This post is based on my talk at Crypto, Culture, & Society. Crypto, Culture, & Society is a learning DAO that is working to build a liberal arts education system for the cryptocurrency space.
Today, while more complex activities have moved from the physical to the Crypto world, tools to coordinate in a Crypto-native way have not evolved at the same pace. DAOs are emerging as a decisive coordination mechanism, but they are still in their infancy. To reach its fullest potential, DAOs—like nation-states—should strive to build a thriving internal economy and serve its mission.
This post talks about how DAOs should build their internal economy, use their native tokens and treasuries to serve their goals, and apply models from economics, history, and anthropology to function effectively.
I. How to build the economy?
Why are Japan, South Korea and China able to succeed?
In How Asia Works, Joe Studwell details the economic models that Asian governments have implemented to build successful economies, including Japan, South Korea, China and others .
The success of these countries and regions runs counter to traditional economic ideas emphasized by Western universities and institutions such as the International Monetary Fund and the World Trade Organization. Unchecked free markets can be harmful to underdeveloped economies. Successful Asian economies have plans for which parts of their economies to open and when.
Strategies cited in the book include:
- Land reform : allocating land from inefficient feudal landlords to small farmers;
- Immigration policy : allow certain skilled personnel to immigrate and limit foreigners’ land ownership;
- Import and export policy : subsidize exports and impose tariffs on strategically important imports;
- Protect local industry : protect local farmers and manufacturers from foreign competition;
- Currency protection : currency devaluation, making exports more competitive;
- Special Economic Zones : Delineate areas like Shenzhen with more economic autonomy;
- Tax incentives : provide tax subsidies for local industries;
Countries like South Korea and China started out with large amounts of land and relatively uneducated labor. It is too costly to train citizens for high-skilled jobs in fields such as information technology and financial services. Instead, the government adopted a policy of land reform, allocating land to agricultural laborers who worked on it.
Thus, after being financially incentivized, small plots of land run by farmers increase productivity and crop yields. This increases the household income of the people. The success of agriculture, in turn, led to the development of local manufacturing. Since manufacturers cannot get rich from local consumption (the local economy is not rich enough), they have to focus on exporting to the US, Europe and other wealthier economies.
The way to stimulate exports is not to fully open the economy, but to selectively set up special economic zones that provide tax subsidies for strategically important industries. Governments selectively reassess currency values; China, in particular, has a reputation for lowering currency values so that its exports are competitive in global markets.
While these strategies are unsustainable in the long run, they are important in the early stages of economic development. The construction of the economy requires the establishment of a strong foundation before it can be fully opened to foreign competition.
Applying the government’s successful economic model to the DAO
So what happens when we apply the Asian model of building an economy to building a DAO?
Let’s take FWB as an example.
- Land Reform: Broad Token Distribution
Similar to how East Asian governments distribute land from feudal landlords to laborers, DAOs must distribute tokens to a wide range of participants, allowing contributors to earn tokens, which may cause inflation of tokens, but It can also dilute old, inactive participants and attract new, active participants.
One of the things FWB is doing is setting up several working groups that allow members to earn tokens for their contributions to the DAO.
- Immigration Policy: Token Threshold (75 FWB) and Scholarships
FWB offers membership to anyone who owns 75 FWB tokens and is approved by the FWB team. They also have a program of granting scholarships to selected applicants.
Unlike the Open Borders policy, this policy governs the membership of the DAO at an early stage.
- Currency Protection: Liquidity Provisions and Treasury Diversification
A large portion of the token supply of FWB is held by the treasury, so the circulating supply is limited. The treasury is used selectively by responsible communities.
FWB manages their liquidity program. Most large liquidity providers are trusted FWB members who do not sell their FWB positions at will.
- SEZ: FWB City, FWB Doorman, FWB Radio
You can think of the definition of a secondary DAO as loosely defined SEZs. They are empowered and given some money to produce a specific product or service.
- Tax benefits: funds from DAO treasury
FWB is a country and must provide people with public goods in order for it to function within the country. Similar to how the government would provide tax subsidies to industries that benefit the country, FWB provides treasury funding for activities that help it further its mission.
FWB’s treasury has funded a token threshold product (a product that grants access to a community or content exclusively to token holders), an editorial covering FWB’s weekly news, and events in individual cities.
Designing Tokens and Treasurys as a Decentralized, Programmable Game
The DAO is an internet-native organization whose key rules are governed by smart contracts rather than laws. Important things like membership, ownership, key assets, or community-owned properties can be coded on-chain. And at the fringes, there are specific people who govern key parts of the DAO, such as shared bank accounts or treasuries, protocol upgrades, and changes to the DAO’s charter.
Today, most protocol DAOs allocate 40-60% of their native tokens to the community treasury, which is then redistributed through on-chain governance. The challenge is that on-chain governance is slow and ineffective, meaning hardly any native tokens are distributed.
However, over time, the rules for distributing native tokens can be coded at the beginning of the DAO’s formation. By setting these rules, the DAO creates a game in which builders, users, market participants, and other stakeholders can all play to earn native tokens.
