Eight steps of magic take you on the road of decentralization


Recently, the energy that can be exploded by DAO/community-driven has been verified by a large number of projects. I used to have no proof, but now I finally have an example! I believe that there will be more DAO/community-driven projects in the future, and of course more successful projects will emerge. However, for most of us, how to use DAO/community-driven to start our projects is still a wall in front of us. Fortunately, the savior is here,  this article by Eric Arsenault is undoubtedly an excellent guide to get started, I hope it can inspire everyone! —— Typto

The decentralization movement is coming. A core part of the movement is to provide a clear decentralized approach for projects and teams. This article aims to clarify this process for the project party.   

The path to decentralization is now clear

Why is it decentralized? The reasons include:

  • Give early holders an easy way to exit
  • Use the new form of network effects to give projects without core competitiveness a competitive advantage
  • Standardize activities by removing the participation of third parties (raising funds, allowing securities trading, issuing dividends, etc.).

The inspiration for this article comes from the number of new projects in the field and the concept of ownership economy proposed by Jesse Walden . At the end of the article, we give an example to demonstrate how to apply this process to your project.

I am honored to be able to collaborate with MetaCartel Ventures and DAOstack to write this article. The former is looking for projects that can be funded with this model, and the latter is a governance project that specifically builds products for this market. If you need governance support, please contact us! Thanks also to Gabriel Shapiro for his support. 

The first step: initial stakeholders

Most projects will have a clear stakeholder group. Usually this includes the founding team, investors, and if tokens already exist, it may also include token holders. For legal entities, you will want to provide investors with the right to govern tokens in the future (via SAFG ). 

In all cases, the holder will receive governance tokens.

Step 2: Incentives and ideal stakeholders

In addition to the initial stakeholders, projects that want to achieve decentralization need to consider this issue, such as who wants to manage future agreements. Project parties need to think carefully to ensure that the right incentives are implemented, because if you don’t get this right, you may end up in a situation where the agreement is hijacked.

For many projects, the ideal token holder will be obtained through some form of "active mining", while other projects may choose this strategy:

  • Airdrop governance to a group of people
  • Hand over governance to an existing decentralized network, such as an existing DAO
  • Sell ​​membership (the advantage of this is that it can also raise funds, and it can also be decentralized)

Some projects can also choose to deposit a certain amount of governance tokens directly into the project's future DAO vault. The advantage of this is that with the formation of the community, the community can run funds, which is especially important when the project has no cash flow.

The second step is actually about these issues-who do you want to allocate governance tokens to, and what activities (if any) you want to incentivize your agreement. You may choose not to define all incentives from the beginning, they may change over time. 

The rest of this article focuses on "active mining" as a form of governance distribution because it seems the most effective. Other allocation modes also need to be changed slightly. 

Step 3: Clear your timeline

Generally speaking, the concept of ownership economy can be applied to every project. Through some form of "active mining", to give users more ownership, this method will definitely increase the user's participation. 

The real question is: "How long should we keep these incentives?". The answer depends on many factors, such as project vision, investor/team timeline, maintainability, etc. 

I believe that the longest lasting project will choose a continuous incentive model (that is, there is no token cap), because this allows the project to adapt and provide incentives for new users of the platform. Quite ironically, many people in the Ethereum community made fun of Bitcoin's supply cap and at the same time created an agreement with a token supply cap.

For projects with a short timeline, or projects with strong advantages (such as YFI), a shorter incentive period may be a good choice. 

The third step is about understanding your schedule and plan maintainability, which helps to arrange the token issuance schedule.

Step 4: Establish a token economic model

Before you start issuing ownership, questions that need to be answered include:

  • How much ownership should a founding holder have after X months?
  • Is there some kind of token burning model to reduce supply?
  • Should the initial holder's tokens be calculated together with the mining activity, or should there be another exercise schedule?
  • Will some of the tokens be directed to DAO, and do these tokens also have an exercise schedule? 

Once you have completed steps 1-4, you are almost done! You have the initial and future token holders and the token release schedule, now you just need to execute it. 

