DAOs are meant to create a paradigm shift in the workforce, enabling a more capital-efficient pathway to reach its goal. You don’t need everyone to be a constant contributor to DAO or even a token member of a DAO to contribute. You want the most qualified individual or team to service your DAO. Regardless of their affiliation with the DAO or not, DAOs need to open their doors to service providers/consultants who can further them in their mission.

Protocols are not an organization. Organizations service protocols.

Dangers of Discord

DAO communication generally occurs in their humble abode, good ole Discord, usually exclusive to token holders via guild or collab. Depending on the aim of your DAO, you may want an exclusive group of people for NFT collectors or investors. For DeFi DAOs, a limited pool of participants will not serve their best interests.

DeFi Protocols such as Uniswap, Aave, or Compound require specialists to maintain and improve their protocols' technicalities and manage their finances. In becoming a DeFi powerhouse, these DAOs accumulate a large treasury, going up into the billions. With no specialized talent to handle them, these treasuries won’t be capital efficient. They can lead to the downfall of these protocols if they aren’t prepared for the current market conditions we face.

You won’t be able to find all that specialized talent within your DAO. Open your door. For those protocols that require treasury help, they can look to services such as Karpatkey, who currently service ENS, Balancer, and Gnosis, among others. For those protocols who want designers, look towards Vector DAO. For those protocols who want support in decentralization, look at StableLab.

But how do we facilitate these conversations?

A token-gated organization enables those interested or have skin in the game to be surrounded by like-minded individuals, but under discord, there are limits in place. On one side, a token-gated discord enables you to form a collective of people who share a goal. On the other hand, discord limits the DAO to a set of people, where you will need to look outside of your discord to find relevant professionals.

This introduces numerous obstacles that only deter people from contributing to a DAO.

Meet Bob

Take Bob the Third (Bob for short), for example.

If he wants to contribute to Aave, he can apply for a grant via Aave Grants DAO or participate in the forums. Fortunately, some DAOs have a seamless process to get involved.

In another scenario, if Bob wants to contribute to Developer_DAO, he will need to purchase the relevant NFT or CODE token to enter Discord. After a rigorous onboarding of sifting through channels left and right in the trenches, Bob might figure out a way to provide his services to Developer_DAO.

Not only is this inefficient, but time-consuming. To offer my services, I need to spend capital. To connect with members of the DAO, I need to spend capital. Regardless of whether Bob has worked in another DAO, he might not have enough proof to show his experience.

Discord wasn’t built for DAOs; evidently, it does not promote collaboration across different entities.

Beyond The Tide

For a DAO to reach its true potential, organizations need to be able to collaborate seamlessly with one another. Without this space, DeFi DAOs will continue to struggle to initiate spaces where they can communicate with relevant external services that can support them on their journey to decentralization without compromising quality. 

It has already become common practice to spin up SubDAOs or service providers empowered to enact a specific service on behalf of a DAO; Risk analysis, treasury management, or other services. Instead of passing every decision through governance, these empowered groups can avoid governance and streamline decisions within a group. This makes the process more efficient, but another obstacle shows up at some point.

These service providers are constrained within DAO that they are formed. As I previously mentioned, they need to accumulate the relevant token to enter a discord, become a trusted member of the DAO or have a history of experience before going for a paid position. It is difficult for a service provider to translate their services to another DAO since there is no attribution of their work for a DAO. Taking a verified collection of your work from DAO to DAO helps you get hired.

Open Space

The lack of open space between organizations, service providers, and individuals prevents DAOs from reaching their true potential. A space that can seamlessly be spun up to facilitate conversation between DAOs and service providers/individuals to tackle specific problems is the next step in combating coordination in this online world of DAO work.

Imagine a space where DAOs can initiate areas with relevant contributors, internal and external, to tackle a task. Once completed, the room can be closed, and each contributor can be compensated and attested for their contributions. Each individual carries their history of attestations and work as they move from one DAO to another, only providing their services to a DAO when needed.

Not only is this more capital efficient for a DAO, but it enables a seamless transition for contributors to work with various organizations. 

A space for fluid conversation. A space for temporary work. A space for connection. ** My recent conversation with Nelson about Avenue inspires this blog.**

Soon after, on-demand entertainment was the beginning of the next cold war in the mid-2010s, where on-demand streaming sites such as Netflix, Amazon, HBO, and Youtube, amongst others, fought over your dilated pupils. Since the beginning of online entertainment, the barrier to becoming a creator has lowered year after year, enabling the average individual to become a creator and generate an income or even create their own online entertainment companies. But where do the consumers lie in this?

One-Click Demand

In the past few years, we have seen people transition into youtube careers and DVDs box sets turn to on-demand TV. In a world where music, videos, and books are available on demand through a few simple clicks, it's an unforgivable mistake not to have your entertainment available to your viewers on demand.

Gone are the days when you would come home from school or work and wait to see “Countdown” or “Deal or no Deal” on your TV. Are you bored? Slap on some Netflix. Want to dance? Spin some tunes on with Spotify. Need a new book? Download one on your kindle!

As a society, we are now subject to an overdose of entertainment. We are spoilt by choice. The issue is no longer,

“Do I like what is on TV?”

To

“What should we watch?”

Consumers Control the Show

Due to the overload of on-demand entertainment, creators fight for our attention. In 2020, the average person in the UK spent up to ⅓ of their waking hours watching TV or online entertainment daily. We, the consumers, as a whole, indirectly decide the future of these shows, sequels, or seasons. Whether we watch a portion or the entire section, we contribute to a behind-the-scenes discussion to determine the continuation. Communicating our preferences for a show can be based on watch time and social media support, amongst other factors.

Similarly, YouTubers can gather information from the likes and comments of a video to understand their audience's taste for specific videos. Does the audience want more “Content A” or “Content B”? This data, along with the youtube analytics, can help shape a YouTuber's Video Series and contribute to their success. If a Youtuber notices that a specific series of theirs is gaining more traction, then it would make sense to continue with these series to gain that clout.

Some series even get so popular that cast member(s) can spin off their own YouTube Channels from the popular BuzzFeed, such as “The Try Guys” or “Worth it.”

Consumers drive the direction of online entertainment. Whether it is YouTube or Netflix, the audience plays one of the biggest factors.

Web3 Online Entertainment

So how will Web3 cross-pollinate with online entertainment? One pathway would be for people to become owners of Creators, TV Series, or Films during the stages of creation. This allows die-hard fans to show belief in their conviction of creators. Currently, fans have no way to show ownership of being early to online entertainment besides providing online proof on social media.

We are proud when we see our favorite TV shows or creators gain clout, especially when we are early supporters. NFTs, POAPs, or even tokens could provide this verifiable proof of our support.

