-3000%) which is paid in the form of its native cryptocurrency. By looking at the astonishing returns, the next question might be, are they safe?

Are DAOs safe?

In short, No as well as Yes! Every investment that provides high returns comes with additional risks. Similarly, there are certain risks involved in DAO. However, let's look at the bright side first.

As DAOs operate with the help of smart contracts which are tamper-proof and unchangeable, there is a certainty of its functions. The utilization of smart contracts also reduces the requirements of human intervention in financial transactions and automates the process. DAOs are also managed by multiple members of a community which prevents any one individual to take ownership and prevents anyone from taking any major decisions. Because of these reasons, DAOs are relatively safe when it comes to repayment of capital or payment of other financial dues.

On the other hand, DAOs are relatively new because currently, DAOs constitute a total of less than 3% of the total market capitalization of cryptocurrencies. This makes them extremely early but leaves them with a lot of legroom to grow and gain market share in the near future.

There are numerous instances where DAOs have failed overnight, and investors have lost hefty sums of money in the process. Though such cases are rare, you should be aware of such happenings and preserve your capital.

While selecting a DAO for investment, constantly look at the total money invested at that point in time. The higher, the better, as that shows the availability of liquidity and confidence of investors in the project. Furthermore, ensure the members of the group controlling the DAO are reputed and responsible. This will provide you with additional assurance on the quality of the organization.

Before investing in DAOs, you should do your due diligence and only invest in them with a small part of your total capital or rather with your speculative capital. This will ensure you are well diversified and also protect your overall portfolio and the total returns.