SubDAO Projects - Experimental Model

[Icedcool]

Title: Subdao Projects - An experimental model
Author(s): Icedcool🏴#4947
Date Created: February 23rd, 2022
Date Posted: March 30th, 2022

TLDR:

• SubDAO model for projects to allow long term viability, governance, utility and involvement.
• To enable operations and independent governance, projects Tokenize and reward contributors and the DAO with their base token.
  • Specific distribution is dependent on the project, token, etc.
• To enable alignment with BanklessDAO, the token is paired at a significant amount to the native token (BANK) then pairs to BANK in liquidity pools. (say 10 tokens to 1 BANK)
  • This allows contributors to continue to be paid in native tokens of the project, while accruing value to the BANK token.
  • Additionally, if the project takes funding, this would require the funding to FIRST purchase BANK, then purchase the project token.
    • This would be a Win/Win for all parties.
    • This would be enforced with a written agreement between the project and the DAO.

Summary:

Long term projects(including dev) projects are hard, and take time to develop revenue and find product market fit(ex, AWS and many many others).

This model is to create an additional funding path forward that allows continued work and operational independence while also creating value accrual and alignment with the DAO.

Background:

As subDAOs continue to develop throughout the DAO, some of the challenges that we have are:

• Operations within BanklessDAO
• Alignment with BanklessDAO
• Long term funding

This model is an attempt at a solution around this, that seeks to solve all three challenges.

Challenge 1: Operations

With a token, the subDAO is free to operate and design governance as it sees fit, using whatever specific DAO tooling it also sees fit. A secondary token enables many different governance opportunities, from voting, token gating, and more.

Challenge 2: Alignment with BanklessDAO

The major alignment mechanism of this model is the liquidity pools paired to BANK, and only BANK (at least initially). This creates value alignment to BanklessDAO through the use of the pairing to BANK token.

If contributors are long term aligned with the project, they will hold the token. If they need to sell to an open market token, contributors could sell their token to BANK if they so desire.

If investors are interested in funding the project, they would have to purchase BANK(upward pressure), then purchase the secondary token. Because the LP is an isolated pair between BANK and the token, in the LP this would drive up the price between the token and BANK while BANK would also accrue value on the market in relation to other tokens(eth).

Example:

• Someone wants to invest 100 ETH into BountyBoard.
• They would purchase 100 eth of BANK (current estimates 5.74M BANK at 179K USD valuation) and would drive the price up 63%.
  • 100ETH≈ $284,479.00
  • 5.74M BANK ≈ $179,987.75
  • Bank Price would go up 63% (CHECK MY MATH!)
• They would then purchase the secondary token with the 5.74M BANK
  • 5M BB/500k BANK LP pool
    • 10/1 valuation
    • To be provided by the subdao
  • This trade would put 1 BB token = 1.14 BANK
    • At first glance, this seems fine if the funding comes in and doubles the price of the token.
    • BB contributors could swap to BANK to use for funding, which would be higher across the board.

Additional short term opportunities is that members can signal their belief in projects by swapping for the tokens, and longer term opportunities is to create project indexes that allow people to buy project groupings with $BANK.

I could see this translating into a website where people could see all the different projects and pools that they could swap tokens for.

Lastly, if someone were to independently create a pairing to an additional token, that would most likely be a success scenario where the token is so valuable that people want additional routes to purchase the token.

Challenge 3: Long term funding

By projects tokenizing they can reward contributors with their native token and would be less reliant on the DAO to continue to go back for funding.

Additionally, having a native token allows for project defined engineering and utility to design and implement governance and token utility. This includes ve options, escrow, staking, etc.

Specifications:

• Projects request funding in whatever form they need
• Projects would mint a token, and then decide on a distribution amongst core contributors and distribution for liquidity.
  • This mint would need to be an adequate enough supply to both be distributed to core contributors, compensate future work, AND provide liquidity to the pool.
• The project would then create a liquidity pairing of their funding to the BANK token.
  • The pairing price point would need to be decided upon by the project and implemented to support alignment. (10 token <> 1 BANK)

Success Metrics or KPIs:

ACKNOWLEDGEMENT:

THIS IS AN EXPERIMENT.
I’m hoping we don’t rug ourselves, but at first glance this seems like a very cool way to support the long term alignment of projects and the DAO, while allowing projects to design and express unique governance and tokenomic systems.

Risks:

(to name a few)

• Token challenges
  • If a core contributor decided to sell all their tokens for bank, it could cause problems for the pool
    • Major decrease in price of token to BANK
  • Regulation
• Token engineering overhead
  • Need simple and easy method to mint tokens

[jonvaljonathan]

Iced this one solution and I support you if you want to try it!

I guess I’ve always preferred the sort of venture type model where bDAO multi-sig receives project tokens in return for BANK funding. My vision hasn’t had much traction.

I say go for your option and see what happens! Maybe design some sort of risk-mitigation mechanism too?