Creator tokens could unlock NFTs that provide unique experiences or merchandise. YouTubers could even tokenize themselves and reward viewers for watching their videos. In return, these tokens could be used to financially support a YouTuber’s career while enabling holders to speculate on a YouTuber's career. This would turn YouTubers into an investment market.

New online series could offer seasonal NFTs that provide ownership of each season, distributing revenue and unlocking unique experiences. As a Peaky Blinders fan since Season one (It is based on my city, after all), I would have loved a POAP to show my early support for the show.

Beyond the Screen

Web3 online entertainment will be a massive change for the industry. Still, I think it will only occur once the current web3 UX problems, such as wallet onboarding, wallet safety, and interacting with the blockchain, will be as seamless as our current experience in the traditional world. The convenience of being able to support a creator or show is nothing new; we have seen it with Patreon, Twitch TV, Substack, or even Kickstarter but the web3 experience needs to be as fluid as that.

As one of the largest contributing factors that creators get to live these lives, it is only fair that a creator's supporters are brought along for the ride. Supporters, consumers, or audience members should no longer be expected to support creators without any tangible evidence of their support. A supporter shouldn’t have to show their Patreon bill as a sign of support.

I have been shut down by banks multiple times without a sufficient reason. Even when I ask for clarification… “Please read T&Cs.” Thanks for that fabulous and precise insight, Steve.

A majority of us don’t trust banks, and it's a big reason why we joined the web3 space. Banks don't have your best interests at heart, so why should we store our money there? This is where self-custody enters.

No one can take your possessions. You have complete control.

Sometimes a bit too much control.

Web3 wallets are quite simple. If you own your keys, you own your money.

Nobody can take control of your money, that is, unless they have your seed phrase.

Who knew words were so dangerous?

I wasn’t the biggest fan of English class, but damn, no one told me that twenty-four words could make or break my financial future.

“Sticks or stones may break my bones, but your words will never hurt me.”

I hate to break to you, but twenty-four words could make any crypto HODLer cry like Niagara falls.

Steve, James, and so many others have lost fortunes simply because they lost twenty-four words…

But why do I keep talking about these words?

Unless you live life on the edge, you are likely storing your wallet seed phrase on an offline phone/laptop, bank safe, or even a piece of scrap paper in your basement. 

And honey… this ain’t the way for you or the rest of the millions or billions of web3 users. Self-custody comes at the cost of convenience and, in some cases… millions of dollars.

Seed phrase? What am I planting?

Seed phrases are a list of 24 randomly generated words that enable a person to take control of the private key behind an account. Wait, let’s roll that back a second.

Private keys.

Private keys are kept secret for a reason. A private key acts as the valid signature enabling you to authorize a transaction. Essentially it means this….

Private key = control of an account

If you lose access to your wallet by losing your phone or laptop, your seed phrase will enable you to regain access to your private key. One more time for the crowd…

Private key = control of an account

This is the current failure of the system, but we will get to that later.

Back to planting some phrases.

Seed phrases are not a viable option to onboard the next generation of crypto users. My mum is a Facebook power user and can use all the filters in the world but ain’t nobody got time to keep a record of 24 words.

Whenever I return home from traveling, I repeat the same sequence of events.

1. Eat some chickpea curry.

2. Hug a tree.

3. Check my seed phrase on three different forms of offline storage.

4. Be a happy bob.

Self-custody is an essential part of convincing people to move to crypto, but it comes at the cost of inconvenience and stress. Account abstraction will remove this pain and make self-custody much more straightforward. 

First, let’s dive deeper into the problem and understand how wallets act.

A primer on Ethereum accounts

Wallets currently act as Externally Owned Accounts (EOAs).

An EOA account has the following features:

• A public address for identification

• A nonce to ensure transactions are unique

• A balance in ETH to pay fees

Earlier, I mentioned private keys as the authorizer of transactions. A public key is public and will give your wallet address.

One final time for the crowd…

Private key = control of an account

The signer and the account are merged.

Signer: Authorised to spend your tokens

Account: Holds your token.

To authorize a transaction, this currently means that you possess control of the account. With control of the account, you can spend the contents of the account (tokens and NFTs).

This is one of the biggest issues of EOAs.

Your entire wallet depends on controlling this signer. Lose your private keys, lose your wallet.

Time for divorce

Let’s break up the account and the signer.

Signer =/ Account

This simple act enables so many more opportunities since authorization to spend tokens is no longer associated with the wallet. This means we would no longer term these as EOAs. We are now entering the world of smart contract wallets.

Now your account can become a smart contract that defines a valid transaction.

A valid transaction could be multiple signers, replacing signers, or even using different signature schemes.

At first, it sounds pretty weird to separate your signer from the account because how else do you authorize transactions? This separation enables your account to swap, replace signers or add multiple signers. Abstraction at its finest.

Divorce = Double the Presents.

Who knew divorce would be good?

The divorce of signer and account give presents that you want or, dare I say, need.

Social Recovery

This is the bad boy of AA. We can say goodbye to seed phrases. No longer do you have to keep 24 words safe anymore.

Social recovery can be done via off-chain or on-chain methods. This is all made possible by Argent, the first social recovery wallet.

You can have authorized guardians (MetaMask accounts, Ledgers, or Argent accounts) who can help authorize a new key as the legitimate owner of your account.

If you ever lose access to your account, all you need to do is get in touch with your guardians and get them to approve the recovery process. To make this a resilient process, you would have a minimum number of guardians you trust and who don’t know each other.

Session Keys

In playing games like Axie Infinity or purchasing weapons in a blockchain game, you would have to approve each transaction. Instead, you can pre-approve certain transactions enabling you to enjoy a game without having to approve each transaction within a game.

With these pre-defined rules, you can play games for X amount of minutes or under certain rules while knowing that a Dapp has restricted access to your wallet to spend only the tokens or NFTs you have authorized.

** **Session keys can be customized in different ways; X amount of time, X amount of tokens, particular transactions/smart contract interaction, or even XYZ token.

Batch operations

Currently, you initiate a new transaction for every on-chain interaction, as seen below. Not only is this time-consuming, but it is also gas-consuming.

With AA, you can bundle transactions before processing a transaction, as seen below. This makes the UX experience much more seamless and also reduces gas costs.** **

Apply this to shopping for NFTs on Shopify-like platform. In the web2 experience, we will add NFTs to our shopping basket; then we can purchase them all in one click.

If we were to do that without AA, we would have to approve each NFT purchase transaction. Instead, AA enables you to purchase several NFTs in one click, making it a much more seamless experience similar to Web2.

Secure Enclave

You can turn your IOS or android device into a hardware wallet.

Any fee payment

Currently, on Ethereum, users always have to pay gas fees in ETH regardless of the transactions. With AA, users can pay gas fees in any token.

Even if you don’t possess ETH, with AA, you can pay gas fees in any other token like MKR, AAVE, or others.

