In a short time, decentralized autonomous organizations (DAOs) have gone from another little-known crypto niche to an intriguing investment opportunity for businesses and individuals alike.

These blockchain-powered projects function similarly to publicly-traded companies. The key difference is that instead of a team of executives making decisions, a decentralized group of shareholders make the decisions.

Today, there are hundreds of DAOs accounting for billions of dollars in assets. You can find DAOs for decentralized finance (DeFi), charity funds, trading platforms, gaming platforms, and much more. DAOs currently only make up a small percentage of the total market capitalization of crypto — however, this is due to change in the years to come.

With the increased interest comes the potential for solid investment returns — especially for those who get in early. In this article, we’ll examine what to look for when investing in a DAO and how you can create a process for finding (potentially) winning projects.

What are the different types of DAOs?

Before you invest in a DAO, it’s important to know the difference between the different types of projects. At their core, DAOs are simply an organizational structure, meaning there are countless potential use cases. While the structure can provide advantages for various kinds of projects, not all types of DAOs provide the same investment opportunity.

Grant DAOs

Grant DAOs comprised many of the early versions of the organizational structure. With a grant DAO, members contribute capital which the DAO then uses to fund various endeavors. In exchange, the contributors get to vote on how the DAO resource allocation.

The size of your allocation gives you a greater say in the direction of the DAO. However, the shares are generally non-transferable, meaning there isn’t a way to profit from the investment as you are unable to exchange them for a higher value.

Protocol DAOs

Protocol DAOs were the first type of DAO to give power to the community rather than the core team of creators. While Grant DAOs use non-transferable shares, Protocol DAOs issue transferable tokens. These tokens govern the protocol and only holders can make changes to the network.

Because the tokens are transferrable, they have a secondary market value and can be distributed on crypto exchanges and between individuals.

Investment DAOs

With an investment DAO, members pool their resources to collectively invest in different assets. This includes NFTs, cryptocurrencies, companies, or anything else with the potential of financial return. (Of course, in the case of the DAO that overpaid for a copy of a Dune book under the mistaken idea they could flip it as NFTs, research those financial returns thoroughly.) [1]

This DAO lowers the barriers to entry for many investment opportunities. By pooling large amounts of capital, the DAO can invest in early-stage projects which are normally restricted to more qualified investors. By getting in on the projects early, investors are able to earn greater returns.

Social DAOs

Social DAOs work to bring people together into online communities where they can share their interests. The most popular example of a social DAO is Friends With Benefits. To join, users need to complete an application and acquire 75 FWB tokens. 

By joining the group, members get access to a thriving community of creatives and other figures in the crypto industry as well as exclusive events.

Game DAOs

Gaming DAOs give the power to make decisions to a game’s community rather than the game’s developers. A great example of a gaming DAO is MetaClan. Members can build and play together to earn in-game rewards in the form of cryptocurrencies and NFTs. To get a MetaClan membership you need to purchase the DAI cryptocurrency.

Decentraland is another great example of a Gaming DAO. Members get control of all the policies for the virtual world including types of wearable items and how the platform conducts auctions.

If you are looking solely for profit, Investment DAOs and Protocol DAOs typically provide the best opportunity. This is what we will focus on for the remainder of the article.

How to earn from a DAO

For your DAO investment to be successful, it must have a way to generate profit. There are several ways this can occur:

Token appreciation

The simplest way to earn from a DAO is for the underlying price of its assets (usually tokens) to appreciate. When the price goes up, you can sell your tokens at a later date just as you would share of a company or a non-DAO cryptocurrency.

Tokens appreciate when buying interest in the project increases. As the DAO becomes popular, more people will buy and, more importantly, hold the DAOs token. This simultaneous increase in demand and drop in supply leads to higher prices.

Keep in mind, the DAOs token price can drop just as easily as it can rise. This is why it’s important to do your homework and find a project in which you are confident.

DAO staking

Another way you can earn income from your DAO investment is through staking. In simple terms, staking is the process of using your tokens to participate in transaction validation on the project’s blockchain. Staking is only available on blockchains that use a proof-of-stake model.

To stake, users allocate their coins to the crypto protocol. The protocol uses the available staked coins as validators. As their name suggests these validators validate the authenticity of each block on the blockchain. This allows the protocol to verify that each transaction is legitimate.

The validators collect network fees for every transaction. These are then distributed to the staked coin holders. The more coins you stake the more likely you will serve as a validator for transactions. Staking your coins does not relinquish your ownership of the assets. It is merely putting them to work to allow you to generate passive income. 

Some staking protocols set a time limit for your coins to remain staked. With others, you can remove the stake whenever you choose. For these, the process may not be immediate and you may need to wait for the unstaking process to take place.

