Meet the SAFG: DeFi’s Emergent Framework for Participatory Investing and Protocol Development

Last week, we saw the successful alpha launch of Futureswap, and this week, the first public voting on Compound’s governance protocol is taking place. While seemingly disconnected, these events in the DeFi space point to a tectonic shift in the nature of crypto investing for both individuals and institutions.

This category of change can be characterized by a framework I’m calling the SAFG: the Simple Agreement for Future Governance. While conceptually similar to Y Combinator’s SAFTE (the Simple Agreement for Future Tokens or Equity; covered below), the SAFG is meaningfully different. It is an evolution — an earned right based on participation — that enables decentralized protocols to more effectively launch, grow, and govern themselves with their communities.

But the SAFG is not a contract that a company will give you to sign. Rather, the SAFG is an agreement, in code, between the protocol and its community. And it states that when you organically invest your time, resources, and energy into the project, you literally earn the right to participate in future governance decisions. It’s that simple, but as you’ll see, this simplicity is deceptively powerful.

It’s About Participation and Governance

At its core, the SAFG is about two things: Participation and Governance. And from this statement, we can define its evolution more clearly:

Today: Investors buy into SAFTEs.

Tomorrow: Anyone participates to earn SAFGs.

The SAFG uncovers a blueprint for how DeFi projects can launch faster, create economic models more tailored to their communities, and align the long-term interests of their participants to the growth of their protocol.

Fundamentally the SAFG shifts us from a world of “buying to own” to one of “participating to govern,” which can ultimately result in more successful protocols and healthier communities.

The SAFTE’s Shortcomings

To understand the SAFG, let’s first look at its progenitor, the SAFTE.

When the world needed a simple, standard method to bring capital together with early stage founders, YC introduced the SAFE (Simple Agreement for Future Equity). This became the industry standard for structuring early stage deals. As the crypto market developed, and venture capital needed a uniform way to access these new deals, the SAFE (d)evolved into the SAFTE, which accounted for conversions between tokens and equity.

While the SAFTE iterated on a widely accepted instrument based on historical deal structures, it didn’t fully align with crypto’s ethos of open access. The SAFTE restricted purchase to accredited investors and did little to improve incentive alignment with the protocol’s actual users.

The SAFG Framework

The SAFG introduces a framework for how teams can design — and communities can approach investing in and collectively evolving — decentralized projects. It can be summarized like so:

People who participate in the protocol earn governance tokens that can eventually be used to vote on protocol changes.

The SAFG framework is so simple that its most powerful aspects are easily overlooked. But don’t let its simplicity fool you. The SAFG optimizes for the creation of protocols that are minimal from an early feature standpoint, yet maintain maximum flexibility in critical venues (e.g., regulatory, economic).

The structural pattern for launching a protocol with the SAFG is that its governance tokens:

• Can only be earned through authentic participation in the protocol;
• Are likely non-transferrable and cannot be acquired on the open market at launch;
• Guarantee no additional benefits (e.g., economic, at least initially) beyond participating in protocol governance; and
• Are the primary mechanism used to vote on protocol changes.

That’s right; SAFGs are non-transferrable, non-income generating tokens that only guarantee holders the right to vote on protocol changes.

In an instant, protocol upgrades become even more interesting.

To understand how the SAFG serves as a potential roadmap for progressively decentralizing and evolving a project over time, let’s look at the recent launch of Futureswap’s trading platform and Compound’s governance protocol more closely.

Futureswap’s FST Token

Last week Futureswap launched a decentralized futures exchange that will be owned by its community and governed through the use of its governance token (FST). This token is non-transferable and cannot be acquired on the open market; the only way to acquire it is through active participation in the market as a trader, referrer, or liquidity provider. While FST holders earn discounted trading fees for holding the token, they do not capture income from holding the token.

Compound’s COMP Token

This week, using its new governance token (COMP), Compound is conducting its first decentralized vote to make meaningful protocol changes. The attributes of the COMP governance token are, once again, that it is non-transferable (thus it can only be earned by users of the protocol) and that it only guarantees the holder the right to participate in the governance process. Nothing more.

