Converting a DAO into a Fund — Maybe Not Such a Crazy Idea

Updated: July 18, 2025

Key Points

• DAOs pivoting back to principal-agent governance design is the result of the lasting shortcomings of decentralized governance and the lack of strategic alignment.

• A resource allocation paradigm shift for DAO management is necessary, instead of the politicization of the decision-making power distribution.

• DAOs need to create an amalgamation of the principal-agent mutual fund model and the polycentric governance, coherent with the decentralization ethos, to achieve better resource allocation outcomes.

This article has been prompted by my reading of Yuga Labs' recent announcement to dissolve the ApeCoin DAO and replace it with a more streamlined entity, ApeCo. ApeCo is to be a branch entity within the Yuga Labs ecosystem, with a defined management board. 

The main reasoning behind the proposition was that DAO became increasingly "dysfunctional and hampered meaningful development." In other words, the collective governance model without leadership and strategy lacked directionality of development and stalled, immersing more and more in the system gaming rather than building value. These shortcomings of DAO manifest in many DAOs. The proposition has been voted positively, and hence, one should expect the dissolution of the ApeCoin DAO. Naturally, this precedent raises a question about what DAOs were meant to become and what they can realistically sustain.

Problem of Resource Allocation

While the governance model in tokenized communities may initially resemble a political decision-making process, it is perhaps more accurate to view it as a resource allocation problem. Collective governance becomes most relevant in contexts involving the management of common-pool resources and public goods. In such settings, governance is not merely a matter of preference aggregation but of determining how to optimally allocate shared resources to maximize collective benefit.

In the case of tokenized DAOs, where members jointly manage a shared treasury, the central task is to allocate capital across competing proposals in a way that maximizes returns and, by extension, increases the welfare of both individual members and the DAO as a whole. Realistically, this task demands a model closer to portfolio optimization than to idealistic consensus-building, especially in high-uncertainty, multi-stakeholder environments.

However, unlike personal investing, this model must contend with the aggregation of heterogeneous preferences. And unlike venture capital, DAO governance is not designed to take large, concentrated risks on behalf of a small group of decision-makers. The central challenge, then, lies in efficiently aggregating diverse preferences to optimize long-term performance. Kenneth Arrow’s impossibility theorem makes this difficulty explicit: when more than two options are in play, no voting system can reliably aggregate individual preferences into a collectively rational decision.

This insight undermines the ideal of egalitarian token-based voting. In practice, when DAOs are confronted with multiple proposals and limited capital, the promise of democratic allocation collapses into procedural gridlock or winner-takes-all populism. The prioritization of proposals – essential for portfolio optimization – becomes a structural impossibility. Thus, the resource allocation problem in DAOs is not simply a matter of democratic participation, but of designing mechanisms that transcend the limitations of one-person-one-vote governance.

Mutual Fund Design as a Resolution

One path toward resolving this dilemma is to reintroduce an agentic model of governance – an approach already evident in Yuga Labs’ proposal to replace ApeCoinDAO with ApeCo, a managerial core with more explicit operational mandates. From the perspective of financial resource allocation, the closest existing analogy is the mutual fund. The mutual fund model shares many similarities with DAOs: both manage pooled capital under governance constraints with the goal of producing a collective benefit. Yet, the mutual fund derives its resource-allocation efficiency from the principal-agent model – a structure that DAOs were initially designed to replace.

The contrast becomes particularly evident when we examine the practice of portfolio rebalancing in both systems:

• Random initiatives selection. Mutual funds rely on centralized rebalancing, executed by professional managers who are accountable to clearly defined investment mandates. In DAOs, initiatives get created and voted in a random order, outside of a clearly defined strategy.

• Lack of coherent assessment. Mutual funds evaluate asset decisions within an integrated portfolio framework to maintain strategic coherence. In DAOs, proposals are assessed independently, without coordination across the broader set of active or past investments.

• Lack of consensus on performance objectives. Mutual funds rely on established benchmarks and optimization models to guide allocation decisions relative to risk and performance objectives. In DAOs, there is no common reference point or optimization logic to determine whether treasury spending aligns with evolving community priorities.

• Weak incentives for participation. Mutual funds incentivize decision-makers through structured compensation tied to fund performance. In DAOs, token holders are rarely rewarded for participation, leading to governance shaped by the most vocal rather than the most informed contributors.

• Lack of professional supervision. Mutual funds mitigate long-term inefficiencies through professional oversight and strategic discipline. In DAOs, a lack of systemic feedback and reallocation mechanisms often results in initiative drift and inefficient capital deployment.

Conclusion

Examining these inefficiencies, one must be prompted to ask: Should DAOs emulate mutual funds in their governance structure to achieve higher efficiency in resource allocation, improve accountability, and enhance coordination through the introduction of centralized decision-making mechanisms? At least, this type of thinking about the DAO in terms of portfolio management rather than consensus building shifts the perspective from the process (How?) to the outcome (Why?) and provides inspiration to design new governance technologies that preserve decentralization objectives while also incorporating a focus on results.

References:

ApeCoin DAO. (2025, June 6). AIP‑596: Sunsetting the DAO and launching ApeCo: A new operating model for ApeCoin. ApeCoin Forum. https://forum.apecoin.com/t/aip-596-sunsetting-the-dao-and-launching-apeco-a-new-operating-model-for-apecoin/28242

Arrow, K. J. (1950). A difficulty in the concept of social welfare. Journal of Political Economy, 58(4), 328–346. https://doi.org/10.1086/256963

Reguerra, E. (2025, June 6). Yuga Labs seeks to replace ApeCoin DAO with new entity, ApeCo. Cointelegraph. https://cointelegraph.com/news/yuga-labs-aims-to-replace-apecoin-dao-with-apeco