Bitcoin Block Rewards: A Game With Transparent Rules – The Birth of Economic Activity
Bitcoin provides a great example of the implementation of this idea. Bitcoins are produced as a reward for mining, and an important function of mining is to use computing power to verify and record new Bitcoin transactions. Incentives laid out by Bitcoin’s creator, Satoshi Nakamoto, have spurred players across the ecosystem and economy to mine Bitcoin, including mining companies like Bitmain, hydroelectric power stations in Italy and Costa Rica, ASICs designed to mine Bitcoin Miners, and many more other players.
While the Bitcoin model has also been criticized, it has established a transparent way for market participants to earn Bitcoin and has been very successful.
Curve: an open, attack-resistant mechanism that leads to complex economic behavior
Curve is another example of a protocol that has a very transparent system for distributing native tokens to reward participants and create utility for those tokens. On Curve, you can lock your tokens in a voting escrow so your tokens are subject to Curve’s vesting schedule. By locking your tokens, you can not only accumulate more tokens, but you can also vote on the distribution of token rewards and add new gauges to the protocol.
Based on the rules that Curve has created for the utilization and distribution of its tokens, an entire ecosystem has arisen with a lot of activity inside and outside of the DAO.
For example, Convex emerged as a protocol that unwinds the governance and economic rights of Curve holders. As Kydo said, a group of people inside Curve Finance wanted to maximize yield on their CRV. However, their personal voices are not enough to change reality. Therefore, they want to centralize their voting power (consortium) to fulfill their needs on Convex Finance. Holders can cede their Curve governance rights to Convex while maintaining the economic benefits of veCRV, which includes transaction fees, yields, and CVX rewards. Additionally, holders can bribe veCRV holders through Votium to vote for rewards to specific pools.
Alliance between DAOs
Business-to-business relationships are rigid, while DAO-to-DAO relationships are fluid. B2B relationships are defined by legal contracts, proprietary software, and private negotiations with key company executives. D2D relationships are defined by smart contracts, forum governance posts, open source software, and open negotiations with the DAO community, token holders, and core teams.
D2D cooperation is closer to a nation-state alliance than a corporate merger. An important D2D token exchange is like a NATO agreement, in part to protect each other from stepping on each other’s toes. Yearn is a good case – they helped several protocols like Pickle, Rari Capital, and Alchemix when they were exploited. This helps Yearn build trust with other DAOs.
When the code is open source and forkable, you are more likely to have community and ecosystem development around the protocol. And this cannot be enforced by applying pressure.
A successful collaboration involved product integration, resource sharing, support during an attack, and an increase in the economic value of both DAOs. Cooperation will also involve participating in the governance of each other. Cooperation exists as long as both communities are willing. If you implement token swap via Sablier flow, then both DAOs can cancel the flow or sell tokens at any time.
II. Barter and Gift Economy
Cryptocurrencies financialize just about anything — from an open source protocol to a memorandum to a person’s future income. The financialization of everything combined with the ability to exchange anything through decentralized exchanges like Uniswap and Sushiswap suggests that we are entering a loose barter economy.
Anything can compete for currency. It’s easier than ever to create an asset out of anything, and it’s easier than ever to exchange assets with each other.
Liquidity is to Web3 what bandwidth is to the web
As exchange becomes more common (more important to the economy), so does liquidity.
An interesting analogy is that bandwidth provides what the Internet age provides what liquidity provides for the blockchain age. Bandwidth is the speed at which data flows over the network, and liquidity is how easily you can exchange your assets for other things. Having an abundance of both is the basis for a thriving DAO economy.
The Gift Economy within the DAO
Many anthropologists disagree with the widely held view that barter economies evolved before credit- or money-based economies, an 18th-century economist and philosopher Adam Smith disagreed with. The dissemination of a point of view has made the greatest contribution. In fact, many anthropologists believe that the early economy was based on a gift economy of generosity and reciprocity. (e.g. I give you something you need and then at some point you repay me in a certain way).
This also seems to show up in interactions within DAOs. As trust is built within the DAO, members’ trust is precipitated so that they will at some point be rewarded for working hard to advance the DAO’s mission.
However, the concern in Web3 is that every interaction has the potential to become transactional. DAOs must take care to prevent this from becoming part of the culture, as it devalues members’ intrinsic and social motivations. The best DAOs will operate the gift economy internally, even if they are more transactional with other DAOs.
Inexhaustible treasury and infinite time horizon
Having sustainable capital is valuable because some projects require long time horizons and inexhaustible sources of funding. The endowments of Chinese monasteries and universities are built with this understanding – the funds need to exist in perpetuity.
The DAO treasury needs to regularly fund long-term, open-source projects. And that means funding needs to be available as continuously as possible.
But like anything, there are exceptions depending on the goals of the project – whether it’s a DAO or a traditional institution. For example, the Gates Foundation plans to spend all its resources within two decades of Bill and Melinda’s death so they can focus on today’s most pressing issues.
Socialists meet capitalists in DAO
DAOs are interesting because they contain elements of two different ideologies, socialism and capitalism. A hybrid model is starting to emerge that incorporates the liberal leanings that everything can be financialized, that money should not be controlled by any central entity, and the leftist view that labor should have more means of production, while It should be more than just wages. That’s why Web3 contains so many political opinions – because people can be attracted for different reasons, and both sides can be right.
In many ways, DAOs provide a better model for coordinating and distributing ownership than some of our existing structures. A successful DAO will build a thriving internal economy that drives the fulfillment of their mission.