Dapp Kindness

Currently, most projects require users to pay fees, or they will pay for users by refunding them with their native tokens. This is a very common practice to provide them with some form of gas rebate that they receive after a few days.

Instead, Dapps can pay fees on behalf of the users during the transaction. 

These rewards can be claimed after seven days, but through AA, Hop could cover the gas fees initially instead of users paying gas fees and being compensated seven days later.

Account Abstraction and Beyond

This is all thanks to the changes introduced by EIP-4337 (currently a work-in-progress), which focuses on implementing AA without modifying the consensus-layer protocol. With the technology in place, Layer 2’s like StarkNet and zkSync will launch with native account abstraction.

Social Recovery Wallet, Argent, has strongly aligned itself with both Starknet and zkSync, and we can look forward to a future where more users will be able to make transactions on the blockchain using Argent and not worry about losing their private key.

Account abstraction will help enable the onboarding of the next billion users since seed phrases will become a thing of the past. However, as you can see, AA enables so much more than removing seed phrases.

The UX of interacting with the blockchain will become an experience similar to web2. An experience that doesn’t feel like we are using the blockchain is an experience that we should strive for.

** **

It is a collaboration across systems. DAOs, on the other hand, are unlinked, misguided, and full of broken pathways making it harder to reach the simplest of decisions.

DAOs, similar to the body, are systems, but fortunately, our body comes with in-built mechanisms for synchronicity and protection. The same can’t be said for DAOs. However, these characteristics should be encouraged and implemented within DAOs to make for more robust and functional organizations.

Building Blocks of a DAO

Over time, communities have constructed various bodies for DAOs. Similar to human evolution, DAOs adapt and evolve as we identify more effective and valuable practices.

What was one a valuable organ for our body, an appendix, no longer has a function as we eat a more varied diet, targeting more meat and other substances than solely plants. DAOs face a similar pathway as contributors adapt to more appealing standards presented within DAOs, leaving what was once an ideal framework unused, gathering dust on the bookshelf.

The current body of a DAO consists of the following; Discord, Discourse, Safe, Off-Chain voting, On-Chain voting, and others. Like amino acids that form protein, these tools form a core part of the DAO. They can make or break a DAO.

A single change in one nucleotide can form different amino acids and, ultimately, a different protein. Nucleotides, in this case, are synonymous with the building blocks for a DAO. If you focus on onboarding, such as; having weekly onboarding meetings and intentional diversity, among other practices, you will build a functional protein structure that supports your DAO in many ways.

Whereas if you don’t respect the importance of onboarding, you end up with a malformed protein structure. A dysfunctional DAO. These comparisons aren’t exactly fair as we don’t determine our nucleotides, but we have the option to build a foundation for a DAO. Still, they aim to demonstrate the importance of each nucleotide or building block, as even a small change can have a significant impact.

Like Medicine, Web3 is Everchanging

Not so recently, blood leaching was a common practice amongst physicians, believing that leeches would suck toxins out of the body. Today, we know that to be false, but arguments at the time made it a reasonable practice.

A more recent example is how healthcare systems in the UK are starting to implement more holistic practices into their work. Practitioners are starting to focus on the root cause of a disease rather than treating the symptoms. In one case, a doctor could advocate for a change in a pre-diabetics patient's diet and exercise routine rather than prescribing diabetic medication. A prescription will only treat the current symptoms, whereas a lifestyle change can reverse diabetes. But how does this relate to DAOs?

Every new DAO, protocol, or tool is here to solve a problem. Whether that be a financial, social, or another topic. Few succeed, but why do they succeed? What does it mean to tackle a root problem? Let’s look at one example.

DAOs are currently undergoing a contributor crisis.  Most DAOs have people who want to contribute but aren’t sure how to get involved, and DAOs do not know how to manage these contributors. In this case, the root problem of the contributor crisis lies in a lack of clarity.

1. What is the ultimate problem that the DAO tackles?

2. What is the membership criteria for the DAO?

3. What is the onboarding process for the DAO?

4. Is there a form of compensation? If so, how does it work?

Similar to pre-diabetic or diabetic patients who have an opportunity to reverse diabetes, DAOs have an opportunity to tackle their root problems. A discord invite and self-assigned emojis aren’t onboarding.

Instead of relying on contributors to figure out the Rubix cube, that is Discord, DAOs should employ practices that simplify onboarding in a more approachable manner. It’s not an easy feat, as one has to unlearn old habits and find ways that match their processes, but in the long term, the rewards are endless.

Bodies Are Built To Fight, So Should Your DAO

Our bodies are built to fight, to protect. They are built for enemies.

Should DAOs be built for enemies?

Currently, DAOs are successful because most people share a similar vision and agree on most issues, but once it becomes rowdy, it turns into a showdown. Recent forum posts from MakerDAO and Balancer are clear examples of when arguments took a nasty turn, becoming more personal and less professional. As much as we try to avoid conflict, it is inevitable.

Especially in a digital world, it is expected to see people clash. We’ve seen it across Twitter, Facebook, and Instagram for years, and we should not expect anything less within DAOs. Still, currently, no solution is actively used to facilitate controversial discussions among members of DAOs without it ending with someone badmouthing someone’s cousin or cat.

One way could be to implement the use of Pol.is, which focuses on finding common ground to find similarities. It may not be completely trustless, but implementing a mechanism that automatically takes controversial discussions and employs the Pol.is mechanism could help filter through a lot of noise.

A tool like Pol.is could help DAOs debate topics in a much more formal manner, avoiding tension and reaching a fair ending. Not every fight is avoidable, but a controlled fight is the best option.

Cleaning a DAO: Marie Kondo Style

Unlike DAOs, our bodies are built to fight. After you get a bit tipsy-tipsy, your liver works to expel the toxins, aka vomiting. Even though you may hate hanging over the toilet seat at 4 am with your man-bun tied behind your head, hey, you can’t complain. Your body is in the boxing ring, going rounds with those six vodka shots you knocked back 30 minutes ago. If you do not respect the limits, consequences follow.

DAOs are no different. A lack of meaning, clarity, or organization will be the greatest reason for the downfall of a DAO. Very few processes within DAOs function encourage removal. Not everyone or everything needs to stay in a DAO, and this hoarding mentality can be detrimental to the efficiency of a DAO.

One new way to explore “removal” is to see some individuals as temporary contributors. Using a Prop House or grants committee, one can employ contributors for a goal or x amount of time like a paid volunteer rather than explicitly being classified as a part-time or full-time contributor to the protocol. Prop house presents a compelling model since it is less hands-on for a committee but more hands-on for the community, as token holders will vote on whose project is funded.

Not only does this remove the process of going through a governance proposal, but it increases the capabilities for service providers to jump between protocols and offer their services to prop houses. If deemed fit by the community, they can provide.

Have you had your check-up yet?

