Tokens Tokens Tokens

Since DeFi started taking off in 2020 it has predominately been financed and incentivized through tokens. Tokens have flipped the network bootstrapping problem on its head; a traditional network faces a challenge getting users in early days and relies on word of mouth, tokens incentivize early adoption by offering financial upside. This allows a network to attract capital and scale up much faster than traditional counterparts.

However, this is usually not organic adoption. As we’ve seen time and again, protocols can go through a period of a false sense of product market fit due to their token incentives, only to watch their users and TVL go through a death spiral as their token price falls. The financing of this activity also uses a rather basic capital formation structure, using purely tokens (similar to equity) to facilitate activity, and in many cases, just rent it. Very little has been done so far to incorporate debt or more exotic products like options to finance DAO activities, putting immense pressure on the token as it is the only form of financing available to pay contributors and incentivize capital/users. Since DAO’s are early stage and mostly pre-profit, their treasuries are also heavily concentrated in their native tokens, making the health of the protocol more volatile and less likely to be able to weather longer downturns like the bear market we are in now.

Instead of just paying for users by giving out tokens there are different ways DAOs can finance activities, although the strategy employed depends on what the funds are for. Is the DAO looking to diversify assets away from just their own token, pay DAO contributor salaries, or fund (and bootstrap) a new product? All of these would require a different service/product. Before we dive into solutions coming to market today I want to touch on the SUSHI attempted raise from July 2021 and some lessons learned throughout the process.

Sushi Phantom Troupe: An Experiment in DAO Financing

The first major instance of a DAO financing attempt came a year ago in July 2021 when SUSHI was looking to do a strategic raise. To set the stage, SUSHI is a “community fork” of Uniswap v2. All the tokens were earned & owned by the community or from funds buying off secondary markets. In July 2021 there was a proposal SUSHI Phantom Troupe, a plan to get some VC’s on board to promote & become long-term partners to SUSHI and diversify the treasury into stable assets, blue chips, and seed liquidity in markets for SUSHI’s new Kashi product. At that time, SUSHI had a treasury of ~$214M in SUSHI tokens and a protocol that was making ~$30-40M/month in swap fees. Like most protocols however the SUSHI emissions were far > than income earned, and all of this income went to holders of xSUSHI, not the DAO treasury. This would be like Uber giving users Uber equity for riding with them and then paying out all the income to drivers and holders of Uber shares. You can see how this is circular and not a sustainable long-term strategy.

Since the community wouldn’t budge on the 5bps full xSUSHI payout ratio (which was misguided even then), new strategies needed to be looked at with respect to diversifying the treasury. Side note: the fact that we tend to include native tokens in treasury assets is not really correct anyways; companies do not include unissued shares on their balance sheet, why do we include tokens there, especially when they are rather trivial to mint later in a DAO’s life (AAVE, YFI)? While none of the fundraising mechanisms proposed ended up passing for SUSHI I want to go over the two proposed by UMA because they can be useful for DAO’s to reconsider in the future.

Range Tokens: UMA’s first proposal was something called a range token, most comparable to a convertible bond (which we will go over with Porter later). Details were as follows:

Token Name: rtSUSHI-0122
Size: 50,000,000 rt-SUSH-0122
Maturity: January 31, 2022
Price: 0.875 USDC
Total Value: 43,750,000 USDC
Collateral: 12,500,000 $SUSHI ($100M at time)
Range: $4-16/SUSHI
SUSHI price at raise: $8

The SUSHI DAO would write 50M range toke