Why do we see this pattern occurring in two different places? What’s so interesting about the simple guarantee of being able to participate in future governance?

The Benefits of the SAFG

As it turns out, the SAFG’s illiquid, non-income generating governance tokens bestow a number of benefits on projects and their communities, including the ability to:

• Improve governance participation rates and decision quality through long-term interest alignment;
• Ship lighter, tighter protocols — faster;
• Improve regulatory compliance in various jurisdictions; and
• Enable optionality to introduce tailored, value-capture mechanisms at the right points in time.

Let’s look at what these mean in practice.

Improve Governance Participation Rates and Decision Quality Through Long-Term Interest Alignment

Because governance tokens are only awarded to those who participate in the protocol and they offer no additional incentive, governance remains with those who most heavily use the protocol for its intended purpose. Quite naturally, these heavy users understand the protocol intimately and will likely hold strong opinions, making for more informed governance decisions. This is the opposite of the tragedy of the commons.

Ship Lighter, Tighter Protocols — Faster

Distributing SAFT-style governance tokens to the people who use the protocol most, and care deeply about its long term success means that protocols are now working with organic, engaged communities. And when project teams realize their community’s ability to vote with speed and intelligence on critical upgrades, they are freed up to optimize for early protocol designs that have reduced surface area and are laser-focused on testing core assumptions.

Improve Regulatory Compliance

With a lightweight protocol and no hint of transferable income-bearing assets in sight, SAFG protocols can launch quickly in almost any regulatory environment. They can then upgrade themselves, in a decentralized fashion, in ways commensurate with the community’s needs and desires for future development.

Enable Tailored Value Capture at The Right Moment

Now, the above items are powerful, but tailored value capture is perhaps the most interesting aspect to understand.

SAFG communities consider protocol upgrades as part of their engagement duty. And in these communities, authentic participation simultaneously builds a corpus of knowledge that can be applied to protocol upgrades when the time comes (if ever) to vote on value-capture mechanisms best suited for the protocol.

This is a complete inversion of the previous paradigm.

Historical product development paths forced products to market with economic models baked in, meaning the financial hypothesis had to be right from the start. You can only tweak things so many times when the end users aren’t fully invested in the process.

But with SAFG protocols, we no longer need to shoehorn economic models into products at the wrong moment. Instead, teams can trust an aligned, patient, and participatory community to design, vote on, and implement value capture mechanisms best suited to the protocol when the time is right.

The magnitude of this shift cannot be overstated.

DeFi Capital is Participatory Capital…

DeFi users are early adopters, and when a new protocol rolls out, they risk real capital from day one. As a result, this caveat emptor community is vocal in conversations dealing with security audits, novel mechanics, and potential risks. We are witnessing the emergence of DeFi-grown tools for how protocols can more effectively launch, learn from their communities, evolve their incentive structures, and rapidly decentralize themselves.

…and Participatory Capital is Writing the New Rules

I predict we’ll see numerous flavors of the SAFG in the coming year(s), and that we’ll witness protocols rapidly fine-tune community incentives to organically scale faster than their predecessors.

Because investment in an emerging protocol is no longer an open-market purchase; it’s joining a community and using the protocol. In the process, you publicly prove or disprove the protocol’s viability while simultaneously proving or disproving your original investment rationale. It’s a double win for those who know how to play the game.

Yes, DeFi is quickly changing the world.

And the difference between investors who actually use the protocols they’re investing in and those who don’t grows more apparent with every block mined.

The ideas for the SAFG framework emerged from countless protocol and economic design sessions with my friends and colleagues at IDEO CoLab Ventures and a number of amazing people, projects, and teams in the DeFi space.

Looking to play by new rules? Get in touch; DMs are always open to people pushing boundaries.

Sincere thanks to my teammates Dan, Ian, Joe, and Tara for their feedback.

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