We all don’t do it, but we ought to. See your doctor, see your dentist. Those check-ups are invaluable as we age to ensure that our systems are checked, but why don’t we do this for DAOs?

So many screamed about the health of a DAOs treasury, only for the screams to be deafened by the hype of “soon $10k ETH” or “wen lambo”. Now many DAOs are paying the price like Index Coop, which laid off many contributors in the past month. One of my recent articles expands further on treasury diversification, but in summary, many DAOs have lost over 50% of their treasury since Dec 2021.

As DAOs expand, they fall victim to the fallacy that their treasury is impenetrable. Recent times show different. Popular DAOs that we know now could evaporate over the next couple of years. Bringing in external support, such as organizations like Llama, which can focus on diversifying your treasury safely and sustainably, would be money well-spent.

In addition to the DAO treasury, many of the following should be involved in your DAO check-up:

• Decentralization of the protocol

• Voter participation

• Decentralized workforce

• Contributor on-boarding

• Amongst many others

Without continuous check-ups, DAOs lay vulnerable to being deficient in certain aspects like those outlined above. Recently, MakerDAO detailed the decentralization of their MKR token, including delegate decentralization, voter turnout, and other details, setting a standard for themselves. In 6-12 months, it will be interesting to see whether they have progressed or regressed in decentralization, allowing them to pinpoint reasons for their result.

Monthly treasury management reviews, Quarterly working group reviews, and annual decentralization reviews are examples of certain reviews necessary to the longevity of a DAO.

Unchecked, these could lead to the fall of a DAO.

Closing thoughts

Medicine, in some ways, is analogous to Web3, but in other ways, lives on polarizing ends. One reason I resonate with healthcare as a way to identify similarities with web3 is its core nature. Medicine cares for someone's physical and mental well-being.

Web3 opens up opportunities to improve one's financial well-being, whether banking the unbanked or allowing permissionless transfers. In some ways, they both have many privileged roles as service users hope to see a change in their lives.

This post will explore the tokenization of communities and ‘X-to-earn’ of leading protocols such as Axie Infinity, StepN, and RabbitHole. In doing so, we will understand the culture of these protocols to identify what makes a sustainable and ideal x-to-earn protocol.

X-to-earn as a concept is quite controversial, and this post will explore various perspectives to identify the benefits and drawbacks of tokenizing communities with an x-to-earn mechanism.

What is X-to-earn?

‘X-to-earn’ has become a recent phenomenon in the past year, spawning concepts like; play-to-earn, walk-to-earn, and learn-to-earn. Tokenisation of each community has provided an opportunity for individuals to earn X token through an act that would not generally be rewarded in the traditional world.

The opportunity to earn money for tasks we take for granted, such as gaming or exercising, is now gamified and tokenized, providing users a chance to be financially rewarded. The current gaming ecosystem revolves around gaming companies, professional gamers, or streamers who mainly earn money from games. Now that script has been flipped, with an everyday user being able to earn money from games or tasks.

But does it come with a twist?

Completing activities such as learning or exercising can be a joy or a burden. Some of us love exercising, while some of us do not. Could tokenizing these activities encourage users to find joy in tasks they once hated? Could this be a boost of motivation for those tasks that some find mundane?

X-to-earn encourages the user to focus on a task, and in the short term, you are rewarded with an X token, which might have a monetary value, but what happens if you solely focus on the reward? Does it strip away that feeling of ecstasy when you finally reach that long-term aim?

X-to-earn plays a lot on the psychology of the mind. We should contemplate the power of x-to-earn and its suitability for specific tasks. In some cases, this could do more harm than good or it could nurture a mindset of short-term gain rather than long-term. We have seen the damage that social media has done to one’s attention span, could x-to-earn have a similar effect?

Axie Farms

Overview

Axie Infinity involves having a team of three Axies which are characters you will use to fight another team of three Axies. In playing these games, you would earn $SLP (Single Love Potion), a currency within the game that can also be exchanged for fiat money (GBP, USD, EUR). Another currency $AXS was used in-game for breeding purposes to generate more axies.

Each Axie was a Non-Fungible Token (NFT) meaning that you had complete ownership of that asset, meaning that players could buy and sell Axies on the marketplace. In comparison to owning a party hat on Runescape, you “owned” it within the game, but did not possess complete ownership. Creators of Runescape had the power to remove items from a player's inventory, and you could not take a party hat outside of Runescape. Unlike party hats, NFTs are owned by a user and no one can take that away.

Axie Infinity has a simple turn-based mechanism meaning that it is possible for everyone to play the game, and at the peak of the Axie Infinity craze, ‘farms’ of phones were used to capitalize on the financial gain.

Scholarships

Scholarships were introduced to the game, as the cost of an axie team during the bull market had risen to around $600 minimum. These scholarships provided an opportunity for those financially restricted to play the game, and they would split the profit with the original owner of the axies. Scholarships took ‘play-to-earn’ to the next level, formalizing a structure to create a business within the ecosystem.

A standard split between player and owner would look like this.

1. Player: 70-80%

2. Owner: 20-30%

Scholars would see an increase in their percentage of earnings, the longer and better they played. It was a great retention mechanism, similar to a salary increase, that helped owners retain their players. However, this simple P2E game had its own industrial revolution.

Scholars created phone farms of different axie accounts to play as many games as possible, farming as much SLP. It became a job but a better paid than full-time employment (FTE) in certain countries like the Philippines, where a majority of scholars were based. One week of playing Axie Infinity would equal one to three months of their salary, so why would they not take advantage of this.

A new opportunity for earning, but was this the true vision of ‘play-to-earn.’? It encapsulated the earning aspect of play-to-earn at a superficial level, providing players an opportunity to play games and earn from them. There were a variety of ways to earn money within this game, made possible due to the capabilities of NFTs and blockchain technology.

Axie players would use their team of axies to fight other axies, and in doing so, were rewarded with $SLP. Each battle resulted in a gain of $SLP, winning, obviously meant a higher amount of $SLP, but this simple mechanism allowed users to farm $SLP on a daily basis. There were other mechanics involved such as energy which prevented you from playing too many games, but to keep it simple, it revolved around these battles. It took an average of around four to six hours a day for players to complete their tasks, so for some, it was a reduced workload and increased salary.

$SLP itself was an ERC-20 token meaning that you had control of those tokens and had the ability to buy and sell them across decentralized exchanges such as UNISWAP. $SLP also was used for the breeding mechanic within the game to generate more axies. It was an option of burning your $SLP to create more axies or selling the $SLP now for fiat.

Guilds

The owners of axies would grow to own many axies and have a team of scholars through a combination of breeding or buying more from their $SLP. This means an owner would end up with around five to ten scholars working under him, playing on his axies, essentially earning him passive income. On a larger scale, this spawned the creation of guilds within the Axie ecosystem, precisely like the guilds we know from World of Warcraft, Runescape, and other games.

