DAO Tokenomics – Using Tokens For Governance & Incentivizing Communities | Lucas Campbell
Gm Web3 Academy DOers!
There are two certainties in Web3:
- Community is key
- Most users care only about ‘price go up’
So, the question is, how do you build community while satisfying the need of financial appreciation?
Sure… The simple answer is ‘launch a token’. However, how do you ensure that it won’t tank to 0 (because most tokens do) – Let’s talk DAO Tokenomics.
What do projects need to keep in mind when building a community and more importantly, launching a token?
To tackle this question, we’ve brought on Lucas Campbell from Bankless and core contributor at Bankless DAO. Lucas is also the Co-Founder of Fire Eyes DAO, which works with industry-leading projects like Aave, Balancer, Gitcoin, SuperRare, ENS, Optimism and more on their governance and token designs.
Safe to say he knows a thing or two about tokenomics.
So, let’s dig into this and see what your project needs to think about when launching a token to not miserably fail…
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Why Do Projects Need Tokens / NFTs?
Launching a token around your project enables two things:
- Coordination
- Ownership
First of all, when you place a bunch of tokens into the hands of your community, they all come together around that token to build the future of the project alongside you! This way, it is much easier to coordinate your community because it is in their financial interest to listen and contribute.
Second of all, you enable them to own a part of the project that they dedicate their time to, something that’s very difficult to achieve outside of Web3, unless you spend a lot of money on lawyers, paperwork and get listed across various stock exchanges globally 🤦♂️
These two things, in theory, allow you to transform a passive community into an active community. A community of incentivized workers that contribute with ideas and leg-work.
But, launching a token isn’t the easiest thing to do… Let’s discuss the 5 main things you need to think about before launching a token.
What Are The Things To Think About When Launching A Token?
There are over 20,000 tokens in circulation today, according to CoinMarketCap.
Why on earth would you launch a token too?
If you have a legitimate answer to that question, then let’s talk about the 5 steps you need to take in order to increase your chances of success:
- What’s the mission / goal of your project?
- Build your community
- Implement a shared treasury
- Create a governance framework
- Put ownership in the hands of your community
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1. The Mission and Goal of Your Project
Let’s come back to the main question: Why on earth would you launch a token too?
Isn’t there an existing token / coin / protocol that will help you achieve what you need, without you creating your own?
Before launching your token, you need to have a very clear goal in mind as to what that token will enable you to do. Sure, the goal might change in the process but it’s still vital to establish that in the first place.
Otherwise, how are you going to create a community if your goal isn’t properly defined?
Remember, the token is NOT the business, it’s simply a tool for your business. So what is the mission / goal of the business you are aiming to build?
2. Build Community
And that brings us into the second step: building community! According to Lucas, this is the hardest part of your entire process but if you get it right, it’s also going to become your most valuable asset.
Getting strangers to work with you isn’t the easiest thing to do. They need incentives such as feeling like they’re contributing to something greater than themselves in addition to being financially involved.
Once you get them to believe in the process, you’ll have multiple people acting as your brand ambassadors.
Building community takes time and patience. It’s important to recognize that a large audience does not mean you have a large community. There are very different things.
P.S: We will write a deep dive to guide you through the process of building a community and will share our learnings. Stay tuned for that
3. The Importance Of A Shared Treasury
Nailing your first two steps is only the beginning. Now is the time when your project starts taking life and every step you take can make or break you.
In Web3, your community contributes to your project’s journey as much as you do. That’s why you need to implement a shared treasury which essentially is a shared bank account with your community.
This way, all of the funds are transparent and your community can decide the allocation of those funds wherever they see most fit.
As you can see, all of the steps depend on each other. You might ask yourself: How can a community decide?
Answer: a governance framework.
By the way, if you’d like a breakdown of how to participate in DAOs / work in Web3, check out our latest deep dive HERE
4. The Implementation Of A Governance Framework and Why It Could Be Tricky
Governance in Web3 is similar to politics. You let a bunch of people that are part of a project (aka country) decide on certain views, values and future steps.
The benefit of this is the fact that the governance process is completely decentralized and there’s not one person (or a few) that decides upon the future.
However, there are a few problems that are yet to be solved:
- Some people that are part of the governance do not vote / come up with proposals
- Most are only interested in the financial gains and don’t really care about the project long-term.
- A good bunch of them are probably not educated enough to make decisions
- In Web3 1 token = 1 vote so people can buy themselves more votes
Sounds a whole lot like our good old politics, doesn’t it?
There isn’t one answer to tackle all of these issues. However, you certainly need to spend a good amount of time to educate your community about the project so that they’re fit to vote.
One solution is to make each member of the community work for their votes. Instead of allowing them to buy tokens, give it to them based on their contributions. The more they contribute through being active on Discord / Telegram, proposing ideas and discussing issues, the more tokens they get (more voting power).
In this instance, it may be good to use a combination of a token and soulbound NFTs for voting. Soulbound NFTs can be traded or bought on an open market, which ensures voting rights remain in the hands of the right people.
😂 Meme Of The Week 😂
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5. How Do You Provide Ownership to Community
So how do you distribute the voting power into the hands of your community?
First of all, you need to choose between a fungible token and an NFT. After that you have to make an ownership framework to describe how governance will occur.
Example: Nouns DAO is an NFT project that mints 1 NFT per day and each holder has governance rights over the treasury of the project.
One thing to keep in mind, especially when designing the tokenomics of your token distribution is to give as much as possible to the community and as little as possible to the core team / eventual early investors.
Giving more to the community will enable decentralization, something that you want to have in Web3 (although that’s not always the case for projects in the early stages).
How Do You Solve The Immense Need Of Value Accrual For Your Token?
The most important feature to ensure your token accrues value is to build a moat for your product / business.
The same reason that Web2 stocks accrue value is true here in Web3, create a damn good business that is far superior than anyone else in your niche!
Yes, there are ways to ensure better tokenomics and better supply and demand that help to raise the price of your token (ie. ETH burn), but ultimately, it’s about the business.
Uniswap has 0 value accrual to the UNI token, yet it’s valued at over $3 Billion in terms of market cap. Why is that? Because Uniswap is by far the best and most used DEX in Web3. The Uniswap protocol is also earning more fees than any other protocol in the industry, even versus Ethereum and Bitcoin!
Interestingly, none of that value accrues to the actual token (…at least not yet). But, it’s the fact that Uniswap has built a strong business with a big moat that has enabled its token to do as well as it has.The potential that that fee revenue could be turned on to the token holders at the flip of a switch is also a big factor in the token price.
The key is to educate your token holders as to why they are holding the token, outside of just speculation. Governance of course is an important reason to hold tokens, but so are things like using tokens to provide access to communities, events or special bonuses or using your token as a partnership with other DAOs and projects.
Overall, keep your focus on building a strong business rather than trying to game it with complex tokenomic structures.
Conclusion
There isn’t one answer that fits all projects but there are a few things to keep in mind if you want to launch your token.
First of all, find your market fit and make sure that your defined goals are going to solve a real problem. Otherwise, don’t bother starting.
Second of all, start small, scale later. If you do the opposite, you’re going to be overwhelmed and most likely fail.
Tokens can empower communities to take initiatives and build your products for you. Look at Bankless (20 employees) vs Bankless DAO (thousands of contributors).
A DAO helps you build at super speed and scale faster. However, when it comes to big decisions, it can be a real struggle to come to a conclusion.
Define your goals first and see if it’s even worth adding yet another token into the big pile of already existing tokens on the market.
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