How to make DAOs & Tokenomics work together? (Leviathan News)

Tokenomics & Governance (2:25)

Tokenomics aims to align the interests of participants with the system's best interests. It may include fees or external rewards and has distribution mechanisms, often involving token emission

It's important to distinguish between tokenomics and DAOs (decentralized autonomous organizations). Every project needs tokenomics, but tokenomics can exist without a DAO:

• Velo/Aerodrome has tokenomics but token holders can only act on incentives
• Liquity has no governance
• Dyad has tokenomics with Kerosene, but token holdings don't impact protocol decisions

The Uniswap case (6:00)

Uniswap is often described as a highly decentralized protocol with no emissions. Uniswap does have emissions, but they are "privatized" and go exclusively to incentivizing the team and investors, rather than being distributed to users.

The primary function of the UNI token is to determine whether the fee switch is turned on or not. Even this limited governance function is not entirely decentralized, as the core team keeps critical decisions, and VCs (Venture Capital) hold lots of tokens.

Alex is more interested in protocols where all emissions and value go directly to users, with no intermediaries.

Privatizing emissions can be positive (9:45)

For Joey, there is an important difference between governance tokens that may not have real governance power and utility tokens that are designed to be used within the protocol.

Privatizing emissions can be positive if it ensures the tokens are distributed to those who will use the token and benefit from the protocol.

Any privatized emissions system should be fully on-chain and permissionless. Off-chain gating or centralized control over privatized emissions is not desirable.

The original intent behind decentralized finance was to create truly autonomous systems, not ones reliant on off-chain governance or legal entities.

Emissions must be on-chain (12:45)

For Brice, transparency is an essential and non-negotiable value in decentralized finance and considers lack of transparency as a major issue.

Governance models are inherently less transparent than fully on-chain systems like those implemented by protocols like gauges (CRV, VELO, AERO...):

The governance forum, which is often moderated by team members, can be a place for "shenanigans" and lack of transparency:

• The big governance participants often negotiate and make decisions among themselves before presenting them on the public governance forum.
• Sometimes, the governance process is completely bypassed

Brice suggests that fully on-chain resource allocation systems, like those implemented by Gauges or Possum Core, are more transparent than governance models.

Alex mentions ve(3,3) where the weekly distribution of tokens is decided entirely by on-chain voters. This is contrasted with private token sales or distributions, where details like the number of tokens, the vesting terms, and how the tokens can be used are often not disclosed.

Public emissions tend to receive more attention and scrutiny, as the details are visible on-chain.

On the other hand, private emissions are more obfuscated and require more effort to uncover the details, which means they often go unnoticed.

To properly evaluate the outcomes of a protocol, it is important to look beyond just the public emissions and try to uncover the details of any private or less transparent token distribution mechanisms.

DAOs in Layer 2s

The Superchain (18:00)

DAdvisoor notes that the discussion earlier seemed to have a "strong Optimism presence", which led them to think about Optimism's vision for the "Superchain".

Optimism is building a "super chain" where L2 chains built on the Optimism stack opt-in to participate.

In this model, the OP token plays a key role in governing upgrades to the chains within the super chain and in distributing sequencer revenue.

The OP token has a stronger utility proposition compared to a traditional governance token, as major corporations like Coinbase depend on the security of the Optimism super chain, and thus have an incentive to hold and use the OP token.

Alexander notes that Arbitrum's governance token appears to be more of a traditional governance token, with projects voting to give themselves more tokens for incentivization purposes. The token may need; to develop a deeper value proposition.

The problem with Arbitrum (21:30)

Brice believes Arbitrum could have been much more impactful if its resources were used properly.

Examples of misuse:

• Large grant allocated to a committee to fund gaming projects, misaligned with Arbitrum's priorities.
• Token allocations for projects, with the obligation to distribute them and not to use them

We should think of token emissions like a country producing its currency. The key question is not just about the emissions, but what the usage and investment of those emissions is intended for.

Need to ensure token emissions and resources are allocated towards productive, long-term investments rather than just operating expenses.