Examples of popular Axie Infinity guilds include YGG and BlackRock. These guilds would delegate axies from owners to scholars, taking a management fee for every SLP earned by a scholar. This spawned an industry where the aim was to reach a minimum amount of SLP per day and eventually where scholars could earn enough to buy their axie team.

A standard split between guilds, managers, and scholars would look like this.

1. Player: 60-70%

2. Owner: 15-20%%

3. Guild: 15-20%

This was not only seen as a business but as a community too. The power of financial compensation within a game spawned worldwide communities. This is play-to-earn.

Scholars in the Philippines would continue to make higher salaries than in their actual jobs. Some scholars would run events and give back to their communities as a sign of thanks and appreciation. It was a dream for many of them, a dream that was too good to be true.

Guilds and managers developed rules and policies for playing under them. You had to earn a minimum of SLP per day, check-in with your manager, and clock in and out. Members had to undergo training and meetings to ensure they were on track for their daily and weekly SLP earnings. This game had produced a different type of job, except it came with the traditional values of a job. Reporting to a manager, reaching the minimum SLP threshold and the threat of expulsion.

This reduced the game back to a job, albeit a temporary job. Token values being associated with the wave of the market meant that it was inevitable that the token was going to drop and scholars' salaries would be worth very little. During late 2021, the market took a turn for the worse and a new mechanic was introduced into Axie Infinity. Axie teams below a certain ranking were no longer eligible to earn SLP until they reached the minimum ranking. In combination, this changed the Axie ecosystem.

Play-to-earn

In this case, Axie Infinity focused on the financial reward earned from playing the game and they did an amazing job. They managed to create an ecosystem that allowed players to earn large amounts of money from a game. However, it was only large amounts during a bear market. The other side of the grass meant that this game would take a hit during the bear market with both user activity and token value decreasing.

With so much money flowing during a bull market, it makes us question whether it was the lifestyle and financial improvement that made the game attractive or the game itself? Maybe it could be a combination of both, but the idea of ‘phone farms’ makes you lean towards the former.  Will Axie continue to be popular during the bear market or will people jump onto the next big game?

The next biggest question is, does one get the same emotional feeling when completing a game vs earning money from a game?  I am not sure, but I assume that each provides a different feeling, and as great as it is to make money, not every game needs that financial incentive. One of my favorite games is League of Legends and when I made money from boosting accounts there, it never felt the same, compared to playing on my own account.

Many gaming YouTubers and streamers seem to burn out over playing the same game over and over, but because their channel is built on a specific game, they see no other option. Financial compensation is one of the main reasons that those YouTubers or streamers continue playing the same game, because it yields them both a higher viewer count and financial reward, compared to introducing a new game to their channel, which is risky.

Another limitation of play-to-earn is that the token value is pegged to the sentiment of the market, meaning your job is vulnerable to the market. Both $SLP and $AXS have taken quite hard hits, and it is probably hard for scholars to continue playing at these levels. Playing under such a turbulent market can be quite stressful, so could there be a way to alleviate that stress?

Exercise is good for the Wallet

Money Making Sneakers

Walk-to-earn is a more recent phenomenon in the blockchain world but it has been adopted by both blockchain and non-blockchain users, as protocols made it much more user-friendly. The most popular protocol StepN, which runs on Solana, introduced NFT sneakers, which would earn tokens based on the number of steps that you walked that day.

StepN made it simple for any user to use their app with little mention of blockchain technology within the app. It looked like and functioned like any other app, however in the back-end, it ran on blockchain technology. I believe this was one of their greatest reasons for success as it enabled the mass market to use their technology without feeling isolated due to complexity. As these sneakers were NFTs, it also meant that each user owned that pair, proving ownership of that pair, thus preventing users from gaming the system.

Walk-to-earn

Walking is an act that everyone should be doing daily, but realistically this is not the case for everyone. Plagued by technology, we have succumbed to less movement throughout our day and more tweeting at our laptops. Would a tokenized version of movement encourage users to walk more?

Improve your health and earn money. Personal trainers hate them.

On paper, this looked like an amazing opportunity, and for some, it really was. That is, only if you were early enough. A pair of NFT sneakers cost around $1000, and you would earn $100 or more a week along as you walked or ran each day for around 10 minutes.  Clearly, it was not sustainable. StepN relies on new users to buy sneakers to continue rewarding the early investors, which is similar to a ponzinomic structure. The early contributors earn the most, but those who are late to the boat, end up losing their investment.

Walk-to-earn, yes. Sustainable, no.

The Achilles Heel

This lack of sustainability meant that it was only a matter of time till the plug was pulled and people would no longer be making money from StepN. However, StepN has taken multiple measures to prevent this by limiting the number of players on StepN and how much they can earn per day. This relies on individuals re-investing into the game and not withdrawing their money, but once there is a greater outflow of withdrawals over inflow, there will be issues for StepN. This is a temporary band-aid.

Disregarding the failed tokenomics in StepN, they actually developed a relationship where the user technically had a win-win scenario, where they completed a healthy activity and received a reward. Unlike Axie, StepNs “side effect” of walking is a positive benefit for the user of the app and instead has few drawbacks to the activity itself. From an activity perspective,walk-to-earn encourages the user to become healthier and take care of their body, by motivating them to walk, whereas play-to-earn can affect a player's health if they become addicted.

This perspective of getting rewarded for fitness could be a game-changer for those who do not normally find exercising appealing. Since fitness can be a slow journey whether that be in skill or aesthetics, these short-term “gains” of tokens could be a great way to motivate individuals to continue exercising. Gamifying tasks has always been a way to motivate individuals to reach their goals and x-to-earn capitalizes on that mindset.

With no current business model, Stepn revolves around the new users to fund old users and so forth until they onboard advertisers to generate income for users. This is a Ponzi scheme until they are able to get external money incoming through advertisements, brand deals, or sponsorships.

Even though the concept of walk-to-earn is good, maybe this pushed it to an extreme as it is not sustainable to pay $100 or more per week for someone to walk. A tweaked model with a reduction in rewards and an earlier focus on advertisement or deals with health insurance companies could make StepN more sustainable. More importantly, these sneakers NEED a price reduction. You can’t expect everyone to get involved with such steep prices…

The future cannot be “Be rich to get involved in x-to-earn” otherwise it becomes a “rich gets richer” game. That is something we are meant to be moving away from, and instead, provide equal opportunities for everyone to get involved.

What does it mean “to earn”?

These x-to-earn examples we have looked at so far revolve around making money. After all, that is the first idea that comes to mind when you say “to-earn”. However, what if we looked at the word to earn from a different perspective.

There are different things that you can “earn” such as respect or skills.

Over time, one earns the respect of their peers and colleagues through the hard word, kindness, or other positive attributes shown. Or, as one “falls down the rabbit hole” they become more knowledgeable in that specific field, increasing their skill set and opportunities.

