Build In-DAO Economy

This post is based on my talk at Crypto, Culture, & Society. Crypto, Culture, & Society is a learning DAO that is building a humanities education for cryptocurrencies.

While more and more complex activities have moved to the digital world, our tools for collaborating in a digital-native way have not developed at the same rate. DAOs are emerging as a key collaboration mechanism, but they are still in their infancy. To reach its fullest potential, DAOs should, like nations, strive to build thriving internal economies that serve their mission.

This post covers how DAOs build internal economies, use their native tokens and treasuries to achieve their goals, and apply models from economics, history, and anthropology to function effectively.

How to build an economy

Why did Japan, Taiwan, South Korea and China succeed?

How Asia Works, by Joe Studwell, details how governments in Asia, including Japan, Taiwan, South Korea, China, and others, have built successful economies The applied economic model.

The success of these countries or regions runs counter to traditional economic ideas emphasized by Western universities and institutions such as the International Monetary Fund (IMF) and the World Trade Organization (WTO). Unfettered free markets can be harmful to underdeveloped economies. Successful Asian economies have thought about which sectors of the economy to open and when.

Strategies cited in the book include:

  • Land reform: allocating land from inefficient feudal landlords to small farmers
  • Import and export policy: subsidize exports and impose tariffs on strategically important imports
  • Immigration Policy: Allow Selected Skilled Workers, Limit Foreign Land Ownership
  • Protecting local industry: Protecting local farmers and manufacturers from foreign competition 
  • Currency Protection: Devaluing currencies to make exports more competitive
  • Special Economic Zones: Delineate areas like Shenzhen to give more economic autonomy
  • Tax incentives: tax subsidies for local industries

Countries like Taiwan, 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 the land.

The result is that small plots of land run by economically incentivized farmers increase productivity and crop yields, thereby increasing household incomes. The success of agriculture, in turn, led to the development of local manufacturing. Since manufacturers cannot get rich through 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 create special economic zones that provide tax subsidies for strategically important industries. Governments selectively revalue currencies; China in particular is known for devaluing its currency 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 economy needs a strong foundation to be fully open 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 a look at FWB (Friends With Benefits) 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 those who contribute to earn tokens, with a potentially inflationary supply of tokens to Dilute old, inactive participants and support new, active participants.
    • One of the things the FWB has done is set up several working groups that allow members to trade their contributions to the DAO for tokens.
  • 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 offer scholarship programs for selected applicants.
    • Unlike the open border policy, this organized and governed the membership of the DAO in the early days.
  • Currency protection: liquidity provision and fiscal diversification
    • A large portion of the token supply of FWB is held by the treasury, so the circulating supply is limited. The treasury is selectively invoked by the community responsible for the curation.
    • FWB manages their liquidity program. Most of the large liquidity providers are trusted FWB members and they do not sell their FWB positions at will.
  • Special Economic Zones: FWB City, FWB Gatekeeper, FWB Radio
    • You can think of child DAOs as loosely defined SEZs. They are empowered and given some money to produce a specific product or service.
  • Tax benefits: funds from the DAO treasury
    • FWB is a country and must provide people with public goods in order to operate within that country. Similar to the way the government will 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-based product, a newspaper that covers FWB’s weekly news and major events in various 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 legal contracts. You can code important things like membership, ownership, key assets, or properties that the community owns on-chain. And at the edge, you have humans managing key parts of the DAO, like shared bank accounts or vaults, upgrades to the protocol, 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 distributed 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 very 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 participate in order to earn native tokens.

Bitcoin Block Rewards: A Game With Transparent Rules That Create Economic Activity

Bitcoin provides a great example of the implementation of this idea. Bitcoins are generated as a reward for mining as an important function of utilizing computing power to verify and record new Bitcoin transactions. Incentives laid out by its creator, Satoshi Nakamoto, sparked the entire ecosystem and the economy of participants mining Bitcoin, including mining companies like Bitmain, including hydroelectric power stations in Italy and Costa Rica, ASIC mines designed to mine Bitcoin machine, wait.

While the Bitcoin model is not without its critics, it has established a transparent way for market participants to earn Bitcoin and has been very successful.