Align the incentives to win (23:50)

Joey has always been "allergic" to DAOs as a broad concept, as there are issues like forums, committees, personalities, and politics that can arise in DAO governance.

A better system is where governance is more akin to directing the flow of value through a utility token, rather than traditional DAO-style voting.

The key is to design incentives that align stakeholder behavior with the optimal outcomes for the overall system, so it creates a self-optimizing system where no centralized intervention is required.

Solutions (28:10)

Amadeo envisions a layered, "onion-like" governance structure, where there are inner layers that govern specific components, and outer layers that earn value. But we need for this governance structure to be completely open and transparent.

Joey highlights the importance of having a decay or inflation-based mechanism to incentivize participation and contribution in the governance system.

This can be achieved through a well-designed inflationary emission system, where the dilution affects those who should be diluted while allowing for the accumulation of influence by those who contribute the most.

Rise & Fall of veTokens (30:50)

Curve's approach was to give the most weight in governance to those who commit their tokens for the longest term (4 years), and the voting power was decaying over time.

Even though this system is brilliant, Alexander suggests there was a period where people became a bit "disenchanted" with veTokens and tried other approaches, like shorter-term staking and splitting reward tokens from governance tokens.

Despite some challenges, Alexander suggests we may be "coming full circle" to recognize the ve-token model as one of the best solutions for rewarding participation proportional to the depth of commitment.

Features like the ability to sell locked ve-tokens on a secondary market help address some of the potential downsides of the model.

Governance stone age (36:30)

Brice believes the governance solutions in DeFi are still in the "stone age" compared to the rapid evolution seen in decentralized exchanges. It's like we are still at the equivalent of "Uniswap V1" level.

Major protocols like Aave and Maker (Sky) still have simplistic "one token, one vote" governance models, without recognizing the nuances of different user roles (LPs, suppliers, etc.)

The veToken model is still considered "revolutionary" although it's already several years old, indicating the lack of progress in this domain (veNFTs are an upgrade, but they aren't so popular so far)

The DeFi community should be more open to trying "any wild idea" when it comes to governance, as the potential gains from innovation in this area could be immense.

Liquid secondary markets (41:50)

For Joey, liquid secondary markets are necessary to solve the "rage quit" problem, where participants longer interested in participating can easily exit a position.

Wrapping positions in NFTs and allowing them to sell them mitigates bad externalities like pricing issues or accumulation of "stakeholder debt" where large voting power is held by disengaged parties.

• veNFTs from ve(3,3)
• Dyad's secondary market for Notes has already seen some level of price discovery around the "XP" metadata trait that builds up over time

Beware of off-chain management (46:30)

Amadeo expresses concern about the DeFi community's waning focus on decentralization, with many protocols opting for "boring vaults" and moving functionality off-chain.

Getting off-chain management is a "very scary" trend for the industry. Although veNFTs are an improvement, we need a fundamental rethinking of protocol design and governance to solve this problem.

Amadeo argues that protocols need to create "subdivisions" and promote "sub-stars" to attract long-term talent and foster decision-making focused on the protocol's best interests, rather than just short-term token emissions.

Awareness (48:40)

Brice thinks the perception of waning interest in decentralization may be biased or limited, and that there are still many who actively prioritize and value maximally resilient, on-chain protocols. And supporting this DeFi is a core part of the DeFi Collective.

The DeFi Collective places immense value on supporting protocols that are "immutable" and have a maximally resilient, on-chain architecture and is hesitant to support projects that utilize off-chain or "manipulatable" components, as these can undermine the overall resilience of the system.

For him, protocols like Velodrome and Aerodrome are more resilient than Uniswap, due to their fully on-chain architecture. In contrast, Uniswap's reliance on external tools like Merkl and off-chain computations introduces additional dependencies and challenges.

Aerodrome had a rapid TVL growth, while it was launched with a fully decentralized front-end. Furthermore, Aerodrome is approaching 90% of Uniswap V3's volume on Base.

This is an example of how this commitment to security and immutability can attract significant capital (Alexander takes pride in being called a "forker" by Hayden Adams).