These are different from a monetary reward as one is not directly being rewarded with money, but indirectly, one can see great success from advancing their knowledge, expanding their network, or developing a positive reputation.

Down the RabbitHole

Learn-to-Earn

Rabbit Hole is a platform that supports and encourages you to complete certain tasks in Web3, such as DeFi tasks like; staking, lending, and borrowing. This practical experience acts as an on-chain resume to demonstrate your comprehension of Web3 protocols and how to use them.

Completing a task such as ‘lending’ and ‘borrowing’ on Aave or participating in a ‘party’ in PartyDAO enables you to claim credentials from RabbitHole to showcase your learnings. Most of the time there are partnerships with these protocols and the users who complete these tasks the fastest will be rewarded with the protocol's tokens, albeit it is a small reward of around $10, but a reward nonetheless. The advantage of RabbitHole is that the financial rewards aren’t the most enticing part of the protocol, but it is the credentials that you receive.

Win-Win

For those entering Web3, it is a great way to become exposed to a variety of dApps and understand they work. This is an x-to-earn that encourages a win-win relationship for both the user and protocol, with no hidden side effects.

This is a new way for web2/traditional workers to showcase their web3 skills to their employers in either web2 or web3 because there is no way to game this system. Unlike other online traditional courses, on Coursera or Udemy, you can’t fake or game the system. Each user can only redeem a task as completed through on-chain verification.

Not only that, but RabbitHole encourages education and creates a fruitful relationship between the user and the protocol. They provide supporting articles to help users navigate protocols and complete these tasks. It is also unlikely for RabbitHole users to become addicted or to lose their money in using their protocol.

Instead, users of RabbitHole are encouraged to explore the web3 space, and in return, they gain online credentials that can be used for their education, career, or exposure to other dApps. Experimentation and exploration are a user's greatest tool, and RabbitHole successfully implements that without feeling like homework.

RabbitHole does not have a token, and with a low reward from protocol tasks, combined with the gas costs to complete these tasks, it is unlikely that users complete these tasks for financial gain.

Learning is a unique experience, and it is hard to compare it to the other two examples I provided. However, RabbitHole has managed to make completing the task and learning more of a priority rather than a financial reward. In contrast, Axie and Stepn users focus more on monetary compensation.

What is true X-to-earn?

X-to-earn has a different meaning for every person, but would you take x-to-earn to mean earning money?

I believe that x-to-earn gamifies our day-to-day experiences, which is a great tool and encourages people to adopt more habits such as running, walking or learning, etc.  However, as the article's theme has been so far, I believe a user's lifecycle is more important than the reward itself. Protocols should strive to create an ecosystem where the task (learning, exercising) is made the priority and the “to-earn” aspect is more of a supplement rather than the main aim for the user.

If a user of a protocol enters an x-to-earn knowing they will make a lot of money at the start, then it is most likely unsustainable and a way to attract users to buy in. Whereas more sustainable protocols encourage x-to-earn to create a complementary relationship between the activity and the reward.

RabbitHole does not see their users as their reasons for success; they see the adoption of protocols and exploration of new protocols as their success metric. As you can see below, RabbitHole has successfully encouraged users to explore protocols with a majority completing all three pathways.

RabbitHole also has a Dune Analytics dashboard to identify how many users completed a task through their website, exploring other metrics that you can see below. Explore more of their dashboards here.

Does that mean games should stay away from play-to-earn?

Not at all. Play-to-earn will be part of the future, and CryptoKitties and Axie Infinity have definitely showcased the power of play-to-earn. However, I do believe that we should stay cautious, as we do not want to create games that are attractive solely for the financial incentives and not for the gameplay.

Simply, there is one key question to ask.

“Would you play this game if there was no token?”

The joy of playing as Ezio Auditore in Assassin's Creed or Teemo in League of Legends could be lost if players solely played these games for financial incentives. Sure, you might still play the game, but do you think you would play it the same way if there were no financial incentives?

The Future of X-to-earn

Currently, X-to-earn will probably revolve around being the most financially attractive, but in the more distant future, x-to-earn will take a different shape. All these protocols of sleep-to-earn, sex-to-earn, and eat-to-earn are funny, but they aren’t groundbreaking.

The future of x-to-earn will gamify superficial relationships and tasks that we complete daily and allow users to “reward” someone. One example is MintKudos, a protocol where you mint kudos as soulbound tokens to capture community contributors. As non-transferrable tokens, this would allow communities to identify the popular community members on a continuous basis.

If these kudos could be customized to last X amount of time, then kudos could last the same length of a season or cycle that a DAO run, to showcase those members who have earnt the respect of their peers and could be rewarded via monetary compensation or promotion. Users will be “earning” kudos from other users for their hard work. In this way, the kudos is not the ultimate aim but a side effect of one’s hard work and commitment.

Closing thoughts

As with most concepts in the space, we are in an experimentation phase. Research and experimentation will help us understand the power of the x-to-earn and how we can implement this mechanism in our day-to-day lives.

However, with new x-to-earn protocols coming, I will continue to question the relationship between the task and the reward which links to the longevity and sustainability of these protocols and the user's lifecycle.

• Do I want to earn a token for every task that I complete?

• Do I want to be rewarded for this specific task?

• Do I want to pay X amount of money to be involved in an x-to-earn protocol?

• Can I handle another “game” to manage?

Context, Context, and Context

Context is essential for voting in general. Still, to signify your conviction in a voting method like QV, it is paramount that a voter understands the distinctions between each voting option. In the current system, quadratic voting is a great tool when there are various options, and the result is a narrowed-down list of options for moving forward. An example could be a DAO deciding on essential topics for them to focus on in the next quarter.

However, for individuals to vote in these situations, they need to have as much context as possible. Otherwise, voters will vote for the options they are familiar with. One way could be for specialized individuals to write a short overview explaining the reasoning behind a voting option with further links. Hence, voters have a basic overview of all the possibilities.

Reputation

The reputation of a voter helps individuals or token holders identify who are trustworthy individuals. Quadratic voting signifies a voter's conviction to specific choices, making it more helpful to analyze other voting mechanisms, and in doing so, one can build a reputation among voters.

If voters continuously vote in a certain way:

1. Split votes equally (The Even Steven)

2. Vote for one choice (The Top Heavy)

3. Varying weights for each vote (The Informed)

Using this information, we could assign badges to voters and delegates so people can easily distinguish how that individual votes, making it easier to delegate voting power.

Weighted Power

Following reputation, those individuals who are long-term contributors and trusted individuals could increase their voting power by X amount since their opinions are more trusted and valued. Weighted power can also be applied to specific roles. This means that instead of trusted individuals getting 100 votes like everyone else, their votes are increased by a factor of x1.1 to get 110 votes instead.

