Don’t sell your governance tokens
Why DAOs should sell debt instead of governance tokens
DAOs need capital to grow
DAOs need capital to acquire labor so they can accomplish work. The more capital they have access to, the more products they can build, which consequently produces more capital. This flywheel effect of capital fueling growth shows the importance of funds to the success of a DAO. Currently, a prominent way DAOs raise money is by selling their governance token. There are many issues with this approach, which were brought to light when 0xMaki proposed SushiSwap raise money by selling SUSHI, their governance token.
The pitfalls of selling governance tokens
On July 7th, 2021, 0xMaki, the founder of SushiSwap proposed that 25% of the SushiSwap developer treasury be sold to venture capital funds for $60M to fund the protocol’s future development. This upset many in the Sushi community and the proposal was withdrawn after 62% of the community voted against it. Why was the proposal to sell governance tokens rejected?
Takes voting power away from the community
A DAO’s governance token allows the owner to vote on future changes in the DAO. Selling a substantial amount of governance tokens would take voting power away from the Sushi community and put it in the hands of a select few — something the community was not excited about.
Increases price influence of a few actors
A more centralized ownership of the Sushi token would increase the uncertainty of price stability for holders. Individual parties who own a large amount of the token would be able to “dump” on the other holders, selling their stake for a profit while the other holders are left “holding the bag” with the depressed price. As 0xChimp, a community member, wrote in the SushiSwap forum, “Smooth talking tradfi suits trying to schmooze themselves into buying your bags at a discount only to dump on you in 6 months. Thanks but no thanks.”
Gives up protocol revenue, inhibiting growth
Selling a governance token like SUSHI that collects revenue from the protocol is equivalent to selling future revenues. While traditional companies can choose whether or not to pay a dividend to their shareholders, DAOs who share protocol revenue with their token holders do not have this luxury. Revenues from the DAO’s protocol are automatically distributed to the token holders. Any revenue from governance tokens sold from the SushiSwap developer treasury could no longer be used to hire labor and accomplish work, inhibiting the future growth of SushiSwap.
It is unsustainable
In SushiSwap’s case, and many other DAOs, there is a fixed number of governance tokens. This makes selling them an unsustainable way of raising capital. Eventually, the DAO will run out of governance tokens to sell. A sustainable alternative avenue to raise capital is to sell debt.
The benefits of selling debt
Selling debt has none of the aforementioned problems a DAO faces when selling governance tokens. Using credit, a DAO can retain its voting power, not have to worry about being dumped on, keep its protocol revenue, and sustainably raise funds. Also, borrowing money is more attractive to organizations in a high growth stage, which describes most DAOs.
Benefits of debt for high growth DAOs
If a DAO believes their governance token has a strong chance of appreciating in price, why would they want to sell it at the current price? Borrowing money now to invest in growth and paying it off later by selling a greatly appreciated token makes much more sense. Or, even better, using increased protocol revenue from the growth funded by debt to pay off said debt and never having to sell governance tokens.
How can DAOs sell debt?
At Porter Finance, we are building out the first bond protocol for DAOs. Once launched, DAOs won’t have to sell their governance tokens anymore. They will be able to raise the funds crucial to their growth by selling bonds to fixed income investors. If you’re interested in learning more and getting involved before our launch, join our Discord community and follow us on Twitter.