A question I have is: what happens if the project becomes extremely valuable? The BANK peg would stick at 10 project tokens to 1 BANK?

[simonziou]

Great idea. Trial and error is a practical method, just need to control the risk. I remember there is a risk expert on the GSE, not sure if it is within his expertise scope. Anyway, I have some questions as below.

1. Will try on one project first or fully implement on all projects?
2. How to and who decide the convert ratio of subDao token to $Bank? I know 10:1 is just an example, but it implies the subDao’s valuation is 1/10 of bDao if the total token volume is the same? And there is no obligation for bDao to buy subDao token, right?
3. Is there more for bDao besides fixed exchange rate? How can it be guaranteed if the subDao is much more successful than other subDao? If it is by agreement, should the subDao and bDao to register a legal entity first?
4. Not sure where but I have came cross the similar discussion, someone mentioned give bDao certain percentage of initial tokens, looks like simple and easy to execute. Will we try both models?

[ManuelMaccou]

@Icedcool

I could see this translating into a website where people could see all the different projects and pools that they could swap tokens for.

@links and I were talking about the tokenization of projects a few weeks ago. The concept became more interesting when I started thinking of a website/exchange like you mentioned. I’m going to copy/paste my message to him here. Hopefully it will add a little something to the discussion.

If a project has their own token, there would need to be an exchange or market place to sell those tokens. You could use Uniswap but since it’s a different asset class, it might make sense to create a new exchange. Like opensea did for NFTs. Once the exchange was created, the organization registers a project to create the token. Individuals or single orgs could buy the token. But the shelf life is potentially short (project dies) the overall risk is very high. Holders have the option to convert the value of the token to ETH or the orgs native token like BANK. But if they do, the tokens are not sold back to the market they are burned. This incentivizes holders to hold as long as their risk model allows because once they exit and tokens are burned, the value of tokens increase, and the holders benefit. The more people that leave, the better it is for the the people that stay. And the reason for giving the option to convert to a token like BANK is to reduce the risk, and so they can still benefit if the project succeeds and increases the value of the communities token. I’m not sure how much successful inner DAO projects impact the token. Assuming they do a little bit. I’m also thinking this exchange would be small because it’s only for innerDAO projects. Major projects create a community around the project, like Yearn or Uniswap, and then trade on traditional DEXs. So the small market/exchange size, as well as really low token prices may not allow the model to work.

[Berg]

This is a great idea and this proposal has my full support. It would be interesting to see Degen or Banklesss Consulting adopt this model as an experiment to see how it plays out.

[blockboy]

Hey I love this proposal, wanted to contribute a couple questions from a handful of articles that I have read to help further the conversation.

1. Considering that these subDAOs have the Bankless brand attached to them, additional to token alignment, how will we hold them accountable for a cultural fit as well as ethical economic practices?

2. Is there any opportunities for some sort of fair launch type funding where Bank L1s potentially get some insider opportunities to invest? And could Bankless have the rights to some tokens for the purpose of meta governance? Additional to an initial launch could Bankless request rights to potential future revenue streams?

3. Before creating such a program should we consider building some sort of internal accelerator to promote the creation while supporting these subDAOs to make sure that what they are building is truly a novel separate entity that is able to sustainably grow(at what ever rate is appropriate for its purpose) and manage cashflows/contributors?

4. What will be our determining factors for subDAO fit? How might we incubate and support ‘progressive decentralization’?

[links]

I’m not @Icedcool , but I wanted to leave my thoughts on your questions cause they were quite interesting !

@blockboy

Considering that these subDAOs have the Bankless brand attached to them, additional to token alignment, how will we hold them accountable for a cultural fit as well as ethical economic practices?

Is this something we need to worry about in the short term ?

Assuming these projects are being funded by grants and treasury, then they already have to gain our community consensus to get their funding…so it feels like their cultural fit and ethics will be taken into account here. For projects that are no longer funded, they will have already have been forced through consensus so they’ll have the brand on their « DNA », so to speak. Hopefully there will also be a token-swap involved at mint so BanklessDAO holds a significant amount of their tokens. In that case there is a « stick » to keep projects aligned.

Can see it being a potential challenge long-term, let’s hope one of the two groups doing branding at BanklessDAO will come up with some potential solutions.

@blockboy

Is there any opportunities for some sort of fair launch type funding where Bank L1s potentially get some insider opportunities to invest? And could Bankless have the rights to some tokens for the purpose of meta governance? Additional to an initial launch could Bankless request rights to potential future revenue streams?

I had to re-read the post because I swore a token-swap was part of this (ie BanklessDAO funds BANK and receives subDAO token in return), but it’s not there. I do think a token swap should happen, and would take into account both governance and future revenue stream, because they’d be a token holder just like project contributors.

As for L1 investing, with the LP, ANYONE who held BANK could invest in any subproject. Tokenizing at its finest!! The LPs provide each subDAO with a method of direct investment and we can also see project « financial health » based on the LP health, so it’s also a method of accountability in some ways.