The numbers are arbitrary to showcase the power of weighted power. In this case, it's a 10% increase in votes which equals just over three votes, which might seem minor, but it still has an influencing factor.

Maybe weighted power is unnecessary since it ruins the equality of VQ, but it is a concept worth exploring.

Delegation in QV

Voter apathy is one of the most significant issues in DAO governance. With the failure of DAOs to capture a voter participation rate of 5%, one can imagine the danger of a lack of participation. A hostile takeover, treasury liquidations, and much more.

Quadratic voting has been tested on a small group of well-informed individuals like in Optimism retroactive public funding or Colorado voting. Employing this mechanism in a DAO will be much harder than anticipated as DAOs can have many more voters. Not only that, but a lack of understanding or time commitment might influence a casual voter to make the easy choice of splitting their votes equally. This isn’t a good or bad tactic; it simply does nothing. If each vote goes up by an equal amount, it is like nothing happened.

The most common issue with voting is that it takes too much time and happens too often. QV faces similar problems.

Delegating the artificial tokens used in quadratic voting would reduce the need for voters to participate and can trust more informed individuals to have a say. This mechanism could work similarly to the delegation systems we see at Maker, ENS, and others, except a user, would delegate their “artificial” voting tokens to another individual.

However, there are some drawbacks, like delegates gaining too much power. With specific limitations, one could implement an upper bound of delegations that a delegate can receive without centralizing a protocol. Reaching an equilibrium of increasing governance participation and centralizing a protocol will be an ongoing mission within decentralized governance. However, exploring how delegation in QV could tackle this will be interesting.

In doing so, a protocols token is separate from governance and instead focuses on the protocol's success. Delegates can also be compensated for their work… because delegates deserve compensation! Using various factors such as; (i) individuals delegated, (ii) voting participation, and (iii) forum participation can help decide a delegate's pay.

User Experience

User experience is key to the adoption of quadratic voting. We can’t expect everyone to remember a quadratic equation from school, so implementations and explanations should be simple. One of the most powerful tools for adoption is simplicity, and QV needs that more than other voting methods.

Simulating this experience for individuals would help adoption as voters have an opportunity to become acknowledged with the format. Due to the steep learning curve, people are already deterred from getting involved in DeFi and DAOs, so we must guide QV voters through the journey to make it as simple as possible.

Keep in mind that QV adds another layer of difficulty to governance. Implementations such as “sliders” highlighting votes and voting power would help. This diagram above is an excellent idea of what it can look like, albeit with fragmented votes, it will be more complicated.

Fragmented votes

The quadratic formula only works backward to get the whole votes.

Using other numbers like 27 would get fragmented votes like 5.19, which can complicate the user experience. Tallying votes face no difference, but voters might feel deterred by this experience as it is unusual to vote in fragments.

Once again, this links back to the UX, where we must make a distinction between whole and fragmented votes. Explanations of these slight distinctions will help the voters understand what is happening in the voting process.

A simulator and a quadratic formula calculator could be presented with each voting situation to help voters understand how their votes would turn out in different scenarios before locking in any votes.

Closing thoughts

Quadratic voting is an interesting mechanism that tackles many issues in the commonly used model of one-token-one-vote, but it has many drawbacks of its own. With it being a more complicated voting mechanism, it brings other problems, such as comprehension and adoption.

In saying that, QV is in its early stages of exploration, and I look forward to experimenting further with it and exploring some of the ideas outlined in the post.

It is a voting system that is notably gaining more traction in the blockchain space and is currently deployed in various democratic institutions and corporate governance.

The Fundamentals of Quadratic Voting

Quadratic voting revolves around each voter having x amount of tokens used to vote, meaning they can vote for multiple options. However, if they want to vote for the same option again, the next vote will cost more tokens than the previous vote.

This voting method follows the quadratic formula, hence the name quadratic voting.

Voters’ cost = (Number of votes)^2

If Bob has 50 tokens and votes for options A, the initial vote will cost one token. If he wants to vote for option A again, the 2nd vote will cost him four tokens, and then the 3rd vote will cost him nine tokens, etc.

This way of voting means that you can vote for multiple options and emphasize your feelings for an option by casting multiple votes at the cost of extra tokens.

In the blockchain space, this reduces plutocracy, as everyone starts with the same amount of voting tokens and hopes that people who care about the issues will cast additional votes to an option to signify their conviction.

Key Points of Quadratic Voting

Currency

If an actual currency is utilized for quadratic voting, this will make the system vulnerable to a pay-to-win model where wealthy individuals could buy more votes. Quadratic voting involves an increased cost for casting multiple votes on the same option. This mechanism would prevent voters with less capital from being able to signify their conviction for an option, thus supporting the wealthy who have more money to deploy.

Now it is expected to use artificial currencies so that everyone starts with an equal amount of voting power, thus an equal say. Using an artificial currency would prevent affluent individuals from taking advantage of their wealth and instead moves the focus of the voting to those who deeply care about the issues.

Sybil attacks

Sybil attacks are the most significant weakness when using a quadratic voting system. A Sybil attack involves individuals with numerous pseudonymous identities to influence community-based decisions. Using an artificial currency is where Sybil attacks are the strongest, as they can vote for free from as many accounts as they wish.

If individuals could create 5, 10, or even 100 accounts, they could easily manipulate the vote in their favor, thus rendering quadratic voting useless. Due to the nature of quadratic voting being open-source and peer-to-peer, there must be anti-Sybil identification software to prevent these attacks from happening.

One way to tackle this issue is to use proof-of-human systems like BrightID or Proof-Of-Humanity. These social identity networks prove that you are only using an account, and your identity is linked to this account. If quadratic voting systems integrate this network, then it will be harder for Sybil attacks to occur since only verified individuals would be able to vote.

Collusion

Collusion is also a potential thresh to quadratic voting. An individual or group could bribe voters to vote for a particular issue, a problem made worse with artificial currencies. Due to the power of signifying your conviction in this system, bribery could easily manipulate the system.

One way to avoid this is to keep all voters anonymous during the voting period. Voters can’t be targeted if malicious actors are unaware of who has voted or not, nor can they confirm if someone they have bribed has voted in their favor until the voting period ends.

Preventing bribery will be a continuous task, and bribery strategies will only get more complex as time goes on, but we must tackle these issues. Otherwise, bribers will outweigh the majority and vote for the option that favors their interests.

Quadratic Voting in Practice

Colorado

The Democrats used quadratic voting in 2019 to decide on their priorities for the next two years, with 109 possible options. They used an artificial currency, with each member given 15 tokens to select an option. Soon they realized 15 tokens was too little, and after reviewing their options with economist Glen Weyl, they increased it to 100 tokens.

Using the quadratic formula above, one individual could give up to 10 votes to one bill. After the vote concluded, the Equal Pay for Equal Work Act won with a total of 60 votes.

