Decentralized Autonomous Organizations (DAOs) have the potential to upgrade finance. This paper evaluates the design of and system requirements for a decentralized cryptocurrency venture capital investment club that is operating as a DAO (DAOIC).  The design of the proposed DAOIC enables investors to substitute capital commitments by way of reputation token staking on proposed portfolio companies. The proposed design has the potential to lower capital requirements and free up liquidity for decentralized smart contract coordinated investment vehicles.

Key Words: Decentralized Autonomous Organization, Venture Capital, Reputation, Non-Fungible Tokens, Fungible Tokens, Capital, Venture Funding, Finance,Token Models, Cryptocurrencies, Feedback Effects, Emerging Technology, Tokens, Blockchain, Distributed Ledger Technology

JEL Categories: K20, K23, K32, L43, L5, O31, O32

Executive Summary

  • Reputation Replaces Capital:  Instead of capital commitments, DAOIC members stake reputation tokens on deals
  • Return Amplification – the fungible reputation token may be valued by the market as:
    • 1.) a tokenized instantiation of the collective wisdom of the DAOIC  members
    • 2.) a representation of the total ROP on each deal upvoted by DAOIC members via RNFT
  • Risk Mitigation:
    • 1.) collective wisdom of DAOIC members hedges against purchase risk
    • 2.) RNFT staking removes counterparty risk
    • 3.) fungible reputation tokens are liquid assets in secondary market
    • 4.) incentive design ensures consent in RNFT staking which removes risk of loss
  • Liquidity:
    • 1.) removal of capital gives the DAOIC members a permanent option on deals
    • 2.) no capital calls etc. improves liquidity
    • 3.) public secondary market ensures liquidity in fungible reputation token
  • Ratio Adjustments:
    • 1.) provide a key tool for strategic increases in profitability
    • 2.) enable strategic tradeoffs
    • 3.) coordinate overall DAOIC policy
    • 4.) are subject to DAOIC member vote via RNFT staking

Kaal, Wulf A., REPUTATION AS CAPITAL – How DAOs Upgrade Finance (October 24, 2021). Available at SSRN: https://ssrn.com/abstract=3949098

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