@blockboy

Before creating such a program should we consider building some sort of internal accelerator to promote the creation while supporting these subDAOs to make sure that what they are building is truly a novel separate entity that is able to sustainably grow(at what ever rate is appropriate for its purpose) and manage cashflows/contributors?

My personal feeling is that we should focus on experimentation vs setting upfront structures. The structures should follow the need and usage rather than prescribing it - this fits the ethos of decentralization.

Let’s let our projects grow in a way that makes sense to them, and if we find this subDAO model works, THEN we can create structures to make the solution more accessible.

@blockboy

What will be our determining factors for subDAO fit? How might we incubate and support ‘progressive decentralization’?

Similar to the above, I believe this should be driven by contributors. When project teams feel they are ready to subDAO is when they should pull the trigger on a subDAO.

That being said, if it IS an effective model, we could make tools to make it easier, like a BanklessDAO LP website which makes it easy to set up BANK-subBANK LPs, or easier methods to mint and price tokens.

We’re on the bleeding edge here, so let’s use our contributors’ passion to light the way

[blockboy]

Thank you for the thoughtful responses, one thing I wanted to clarify about here:

@links

As for L1 investing, with the LP, ANYONE who held BANK could invest in any subproject.

when I was referring to L1 investing I was trying to imply some sort of additional utility to being an L1, like for example if you are part of the Bankless community, then you have the opportunity to buy shares of a DAO at a discount, or maybe some could set a side after launch. Trying to see if this subDAO model could be one way that we as Bankless are able to drive more utility to becoming a full L1 member

[Icedcool]

@jonvaljonathan

A question I have is: what happens if the project becomes extremely valuable? The BANK peg would stick at 10 project tokens to 1 BANK?

Yea, because the LP is isolated (not in relationship to the larger market), it would stick to 10 project tokens to 1 BANK.

What is really important is that the ‘price’ of BANK is in relationship to ETH (subsequently to USDC), and is maintained across defi through arbitrage.

By adding these pairs, you would be evaluating BANK to the project token. So as BANK accrues value so to do the projects.
Now… if arbitrage happens (WHICH IT MIGHT?) that would change the dynamic here.

@jonvaljonathan

Maybe design some sort of risk-mitigation mechanism too?

I think shared tokens with the DAO should help with that… but I’m not sure.
Thinking about it.

[links]

@blockboy

when I was referring to L1 investing I was trying to imply some sort of additional utility to being an L1, like for example if you are part of the Bankless community, then you have the opportunity to buy shares of a DAO at a discount, or maybe some could set a side after launch. Trying to see if this subDAO model could be one way that we as Bankless are able to drive more utility to becoming a full L1 member

Oooh yeah great point! Like you have to be a Bankless member to invest in Bankless Projects? Pretty nice way to add utility, especially if our projects are successful and visible.

Unsure of what the specific mechanism could be, but you could token-gate the LPs potentially.

[hashedMae]

Moloch Swap, lfg!!!

[Bpetes]

Gnosis Guild Zodiac just added their ‘Exit’ automation for those using the snapshot/gnosis combo – wonder if applicable here.

[ernest_of_gaia]

Horrible idea to create a bunch of fungible tokens. Most likely a security. A very narrow minded model, imo.

A reputation based model with non fungible tokens doesnt need liquidity because it is a model for governance tokens. This is a model for creating a tradable asset that holds some type of economic value. Does the Sub dao want a governance token or a commodity?

[Icedcool]

A reputation based model with non fungible tokens doesnt need liquidity because it is a model for governance tokens. This is a model for creating a tradable asset that holds some type of economic value. Does the Sub dao want a governance token or a commodity?

This model doesn’t solve for governance, it does solve for value alignment to between DAO and subDAO, equity distribution and contributor compensation. Ie, enabling GROWTH!

It is an open issue amongst token voting that plutocracy occurs, and I’m not aware has good solutions, YET. (Optimism and others I think are doing good experiments).

It does depend on the problem space that the subDAO wants to take on, and if they have stables or the like, then their challenge is easy in terms of compensation.

They can use different forms of governance, ideally reputation based and others.

Horrible idea to create a bunch of fungible tokens. Most likely a security. A very narrow minded model, imo.

Acknowledging the VERY ambiguous legal landscape for this. It is a risk.

A subDAO may or may not be engaged in the legal jurisdiction of the USA, so whether or not something is a security depends on that.

[links]

@Icedcool

Acknowledging the VERY ambiguous legal landscape for this. It is a risk.

A subDAO may or may not be engaged in the legal jurisdiction of the USA, so whether or not something is a security depends on that.

To encourage this subDAO model, it may be prudent to continue work on legal wrapper best practices. We’re working on it in Bankless Card, and would NOT mint a token without a legal entity to reduce risk.

A foundation or trust can own property (like IP and crypto wallets), and could work as a good way to limit liability/risk for contributors.