Ownership in Web3
Deciding who should own your project is a critically important step in the path to decentralization. This article outlines some considerations to ensure the long term alignment and success of your network. Protocol wars have only just begun!
What is Ownership
Before getting to “who” should own your decentralized project, maybe we should answer the more basic question of what ownership means in the context of crypto.
On one end of the spectrum, ownership literally means “you own every aspect of this project” (all current smart contracts, assets, as well as any future value accrual mechanisms that might arise from them). There are very few decentralized projects in this category, one of the lone exceptions might be DXdao, which has even decentralized their community managed website.
For the majority of projects at this stage, “ownership” just means having some level of control over some aspect of a project / protocol. There is a huge deal of possibilities here, including even just the promise of future ownership / control (ie, not even giving anything away but a worthless token). Stakeholders for these kinds of projects are relying heavily on trust and good faith in the founding team / members as there is rarely any ownership in the legal sense of the word.
What further complicates this topic is the fact that token ownership does not always equal voting power ownership. In many cases, there is a complete overlap (such as COMP), but in other cases, they are not (such as DXdao, which uses non-transferable voting power in the form of reputation for contributors, along with the DXD token which was given to funders).
There are many different factors that may affect the initial and ongoing ownership structure of a project, including:
- Does the project need to achieve sufficient decentralization for legal reasons? Is the project anonymous?
- Who are the project stakeholders, and what are their investment timelines and preferences? Do they require fixed supply tokens which seems to be in style at the moment?
- How strong is the project’s moat?
- How reliant is the project on the community / external contributors? How reliant should it be?
- Who is building the project? How sustainable is it? Does the project have a source of funds to pay people and to grow a community?
- Do you want to use something that is “out of the box”?
- Can the project give ownership of its assets to token holders? In some cases (like Rarible), this isn’t yet possible.
With this in mind, let’s take a look at four very different projects and see where they stand.
Where they stand: YFI issued 30,000 standard ERC-20 tokens in total. These were initially issued out to yield farmers. Since then, tokens have either remained in the hands of early yield farmers, or gone to speculators. Token holders have technically no control of the protocol (yet), but they do signal using Snapshot, which is executed using a Gnosis Safe.
Contributors to the project include a small group of full time builders active in the community forums. Many of these individuals get paid full salaries in stablecoins (based on the Gnosis Safe transactions). It’s unknown to what extent contributors overlap with YFI token holders.
Thoughts and concerns. Until it’s addressed, there seems to be a poor incentive alignment between YFI holders and contributors. Contributors could potentially fork and reward themselves more handsomely (although this would likely cause irreparable damage to the brand and reputation of stakeholders, so there is likely only a small risk of this). Voting power also doesn’t really seem to be in the right hands. If voting was ever put entirely on chain, there would be a serious risk to the project since there are a number of whales out there who would have outsize influence.
Where they stand. Uniswap tokens were issued to four key groups (investors, team, community, advisors), distributed over 4 years. After 4 years, the project plans to have a yearly inflation of 2%. Token holders control the Uniswap protocol parameters. The DAO has not been used to take any actions yet, mainly because meeting quorum hasn’t been achievable. Contributors (at this stage) seem to be limited to the Uniswap team.
Thoughts and concerns. The decision of Uniswap to have inflation rewards past the 4 year vesting period, as well as a large number of UNI tokens available to the community, is a great direction. This should help build a community with a pool of funds for contributors. However, there is a real threat from projects like SUSHI, which don’t need to deal with the baggage associated with founder / investor tokens and higher rewards. It’s hard to predict what the effect of this will be over 4 years…
Technology is generally not a very good moat, while communities and ecosystems are. Though Uniswap hasn’t always prioritized community building in the past, it remains to be seen if this will change moving forward.
Where they stand. DXdao has a two-token DAO, with both DXD holders (which invested in a bonding curve) and Reputation holders (with non-transferable voting power). DXD holders (so far) don’t have any voting power and thus ~no control. Reputation holders control all of the DXdao products and are for the most part limited to contributors to the project.
Reputation can be minted by the DAO in perpetuity. DXD tokens can only be obtained by purchasing tokens from the bonding curve, or by buying them on the secondary market.
Thoughts and concerns. Voting power in DXdao is held only by Reputation holders. DXD holders are currently unrepresented in the DAO, a problem that has been highlighted and is being addressed.
There is no way for DXdao to mint DXD tokens, which means they depend on funds raised or from revenue sources to pay members, which limits the flexibility of incentives. This design decision might not have been ideal, but time will tell.
Where they stand. Token holders include team members, investors, and speculators. MKR token holders can vote on proposals submitted by the Maker team. Initially 1M MKR tokens were created, which were sold and distributed to the public, team and investors. MKR tokens are burned over time with protocol fees.
Thoughts and concerns. Maker has been successful in building network effects around DAI. With no inflation, DAO treasury, or ability for the public to submit proposals, Maker might have a hard time fostering a community of dedicated builders around their project to be sustainable longer term. On the other hand, maybe Maker won’t have a major need for builders in order to continue being useful… ¯\_(ツ)_/¯
Projects face tough choices when trying to structure their governance since there are often very high risks. New projects should consider some of the factors above, and get familiar with some of the learning points from other projects. As long as you don’t screw up too badly, it’s always possible to shift strategy over time (which I expect we will see more of as the space matures).
In future articles, I will explore which directions I believe projects should be heading and why. Feel free to reach out any time at @eric_rsno on Telegram or Twitter if you have any thoughts, comments, or are looking to DAOify!