In-Depth Exploration the Practical Status and Potential Use Cases of DAOs

Current status of DAO tokens

Many DAO tokens serve to incentivize, coordinate, and manage communities in various ways.

Cryptographic assets play a dual role in finances. Whether positive or negative, the value of tokens affects people’s perceptions of the project. When the token’s value rises, it generates a positive feedback loop of sentiment. Conversely, when the token depreciates, it negatively affects the morale of communities with financial interests associated and ripples across the wider industry. Therefore, creating a DAO token that can maintain a balance of supply and demand is crucial. We explore various use cases of DAO tokens to determine the most effective methods for building DAO tokens in the future.

The tokens of a DAO are typically its most significant financial resource. Most of a DAO’s financial reserves usually consist of its own tokens. These tokens can be used to reward contributors, pay operational costs, and support the growth and operation of the DAO. However, as mentioned earlier, establishing token utility to achieve balance in token expenditures is crucial.

Access and membership

Token ownership can take on various forms, representing either power in governing participation in projects or community treasuries, or connections with the entire community. In the case of Friends With Benefits (FWB), owning at least 75 FWB tokens is a prerequisite for applying to join private and token-gated Discord servers, which serve as the community’s private “town square” where members can share information, organize projects, and coordinate community governance. Additionally, FWB-hosted events require holding a small amount of FWB to participate, effectively broadening the eligibility of DAO membership beyond just community members of the Discord server. Requiring community participants to own tokens is an effective method to generate initial demand for tokens and coordinate interests. However, this approach as a standalone strategy is unsustainable as it only necessitates users to “buy and hold” once, without fostering repeated demand for the tokens themselves.

Governance

DAO tokens typically include governance rights, granting holders the power to propose and vote on various aspects of DAO affairs. These affairs may include decisions regarding new organizational structures, plans, partnerships, team compensation, and even financial asset allocation. Some tokens grant voting rights without any additional obligations, while others require DAO tokens to be “locked” for a period of time to gain voting rights. For example, FWB and GCR tokens can be used for voting purposes without any locking period.

In contrast, Curve’s popular voting escrow model operates differently. In this model, CRV tokens are locked for up to 4 years to gain voting rights. The longer the CRV tokens are locked, the greater the voting power holders receive.

Unfortunately, most DAOs only vote on sporadic proposals, and voter turnout is typically low. Charmverse estimates that the voting participation rate for most DAOs is only in the single digits.

Value growth

One way to generate demand for tokens is to make them a financially attractive or speculative asset. This is most common in DAOs that manage DeFi protocols. For example, Curve Finance has a mechanism similar to dividends for income sharing. Other DAOs adopt buyback and burn mechanisms to accumulate value.

These value accumulation mechanisms are typically applicable to projects that can generate fees or income. Community DAO tokens may not have this option. Token issuers should first consider legal implications to ensure that the value accumulation model does not classify DAO tokens as securities.

Stake

Some projects offer token staking options, usually to earn income by contributing economic resources to the project. For example, Aave allows users to stake AAVE tokens in its safety module in exchange for a portion of protocol fees. By staking AAVE, you can act as a backstop in case of defaults in the protocol, providing financial security to the project.

However, poorly designed staking mechanisms arise when staking does not serve any economic purpose or provide returns to stakers, resulting in dilution of the token’s circulating supply. In this scenario, staking serves no purpose other than incentivizing token holders not to sell. Crypto influencer Cobie has previously opposed such staking designs. Since the last bull market, many projects have abandoned dilutive returns in favor of “real returns” or income generated from actual economic activity.

Potential use cases

In the previous examples, we introduced the current state of utility for DAO tokens. However, we are still in the early stages of experimentation. In the following sections, we will explore various different options for DAOs to deploy their tokens in innovative ways.

Start a custom blockchain

One potential use case is to launch a community-specific custom blockchain. These blockchains can generate transaction fees, thereby creating demand for the token. There are many services and SDKs that make launching custom blockchains easier, but it is still a challenging task. To demonstrate that the costs of launching and maintaining a blockchain are justified, there must be a sufficiently large and actively engaged community. While launching a blockchain can provide better control over the user experience for existing members, it also brings challenges for new member onboarding, such as requiring new wallets, gas tokens, and cross-chain bridges. All of these factors must be carefully considered.

Token migration

Many DAOs were initially launched on the Ethereum mainnet. The gas fees on Ethereum can be prohibitively high, which raises the barrier to entry for community development and experimenting with more experimental token designs and mechanisms. While using the OG smart contract chain (Ethereum) certainly brings some prestige, migrating tokens to cheaper L1 or L2 solutions can help unlock new use cases. This serves as a good alternative to the high costs of launching and maintaining custom chains.

Create token utility around core community activities

Creating additional utility for DAO tokens is crucial for maintaining demand for the tokens. For example, Global Coin Research (GCR) recently passed a proposal allowing members to purchase DAO tokens to reduce the commissions they pay in joint investments. If members are bullish on their early investments made through GCR, they can choose to buy additional GCR tokens to burn, in exchange for reduced fees. The motivation behind this mechanism is to link the additional token utility and demand with the quantity and quality of early investments facilitated by GCR.

Unbinding token utility

Is a token bound to too many use cases? In Web2, each use case has its own corresponding asset. If you want ownership in a company, you can buy stocks. Sometimes there are even different classes of voting shares. Starbucks gives you loyalty points for frequenting their coffee shops, rather than ownership shares. In Web3, all use cases are bundled into one token. We think this is a good thing: users are stakeholders too and should have ownership in the companies they contribute to. But does one token need to represent all of these? Or does this limit growth? With the rise of semi-fungible tokens, we need to explore different dynamic use cases.

Airdrop to your community

Many Web3 communities are not just clubs. They have a mission to drive the development of the Web3 industry. If successful, this mission will create value in the form of incubated projects. The value of these incubated projects can accrue to the treasury managed by DAO tokens, but what if you were to airdrop this value to token holders? The Crypto Oracle Collective (COC) is a DAO co-founded by Lou Kerner of Crypto Mondays, and they intend to do just that. They will start with airdrops from Crypto Monday tokens and plan to promote this approach in projects incubated by COC.

Rewarding and gamifying participation

Community tokens should be easily accessible so that they can spread widely and foster attachment to both the token and the community. Individuals interested in the community can receive a small token gift to initiate a relationship. Members attending community events should be rewarded with a small amount of tokens. Communities should explore rewarding and gamifying participation. The more tokens one holds, the higher social status they should have within the community.

However, it’s important to note that token farming can undermine the community, so some locking periods should be set, and the unlocking mechanism should be based on the contributor’s level of contribution to the community. This way, being the top holder doesn’t necessarily mean receiving the largest reward; rather, those who contribute to the community will truly receive rewards, and tokens from exploiters will be redistributed.

In terms of rewarding higher-contributing community members, the Optimism PGF (Public Goods Funding) model might be a good option. Community members are incentivized to make meaningful contributions because they know their contributions can lead to retroactive rewards.

Of course, airdrops may increase selling pressure on tokens. On the other hand, by offering micro-rewards to small participants, the significance of selling tokens is reduced. This approach can help establish emotional connections between tokens and the community. Some individuals may still sell tokens, but the mechanism can autonomously select community participants who don’t sell tokens, aligning more with the community’s long-term vision.

Conclusion

The emergence of DAO tokens has created one of the world’s most effective coordination mechanisms. Tokens incentivize and enable completely unfamiliar individuals to pool resources and work together towards a common mission. That being said, we are still in the early stages of tokenized community development, and we should all continue to experiment with and explore new token mechanisms and use cases.

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