Step 5: Issuing tokens

At this stage, you can start issuing tokens based on your incentives and your schedule. It should be noted that tokens have no effect at this stage. 

Step 6: Initiate a DAO (optional)

If part of the tokens are allocated to the DAO, you need to do step 5 above when you initiate the DAO. If launching a DAO is not part of the token distribution plan, the team can launch a DAO at any time. In both cases, voting rights will be granted directly or indirectly to token holders.

It should be noted that launching DAO may require more community building work and support, but on the other hand, it empowers the community and increases overall participation.

At this stage, the DAO will only send a signal because it is not yet the owner of the agreement. 

Step 7: Achieve "full decentralization"

Before handing over control of your protocol, the next milestone is to achieve full decentralization.

This is the most obscure place and the least guided area in the project. If you are not fully decentralized, you may end up in jail, so it seems that the best way is to continue. Please refer to this article by Gabriel Shapiro to learn more to keep you safe. Below we try to define decentralization in the context of DAOs based on this article: 

  • The smaller the number of tokens held by the affiliate, the better. In Gabriel's article, he set a 20% threshold.
  • If users of the platform can easily fork, it indicates that the network is highly decentralized.
  • Ownership of the initial team is also an important factor. The holding may be capped at 20%, but for a more conservative team, 10% would be better.

Voter turnout and community participation are another variable to consider. Low participation may hinder you from advancing decentralization, so please think twice! 

Step 8: Submit the agreement to DAO

Once you have achieved sufficient decentralization through a network, you can decentralize your agreement ownership. If you have not initiated the DAO in step 6, you can start now. 

Then you can transfer the ownership of the agreement to the DAO, and then you can start working! Your project can now get the benefits of a decentralized network. From now on, your team needs to apply for funds from DAO to maintain operations, good luck:) 

Example: From startup to decentralization

The following is an example of a possible process for a project:

  • Alice has a very good entrepreneurial idea. It is a P2P photo sharing application. She hopes that this application will eventually be owned by the platform's stakeholders and users.
  • She hopes that the platform will have lasting influence and decided not to set a token supply cap.
  • She set the 5th year as the time for all initial stakeholder token distribution. At that time, 40% of the network will be controlled by the original stakeholders, 30% will be controlled by platform users, and the remaining 30% will be held by the DAO ecosystem.
  • She hopes that users who share photos or buy photos will receive tokens
  • Initial stakeholders include her founding team and investors. She decided to allocate 1 million tokens to these initial stakeholders, 20% of which will belong to investors.
  • Alice hopes that this project can raise a little capital and then decentralize it as soon as possible. She hopes that once the project is decentralized, the network will raise additional funds, and hopes that the network will continue to fund her team's development projects.

Alice founded a company and raised $1 million from investors as SAFG (this is a promise that will take effect once it reaches 200,000 governance tokens). Once these funds are raised, the team will execute and be able to build their platform. 

A year later, they are ready to start decentralizing the platform and hand over governance to users. 

  • The team implements incentives through smart contracts (users who share or purchase photos will receive governance tokens)
  • The team also created a token release plan for initial investors so that their tokens will be issued within 5 years. At the end of 5 years, initial investors and team members will own 40% of all tokens, and the other 60% will be given to DAO protocol and platform users. This means that in year 5:
  • Investors will hold 160,000 tokens (20% of 40%)
  • The initial team members will own 640,000 tokens (80% of 40%)
  • DAO will have 600,000 tokens (30%)
  • Platform users will have 600,000 tokens (30%)
  • About 1100 new tokens are minted every day: 666 of them are given to users and DAOs.
  • After the initial release period, user and DAO tokens are generated at a fixed rate of 666 per day, and can be changed by DAO at any time. 

After 6 months of mining, the decentralization of the project has been very high, and the agreement was handed over to the DAO. After 6 months, Alice and the company will begin to apply for funds from DAO to continue building the product. Soon, some other companies will start working for DAO and contribute to the project.

Congratulations, Alice, you have created a decentralized network.


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