Messari interprets The LAO: How investment DAOs operate?

Author: Eshita Nandini, Messari

Original Title: 《The LAO: the Limited-Liability, For-Profit DAO》

Translated by: Hailsman, Chain Catcher

Investment DAOs decentralize and democratize venture capital by transferring functions such as fund management, LP, and GP roles to DAO members. The DAO conducted the first fundraising experiment in the Ethereum ecosystem, which ultimately led to a new fork of Ethereum due to legal and technical issues. MolochDAO followed suit, reigniting interest in DAOs with a mature governance model aimed at funding public goods, projects, and the development of Ethereum 2.0. Since then, several DAOs with different natures have emerged, such as MetaCartel Ventures and Honey DAO.

Since the era of The DAO, teams have recognized the importance of protecting and building secure smart contracts, but the rules have not evolved quickly. To address this issue, Tribute Labs (formerly OpenLaw) was founded in 2017 and has gradually helped securely launch DAOs.

Tribute Labs: Compliance and Smart Contracts

Tribute Labs was initiated by Aaron Wright and David Roon with the support of ConsenSys. The vision is to help crypto projects create, execute, and store legal agreements. Today, its main function is to provide software and support services to help form and operate DAOs, with a key feature being the handling of legal matters. The team has successfully packaged traditional DAOs as legal entities. In July 2021, Tribute Labs launched the Tribute DAO framework, which supports the building and management of DAOs through a modular architecture.

When combining the digital world with the physical world, there are many legal gray areas. Tribute Labs has successfully linked legal agreements with executable Ethereum smart contracts, thereby creating security for DAOs under U.S. law. It now supports the largest DAO network and will continue to support the launch of new projects that are technically and legally compliant.

Currently, this DAO network has collectively raised over $156 million in ETH, supported more than 120 projects, collected thousands of NFTs, and deployed millions of dollars to DeFi. In return for its services, Tribute Labs charges fees. The DAOs in the network include:

The LAO: An investment collective focused on blockchain projects

Flamingo: An NFT collector DAO

Neptune: A DAO providing liquidity in the DeFi ecosystem

Muse0: An NFT-based museum focused on supporting emerging and underrepresented artists

Dark Horse: Breeding rare horses and digital racing on the Zed Run network

Ready Player: An investment DAO focused on supporting play-to-earn gaming ecosystems

Red: A digital fashion collector DAO

Neon: Focused on supporting and building virtual world visions

Noise: Supporting artists and investing in the digital music space

The LAO is the first DAO supported by Tribute Labs and has laid the groundwork for other investment DAOs we see today. This article will detail the setup, governance, and operational structure of The LAO.

The Dawn of The LAO

The LAO is a limited liability, for-profit DAO, registered in 2019 as a Delaware LLC with the support of Tribute Labs. Drawing on the experiences of previous DAOs and learning from their lessons, The LAO employs the Moloch governance framework, which limits the liability of its members, aims to comply with U.S. law, and uses smart contracts to organize business affairs. Currently, it has $24 million worth of Ethereum available for deployment, equivalent to the funding scale of the past year and a half. The LAO supports projects while increasingly carving out a niche within the Tribute Labs network and other DAO organizations.

Community and Membership

To help achieve compliance, The LAO has set a cap of 100 members for its investor base and welcomes international members. Members subscribe for ownership through a KYC process and by contributing ETH (ETH typically serves as the unit of ownership for The LAO, which is not approved or disapproved as a security). Voting rights also depend on the number of LAO units held by members, similar to how governance tokens operate. Each DAO in the network issues these ownership units, maintained by Moloch's smart contracts, with each member assigned an ERC-20 token that can be transferred by the member.

At this time, there is no actual LAO token, but members can vote to initiate its creation. Unlike traditional funds, there is no GP, and members have complete control over all investment decisions and governance, meaning no one has the authority to engage in arbitrage. The current subscription range for ETH is from $25,000 to $250,000.

Currently, all DAO organizations under Tribute Labs implement a membership cap, and new members must gain the support of existing members to participate, as certification is crucial for maintaining the operation of these entities. According to the team's plan, there is a fixed process for entry and exit for each DAO.

Governance Model

The main features of the Moloch governance structure include game-theoretic design, voting-weighted multisignatures, and a "ragequit" mechanism that allows members to exit at any time. All decisions are made through a proposal and sponsorship process guided by members via "rough consensus" (with no quorum requirement). Ragequitting is permitted through smart contracts, allowing members to exit whenever they no longer wish to be part of The LAO or disagree with the fund's operational methods. In such cases, they can proportionally withdraw their share of unallocated capital. New members can join when existing members leave.

Whenever more than 50% of members vote in favor, LAO members can change any existing operational agreements.

Investment Process

Here are the characteristics of The LAO's investment process, where members can vote to change any part of the current process.

Methodology: As of now, there is no strict investment methodology; all early blockchain projects are eligible for funding.

Sourcing: Any member can nominate one or more projects for consideration through The LAO DApp.

Due Diligence: There is no formal due diligence process; members can conduct their own before voting.

Fees: The DAO and members bear the upcoming fees, but their daily expenses are paid quarterly by service providers.

Investment Terms: The terms for each approved investment are determined by voting.

Additionally, there is no specified investment duration—The LAO will continue to operate as long as there are ongoing investments and funding, until members choose to dissolve the entity.

Other Investment DAOs

With the efforts of Syndicate, several other investment DAOs and investment clubs have been established, which have external limited partners but relatively dispersed investors. Similar to Flamingo, PleasrDAO focuses on collecting NFTs. The model these DAOs follow is large capital, small members, which seems to produce the best decisions and operate relatively smoothly. However, obstacles such as the need for certification, KYC, and other reviews make the current situation less optimistic, even though it is the most legally recognized path.

The DAO umbrella that Tribute Labs is exploring will become a powerful network of innovative projects focused on specific interest areas such as NFTs, digital fashion, and gaming. With the surge in DAO popularity in recent months, 2022 is expected to be a year of improved infrastructure, increased tools, and use cases. Currently, some well-known DAOs are renowned for their speed and accessibility, but as the need for review and more people invest, these characteristics may become less prominent. Overall, however, this structure is successful and meets the requirements for protecting members and entities from legal risks.