This proved to be a massive success for quadratic voting, as there was a clear link between the most discussed topics compared to the bills that garnered the most votes.

Germany

Germany shares another familiar story with the Democrats in Colorado; as Volt Germany, a pan-European party, used quadratic voting to determine the most valued topics in their party manifesto.

Instead, they opted for a ‘burner wallet’, only used for this vote. With their pre-funded wallet, individuals voted for their preferred options, which would signify the most popular topics within the party. Thus creating an anonymous priority list of topics that was immune to social pressure.

Researchers analyzed the voting patterns of this vote and noticed that the topic of Education had garnered a lot of support both from low-and-high conviction votes. In contrast, other issues like the Renewed Economy showed a more skewed vote, with less interest, as most voters did not show their support for it. This type of analysis helps rank the issues of importance for a community and lets them realign their values if necessary.

Summary

Quadratic voting is a system that is rarely used as it is still new but has shown a new path to governance in both the traditional world and the blockchain space. It still has a lot of problems to overcome, but it will be a great way to tackle some of the issues that other voting solutions, such as coin-voting, have as it reduces the plutocracy, the chance of bribery, etc.

I look forward to seeing how DAOs might implement quadratic voting into their governance systems in the future and seeing the different use-cases that will arise, such as the priority rank-list used in the examples. Check out this website here to try quadratic voting for yourself.

Protocols need to capitalize on themselves to ensure the ongoing operations for the foreseeable future and have enough funds to make investments and partnerships with others.

DAO treasuries, in some cases, are worth up to billions of dollars.

However, these treasuries are mainly filled up with a protocol's native token, which, as we will find out, is an inflated number.

Inflated Treasuries

As you can see from figure A, treasuries of these blue-chip protocols mainly consist of their native token.

A token that is considered volatile due to the speculative market will finance the operations of a DAO. It is usual for these tokens to change in value drastically, but how can you ensure the longevity of a protocol if the value of the treasury changes daily.

The Uniswap token has decreased by around 50% in the past three months. Due to a majority of Uniswap’s treasury being in its native token, we can assume a significant reduction in the value of the treasury.

Other protocols shared a similar fate, losing a majority of their treasury to the bear market. Looking at the treasury value on Openorg below on 5th May 2022, let’s compare it to October 2021.

• Uniswap had a value of $10 billion in its total treasury in October 2021

• Compound had a value of $900 million in its total treasury in October 2021

• Lido had a value of $850 million in its total treasury in October 2021

This lack of diversification is detrimental to a protocol. These blue-chip protocols in figure A have a lot of money in their treasury and can potentially stomach these changes, but it does not mean that it is effective. It is never wise to waste potential money, especially when it can be stored for a bear market.

Crypto winters (bear markets) can last around two to four years, so it is crucial to have enough money in the treasury to ensure a similar runaway length. Otherwise, protocols will see themselves going bankrupt.

Treasury management will be tackling the problems I addressed above, but how should we categorize native tokens of a protocol?

Native tokens aren’t as liquid as they seem.

Taking inspiration from Hasu’s article on DeFi treasuries, we should recognize that native tokens within a protocol could be considered as unissued shares rather than actual tokens. Hasu argues that they should be regarded as unissued shares as they are not completely liquid and can not be regarded as functional money.

This point is emphasized as Hasu explains that Uniswaps could not sell 2% of its treasuries without impacting the price of UNI by 80%. If we take this perspective, most treasuries can’t access the majority of their treasury without damaging the token value. Therefore the actual value of a treasury that is accessible is much smaller than the treasury itself.

Treasury management

Now that we understand the dangers of native tokens let’s reiterate the reason for treasury management.

• Maintain an everlasting runaway

• Diversify (Native tokens, Stablecoins, ETH/BTC, blue chips, and risky investments)

• Inflow > Outflow

As we have identified, it is impossible to maintain a runaway, solely using native tokens due to a volatile nature, so how should one diversify?

Stablecoins

Stablecoins (DAI, USDC, USDT) are the ideal place to start. Immune to the volatile nature and a more accessible currency to manage the balance sheet, DAOs can pay salaried contributors in a currency that is easy to understand.

Since stablecoins are not affected by the bear market, it means that protocols would be able to maintain or even increase their spending during a bear market. Compared to an only native token treasury, a decrease in value would significantly damage the available financial options, especially if there is a 70-90% pullback, which is typical in a bear market.

Stablecoins Management

Immediate Liquidity

This can be used for the next few months, such as salaries, grants, software expenses, etc. There should always be immediate liquidity available to cover these costs for the next 3-4 months.

Staked Stablecoins

Staking stablecoins is a great way to take advantage of idle money. There is a difference between scared money and idle money. Protocols may consider it too much effort to employ these staking tactics, but they can be very fruitful, potentially generating hundreds or thousands of dollars per day.

However, a DAO would need to identify which protocols they would use to stake their stablecoins, as there are smart contract risks that come with this. Specific protocols have been battle-tested, undergone multiple audits, and no major bugs would be seen as the most suitable. DAOs could create a set of rules that define what makes a protocol safe enough.

There are protocols like Element Finance, Curve, and Yearn that you can use for a medium-term or long-term strategy ranging from 6 months to a year. These fixed or variable APR percentages would ensure an income that could be used for operating costs.

For example, if a protocol staked 10 million USD into protocol at 4%, it would generate $400,000 per annum, which can be spent in various ways.

How to get stablecoins

Shreyas from Llama has outlined five ways DAOs can diversify into stablecoins, so I recommend reading that article.

Here is a summary:

• Earn revenue in stablecoins

• Sell native tokens for stablecoins

• Form strategic partnerships

• Borrow against native tokens

• Collaborate with stablecoin issuers

ETH/BTC and Blue-chips

These are more investment-based, but they are a great way to diversify from the native token, especially as ETH and BTC will have more minor dips than other tokens. ETH and BTC can be seen as a conservative investment in the crypto space as you are still exposed to the potential upside of gains while avoiding the volatility of holding your native token.

This approach is probably for more mature DAOs when they have built a large treasury and are looking for ways to maintain it, compared to less mature DAOs trying to build their treasury.

Another way is to build DAO to DAO partnership with blue-chip protocols and exchange native tokens for another blue-chip protocol token. In this case, Aave could exchange $AAVE for $INDEX from IndexCOOP through a partnership, that benefits both and now both protocols are exposed to another token. This increases the variety within a DAO’s portfolio and builds partnerships that can be leveraged through meta governance.

Summary

Even though it has become common knowledge that DAOs should divert a portion of their treasury into stablecoins to ensure easy accessibility at difficult times, there are no standards on how DeFi protocols should diversify their treasury.

This lack of standardization in treasury management damages protocols as they are vulnerable to various risks when managing a treasury. Identifying the best practices in treasury diversification would help protocols manage their funds more safely, thus boosting contributor and token holder confidence.