Curve: an open, attack-resistant mechanism that enables complex economic behavior

Curve is another example of a protocol that has a very transparent system for distributing original tokens, rewarding participants, and creating utility for those tokens. On Curve, you can lock your tokens in a voting escrow, which is subject to the Curve token release schedule. By locking your tokens, not only do you accumulate more tokens, but you can also vote on distributing token rewards and adding new rules 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 Finance emerged as a protocol that unbundles the governance and economic rights of Curve holders. As Kydo said, a group of people inside Curve Finance wanted to maximize their CRV (their token) yield. However, their personal voices are not strong enough to sway any proposal. Therefore, they pool their voting power together (consortium), implemented in Convex Finance (consortium). Holders can hand over their Curve governance rights to Convex, while maintaining the economic benefits of veCRV (Vote-Escrow Curve), which includes transaction fees, yields, and CVX rewards. Additionally, holders can induce veCRV holders to vote to issue rewards to specific pools through Votium.

Alliance between DAOs

Business-to-business (B2B) relationships are rigid, while DAO-to-DAO relationships (D2D) 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, governance forum posts, open source software, and open negotiations with the DAO community, token holders, and core teams.

D2D cooperation is closer to national and regional alliances than corporate mergers and acquisitions. An important D2D token exchange is like a NATO agreement, partly 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 allows forks, what you want to “gain” is the community and ecosystem development around the protocol, which cannot be done by force.

A successful collaboration will involve product integration, resource sharing, support in the event of an attack, and increasing the economic value of both DAOs. Cooperation will also involve participating in the governance of the other, and as long as both communities are willing, cooperation will exist. If you implement a token swap via Sablier flow, both DAOs can cancel the transaction or sell tokens at any time.

Barter and Gift Economy

Financialization of Everything

Cryptocurrencies financialize almost anything – from an open source protocol, to a meme, to a person’s future income. The financialization of everything combined with the ability to exchange anything via decentralized exchanges like Uniswap and Sushiswap suggests that we are entering a loosely defined 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. 

A useful analogy is that bandwidth is used in the Internet age and liquidity is used in the blockchain age. Bandwidth is the speed at which data flows over the network, and liquidity is the ease with which you can exchange your assets for other things. Having sufficient bandwidth and liquidity will allow the DAO economy to flourish.

Build In-DAO Economy

Source: Liquidity Wizard

Source: Liquidity Wizard

Gift Economy Between DAOs

Many anthropologists disagree with the commonly held view that barter economies evolved before credit- or money-based economies, widely spread by 18th-century economist and philosopher Adam Smith the opinion of. In fact, many anthropologists believe that early economies were based on generosity and reciprocal gift economies. (eg I give you something you need and then at some point you give it back in a certain way).

This seems to be showing up in interactions within DAOs. As trust is built within the DAO, members cultivate trust, and at some point they will be rewarded for advancing the DAO’s mission.

However, web3’s concern 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 demeans members’ intrinsic and social motivations. The best DAOs will operate the gift economy internally, even if they are more transactional with other DAOs.

An inexhaustible treasury and an infinite time horizon

Having permanent capital is valuable because some projects require a long time horizon and an inexhaustible source of funding. The endowments of Chinese monasteries and universities are built with this understanding – that funds need to exist in perpetuity.

The DAO treasury often funds long-term, open-source projects, which means funding needs to last as long as possible.

As always, 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 the most pressing issues of the day.

Socialists meet capitalists in DAO

DAOs are interesting because they contain elements of two different ideologies, socialism and capitalism. There is a hybrid model that emerges from the liberal-leaning belief that everything can be financialized and that money should not be controlled by any centralized institution, and the left-wing view that workers should own more of the economy than just is salary. 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 collaboration and ownership distribution than some of our existing structures. Successful DAOs will build a thriving internal economy that lives up to their mission. They should have a conscious understanding of how to use their native tokens and treasuries to sustain and grow their community.

Thanks to Austin Green for discussing this topic, to Sara Campbell for helping with the initial version of this article, and to Graeme Boy, David Phelps, Michael Bateman, and Daniel Schlabach for their feedback.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/build-in-dao-economy/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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