For example, with Singularity DAO Bonded Staking, you can deposit and withdraw from your stake during the first five-day period of every epoch. After this period, tokens lock for the remainder of the Epoch while they accrue rewards.

Staking offers many potential benefits, but its use must be warranted. If the staking mechanics are unnecessary it will only cause inflation and lower the overall value of the token.

With staking, you can generate passive income from your DAO investment. Not every project offers staking but those that do often offer high-interest returns.

How to find DAOs to invest in

What to look for when choosing a DAO investment

Here are some of the key traits to look for when investing in a DAO.

1. The goal of the project

When you invest in a DAO, it is important to treat it like any other business investment. Successful businesses almost always solve a specific problem and need. By focusing on projects that provide real value, you increase the success chances of your investment.

You should analyze the team behind the project. See what experience they have and if you can reasonably expect them to pull off their intended vision.

2. Total supply and circulating supply

The total supply is the maximum amount of coins that will ever be minted and distributed to the market. The circulating supply is the current amount of coins in the market. Most coins follow a specific distribution so there are usually differences between the two. 

These metrics are important due to the dynamics of supply and demand. The less the coin’s circulating supply is able to satisfy the active demand, the higher the price.

If you are newer to crypto and have ever wondered why there is such a discrepancy in token prices, it is largely due to the different supply levels. Tokens with a lower supply will see faster nominal increases in price given their scarcity.

3. Market capitalization

Market capitalization is a measure of the project’s total market value. You can calculate a project's market cap by multiplying the circulating supply by the current price.

You should look at the potential growth of the project in terms of market capitalization. Understandably, projects with lower market caps have more room to grow than those with higher market caps.

For example, Bitcoin has the highest crypto market cap and therefore needs significantly more buying pressure than a smaller coin to see an equivalent increase in price. Now, this doesn’t mean you should stick solely to new and lower market cap projects. While these may offer a better potential return, they are generally riskier.

4. Accessibility

You’ll also want to note how many exchanges list the token. More exchanges increase the accessibility of the project. When a project is more accessible it is easier for the masses to invest in which can help increase the value of the project.

Additionally, some exchanges are easier to use and more accessible to others. For example, the simple buying interfaces and centralized management of CoinBase, Binance, and FTX make these exchanges widely popular among users. Coins on these platforms tend to perform well when compared to those only available on DEXs.

5. Community

Finally, you want to look at the DAOs community. A large and active community is usually a sign of a healthy project. One way to assess how large a community is to look at Twitter. If their Twitter accounts have a good amount of followers and engagement it is a positive sign. Reddit and Discord are another good place to learn about a project’s community. 

Best places to search for DAOs

Now that you know what to look for in a DAO, you can begin researching potential projects.

There are numerous approaches you can take to begin the process. Some choose to review popular crypto indexes that contain a list of various projects along with their current price and link to their website. Others, choose to start by scanning social media platforms or viewing content and recommendations from influencers.

Each of these approaches will work. But, no matter what method you use, it is important to do your own research. Don’t just leap into a project because a popular YouTube channel tells you to.

Below we will look at an example of how to find DAOs using the popular index CoinMarketCap.

Finding DAOs on crypto indexes

After you open the site, select Categories, located towards the top of the homepage.

From there, you can scroll through the categories until you find DAOs.

The default arrangement lists the different categories according to recent price changes. If you want a more predictable way to find the DAO category, you can click the Name column to sort by name. You can then scroll to the letter “D” until you find DAO.

Once you are on the page for DAO tokens, you will see a list of DAOs ranked according to current market capitalization. The listings will display the one- and seven-day prices changes, the trading volume over the past 24 hours, and the token’s circulating supply.

Example of a DAO investment

Note: This is not specific investment advice, simply an example of a DAO that matches the criteria of a sound investment.

AAVE

AAVE is an open-source money market platform with several debt-based DeFi products. You can use the platform to deposit digital into liquidity pools to earn interest in the form aTokens. You can also use it to borrow digital assets using collateralized loans.

AAVE uses a fully decentralized DAO to manage the protocol. The holders of the AAVE governance token get to vote on platform management, primarily how the DAO manages the risk and rewards of the various money markets. 

Below are the tokenomics for the AAVE token:

• Total supply: 16,000,000

• Circulating supply: 13,477,755 (at the time of writing)

At the time of writing, AAVE is the 46th highest valued crypto coin with a market cap of $3.7 billion. Given its current market cap, this isn’t the type of project to get astronomical gains. However, AAVE is a well-respected project that continues to see increased interest.

Conclusion

The opportunities to make profitable investments will increase as DAOs gain even more popularity. Projects with extra incentives that create wealth over time (staking) may even start to compete with traditional corporate investments.

The potential is exciting, but don’t forget that any investment comes with risk (especially those in crypto. Use the steps in this guide to ensure your investments are successful.