Once a project like Aerodrome reaches a certain scale and adoption threshold, the "big players who care about" decentralization and immutability will take notice and start to value those attributes more.

Dyad's emissions management (58:00)

Dyad was initially using an off-chain emissions manager (Merkl) to boost kerosene emissions with XP. However, this off-chain solution was the only one available for their use case of Uniswap V3 concentrated liquidity pools on the mainnet.

Dyad is now completing a development process to create a "kerosene dispenser" that is fully on-chain, allowing them to query the XP of any note and calculate the corresponding APY boost.

Beyond the first-principles argument for decentralization, Joey argues that the on-chain approach also has practical advantages in terms of transparency and accuracy of the information being presented to users.

The DeFi Collective's framework

Standardize the decentralization assessments (1:00:00)

 The path of maximizing on-chain transparency and decentralization can feel "depressing" at times, but there are significant long-term benefits:

• Improved composability
• Easier for others to build on top of your protocol
• Simpler data processing and integration
• Better understanding of protocol operations

Brice believes the DeFi community has "failed" to be "militant enough" in defining and enforcing a clear standard for what constitutes true decentralization because average users struggle to distinguish between truly decentralized projects and less decentralized ones.

The collective is working on a framework to assess protocol decentralization to provide clear, commonly agreed-upon resources for evaluating decentralization.

This framework divides protocols into four layers:

1. Settlement
2. Asset
3. Protocol
4. Application

Each layer is evaluated on three vectors: technology, governance, and transparency.

It is inspired by L2BEAT for Layer 2's risk assessment and bluechip.org for stablecoin risk assessment.

Brice acknowledges that the framework has an incentive problem: projects with strong decentralization are eager to showcase it, while those lacking it have an incentive to obfuscate. We can expect a pushback from less decentralized projects.

Yields > Decentralization (1:06:30)

DAdvisoor agrees about the need for clear standards and transparency around the actual level of decentralization in DeFi projects.

However, the reality is that most new users are primarily attracted by the prospect of earning yields and making money.

Even for non-technical users, it should be easy to understand whether a project is truly decentralized or just operated by a small group of people.

Close the gap (1:08:55)

There is a "dire lag" in the availability of clear, transparent, and quantitative assessments of the decentralization levels of DeFi protocols.

The Collective's mission is to provide support and resources to the most decentralized protocols.

However, to fulfill this mission, the Collective needs a clear way to identify the most decentralized protocols, which led to the development of the framework described above.

The Collective will release the initial batch of project assessments around the 1st anniversary next month.

Brice sees a future where the decentralization assessments from protocols are integrated directly into DeFi front-ends, allowing users to easily understand the decentralization status of protocols before interacting with them.

Decentralization or flexibility? (1:11:45)

Amadeo and Joey recognize that it is difficult for protocols, especially smaller ones, to be fully decentralized from day one. There's a risk that less decentralized protocols might outcompete more decentralized ones due to increased flexibility. A balance is needed between decentralization and flexibility.

In stablecoins, higher yield often correlates with more centralization. A quality assessment system could help users balance rewards against risks

3 tiers of decentralization (1:14:00)

For the DeFi Collective, there are three tiers of decentralization:

1. Genuine DeFi (top tier) - Truly decentralized protocol
2. Monitoring - Some centralization vectors, but credible strategy to decentralize
3. On-Chain CeFi - Centralization vectors with no real decentralization strategy

Dyad belongs to the "monitoring" tier. It's not fully decentralized yet, but have design intentions and behaviors to move in that direction over time.

Other projects don't even try to obfuscate their centralized and non-decentralized nature, which makes them easy to classify as "on-chain CeFi".

The "100 monkey effect" (1:16:50)

Amadeo believes more people need to get involved in DeFi governance. He references the "100 monkey effect": once a critical number of individuals have adopted a new habit or behavior, this adoption can mysteriously spread to other groups without any direct contact between them,

The problem is, that there is a lack of incentives and recognition for people to get involved in DeFi governance when they could make more money doing other things like trading.

Systems like "direct democracy" are suggested, with the ability to vote in and vote out different governance structures and participants, but the main difficulty is to make this system sound.