Fundraising and Tokens

How to think about raising money and issuing tokens

Fundraising and Tokens

One of the main superpowers of DAOs is frictionless, fast fundraising. As we saw earlier, ConstitutionDAO raised $47 million in seven days, less than the time is usually takes to form an LLC and open a bank account. Most DAOs fundraise by selling a governance token, which members buy in exchange for voting rights in the DAO. Typically, the more tokens a member buys, the more voting rights they accrue, though some DAOs are experimenting with alternative governance protocols as discussed in the Voting section, like one-person-one-vote. While a token usually does not represent ownership of assets or an equity stake, value can accrue to these tokens since they confer the owner with control over a protocol and its assets.

Platforms like Juicebox make it easy to issue governance tokens, but tokens have disadvantages in allowing whales to buy more votes and dominate voting. Some DAOs are governed raise funding through NFTs, which are unique pieces of digital art that serve as membership cards. NFTs are harder to accumulate in large quantities and are less financialized since they aren't easily traded in bulk, borrowed, and leveraged (for now). Another benefit of NFTs is that a DAO can receive ongoing royalties from future secondary sales of the NFTs. Before fundraising, however, it's important to write up and disclose a clear plan for governance and speak with a lawyer to make sure that your token sale does not violate any laws.

Fundraising checklist:

  • Decide on governance basics (one token one vote? one wallet one vote?)
  • Decide on DAO member rights (what rights does a token actually grant you? Don't make promises you can't keep)
  • Publish the plan
  • Setup a multisig wallet with trusted community members
  • Speak to a lawyer

There are many, many nuances to consider, which is why it's critical to get real legal advice. For example, it's illegal to take contributions from sanctioned countries like North Korea or to promise members returns on an investment.

Token Distribution

Dividing up a token among a DAO's founders, contributors, and community can be a fraught and controversial topic. If a project is too centralized, it will lack community enthusiasm and credibility. If a project is too decentralized, it can become too political and nearly impossible to pass proposals. Over the life of a DAO, from the moment a few founders conceive an idea to the moment a community fulfills the vision, it will become more decentralized as the token becomes more widely owned.

The main mechanisms for distributing tokens are contributor payments, token sales, and airdrops - usually in that order. When a project is just starting out, it usually has no resources with which to pay contributors. Since tokens are free, they are used in the early stages to reward key contributors who move the project forward, for example by building the product. A project may then want to raise money and reserve a percentage of tokens for early backers. Even later in its lifecycle, a project might choose airdrop tokens to the community to incentivize community participation in voting and protocol use. Airdropping is often the endgame, in a sense it is usually opens up the project to a wide base of users and afterwards tokens may be transferred, bought, or sold on the open market. Airdropping decentralizes a protocol to a wider group of people, making it more censorship resistant and resilient against centralized bad actors.

Issuing tokens will decentralize stewardship of a protocol and is often a one-way door, which is why we recommend that projects wait as long as possible to distribute tokens thoughtfully. Selling or giving away too many tokens too early can make it harder to incentivize future contributions. Making a clear plan and sharing it transparently can create community goodwill and set expectations. It's important to be proactive, clear, and intentional about the percentage of tokens allocated to the initial core team and the percentage of tokens reserved to reward future contributors.

Uniswap - A Case Study

Uniswap, a financial protocol that was built by a startup team and decentralized after it found product-market fit, distributed tokens in the following manner:

  • 60% to Uniswap community members (for example, users)
  • 21.266% to team members and future employees with 4-year vesting
  • 18.044% to investors with 4-year vesting
  • 0.69% to advisors with 4-year vesting

This created a relatively decentralized and energized community around the Uniswap protocol. However, the founders and investors still have a high degree of control over the protocol since authoring proposals requires 2.5m delegated UNI tokens, which requires being an early team member, investor, or doing extensive alliance building within the community to amass the delegated votes. While the added centralization allowed Uniswap to continue to move faster, it also opened the door for a competitor, Sushiswap, to emerge and energize a bigger community (see the Organization section).

When giving tokens to contributors or team members, vesting is a great strategy to ensure alignment. With vesting, contributors unlock tokens each month and if they leave beforehand, the tokens are returned to the treasury to incentivize another contributor another day.

MakerDAO - A Case Study

As another example, Rune Christensen owns to about 10% of MKR, the token governing MakerDAO, and the venture capital firm Andreessen Horowitz owns another 6%. While MakerDAO is fairly decentralized on paper, low turnout means Christensen often gets his way, much to the frustration of many community members. Power comes in many forms, not just someones ownership percentage, for example control of centralized communication channels and credibility in a community.

Each DAO must decide for itself its level of decentralization, preserving enough centralization to incentivize building but decentralizing enough to involve the community. There will always be loud voices calling for more decentralization, and while some can be well-meaning, it can also be in hope of juicy airdrops and a redistribution of power. There is no perfect formula for how and when to decentralize, but it's important to consider a variety of perspectives and choose one that works. For example, it's important that a core team is not simply a rubber-stamp parliament that holds a majority of the tokens. It's also important to keep enough of a treasury reserve to fund future contributions. There are also regulatory considerations to distributing tokens widely. Selling tokens from a highly centralized entity is more likely to be an investment since it depends on the effort of a centralized company, whereas decentralized protocols like Bitcoin or Ethereum are less likely to be seen as an unregistered investment vehicles. For more considerations on the legal side, see the section on Fundraising and Tokens. Most importantly, before distributing tokens, it's important to seek legal advice from a cryptocurrency lawyer.

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