Cryptos can change the way you invest, by taking the ‘agent’ off the books

Cryptos can change the way you invest, by taking the ‘agent’ off the books
  • A principal-agent problem is the conflict between a person or group and the representative authorized.
  • In DAOs, the decision-making power lies with the group instead of a central authority.
  • DAOs can be formed for any purpose be it raising funds for a war-torn country or pooling funds to invest in a project.
  • DAOs work for the benefit of the investors and not an ‘agent’.
Many young adults who have just started looking at investments don't take the time to understand how to invest wisely. This is often because their focus is tangible goals like buying a car or a holiday abroad which is all here and now, not the future. Hence whatever investments they make just to save taxes are mostly uninformed choices either on their own or through investment advisors where their interests are not kept at the forefront.

A testament to this is a recent case of front-running at a popular mutual fund house where the fund managers had a substantially higher income than their disclosed sources. As the mutual fund industry is highly regulated, this didn't take much time to come out in the open but unfortunately, the loss of income and trust doesn’t come back so soon.

Cryptos can change the way you invest, by taking the ‘agent’ off the books
Rajagopal Menon, WazirX

This incident brings us to a classic case of a principal-agent dilemma. Investopedia defines the principal-agent problem as a conflict in priorities between a person or group and the representative authorized to act on their behalf.

An agent may operate in a way that is contrary to the principal's best interests. So now, in the case above, you would have been one of the many principals (investors) who put the money in a fund and a power of attorney was with the agent (fund manager).

So technically, the ability to make decisions with your money is not decentralized. If you realize that your fund is investing in something against the judgment of a more extensive investor base, there is nothing you can do. Now, how can crypto change that? How can it give you the power to tell the Goliath what to do and, more importantly, what not to do for your benefit?

DAOs ensure inclusive decision making

This is where DAO, or Decentralized Anonymous Organization, comes in. DAOs are decentralized business structures where the decision-making power lies with the group instead of a central authority. So if any updates or changes are to be made in the present system, forge partnerships or look at raising capital, these decisions are taken through votes. Hence, this process ensures inclusive decision-making across the group.

The voting is done through a kind of token called governance tokens. These are utility tokens that represent every user’s stake in the project and the voting power of the stakeholder is proportional to the number of tokens that they hold. So, for instance, if person A holds 10 tokens vs. person B, who has 5 tokens, person A’s vote has a higher weightage.

The most successful example of a DAO has to be MakerDao and its stablecoin DAI. MakerDao is a smart contract system that issues a stablecoin, DAI, pegged in value to the dollar, but it's not dependent on any kind of traditional financial banking system. A smart contract backed by a large pool of Eth maintains a peg to the US dollar. Data feeds provide the price of US dollars from the outside. Depending on the price, that's the amount of ether you can recover from one DAI.

This means that this cryptocurrency doesn't depend on a centralized infrastructure. It has a stable value and you could extend this kind of model to not just the US dollars like you could have exposure to other real-world assets and commodities.

A unique purpose

DAOs are formed for a unique purpose that can range from something socially motivated like raising funds for a war-torn country to pooling funds so that a group can be investors in a project.

PleasrDAO bought the sole existing copy of the album “Once Upon a Time in Shaolin” by the Wu-Tang Clan for a whopping $4 million and the original “Doge” meme NFT, for $4 million. This is one real-life case of how DAOs invest in something by pooling money and can later decide if they want to sell these assets for a higher price. And the decision to sell is based on voting.

Surmise, it is for the benefit of the investors and not an ‘agent’. Other DAOs with social propensity are HerStory, which collects and funds projects by Black women and non-binary artists, and Ukraine DAO, which has raised more than $6.7 million in support of Ukraine's army.

Though the concept of DAO exists on-chain and is popular with investors of DeFi (Decentralised Finance) presently, it is still a long way from going mainstream. However, everything digital we see today was once on the fringes. Nevertheless, there is a lot that mainstream finance can learn from such collaborative investment ecosystems. At least then, the focus will be for everyone to have their return on investment, not only the agent.
This article is authored by Rajagopal Menon, VP Marketing at WazirX
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