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content overview

content overview

According to data from OpenOrgs.info, the assets managed by the largest decentralized autonomous organization treasury (DAO Treasury) on the market have reached billions of dollars. However, these "values" are mainly concentrated in the protocol's native governance agent Therefore, it also brings many problems and challenges, such as:

• How to make DAO Treasury not too centralized, while minimizing market impact?

• How can specific protocol risks be managed while maintaining a central location?

• How to better fund workflows and pay organizational contributors for highly volatile assets?

Here, we will discuss in detail how to solve the centralization problem in the fundraising process of decentralized autonomous organizations selling native DAO tokens, and propose a solution, namely: Treasury Diversification Sale , but also provides a detailed guide to constructing such sales structures in a positive-sum manner. As a lead investor and additional sale participant, 1kx Network has previously participated in two DAO Treasury token sales, one in Index Coop and the other in Forefront, so we hope to incorporate as much of the lessons learned as possible in this article Share it with everyone.

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Benefits of Distributed Selling

Before diving into the details, let’s review why DAOs should consider (at least some of) stablecoins first when it comes to the DAO Treasury token sale.

In fact, allocating a portion of the DAO Treasury to stablecoins can:

• Dampens overall portfolio volatility

• Offset future operating expenses

• Improve DAO resilience during market disruptions

If DAO Treasury concentrates most of its "wealth" in native tokens, it may be very sensitive to changes in market sentiment, and the development of stakeholders will also seriously affect the valuation of DAO Treasury. Once uncontrollable external events occur, or the future prospects are bleak, it is likely to cause the price of native tokens to be dislocated, and then make DAO lose its purchasing power when it is most needed. Diversification into non-speculative assets increases the safety of capital reserves and also enables DAOs to maintain operations during bear markets.

Furthermore, as crypto analyst Hasu recently pointed out, the native tokens held in the DAO Treasury are essentially very similar to the unissued authorized shares of traditional enterprises. total potential supply. The DAO can realize some purchasing power by selling these unissued tokens, but their actual value may be much lower than the officially quoted market value. In other words, when analyzing the "available purchasing power" of the DAO Treasury, we should primarily focus on the decentralized investment allocation of DAOs.

However, if you want to obtain decentralized stablecoin distribution, you still need DAO to sell its own native tokens. Therefore, there may be some nuances involved in the actual process. The current strategies for raising stablecoins can include but are not limited to the following four:

1. Over-the-counter (OTC): OTC is a common sales strategy where you can exchange tokens directly for another asset without going through the secondary market. OTC transactions can also be direct transactions between institutional investors and/or the community, which have the least direct impact on price and allow for more flexibility in the timing of lock-up and release of the DAO's native tokens. In this post, we will focus on this particular method.

2. Market sell-off: This is also the most direct way to raise stablecoins, but it is also the most unfavorable way to the price. The market sell-off is meant to send a message to stakeholders that there is no confidence in the current valuation of the DAO's native token. Additionally, selling the DAO native tokens in an illiquid market or selling a large amount of tokens in a short period of time could result in downward price pressure.

3. Conditional order strategies (Conditional order strategies): This is actually an alternative to market sell-offs. Using conditional orders, DAO can slowly "divest capital" over time. Currently, conditional order strategies mainly include Natural day-based fund rebalancing, TWAP/VWAP strategies, limit orders, etc.

However, one of the most important things to focus on before launching any of the above strategies is to achieve consensus within the DAO, as fund rebalancing has implications for all stakeholders. We suggest that the community can create a governance proposal for this situation, and then vote to ensure everyone agrees on the need for stablecoin distribution and how to obtain it. In addition, at this stage, it is also necessary to do a good job in the work related to the income target and income plan.

Launch and execute DAO Treasury decentralized sales

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1. Determine the fundraising target and determine the scope of fundraising

Before a DAO is ready to go out and raise funds, one of the first things to do is to determine what its specific needs are. As a DAO, you need to know how much money you want to raise ideally, and what is the minimum acceptable amount, and then design a series of potential funds from the perspective of stable coins and native DAO tokens. In addition, you need to clearly know the maximum number of native tokens that you can easily sell (that is, how many tokens can be sold at the bottom); finally, you need to determine a token sale deadline to complete the entire fundraiser. financing activities. Ideally, this should be a convenient process that will help the DAO move to the next "BUDIL" phase.

After completing all the above work, DAO needs to ensure that the community reaches a consensus. The community's pre-reached consensus will help stabilize the organization and avoid the fundraising controversy that SushiSwap had previously experienced. At that time, SushiSwap proposed to take out 51 million SUSHI tokens from the community treasury to attract institutional investors. The terms of the transaction included:

• Deal size: $60 million (25% of developer funds), with a maximum of $10 million allocated to community members

• Token release: 6-month lock-up followed by 18-month linear release

• 20-30% off sale price

As a result, this proposal caused great dissatisfaction in the community. Many people worried that this method of fundraising would have an impact on the size of the fund pool and the number of strategic investors, and would also lead to a sharp drop in the price of SUSHI tokens. With the lessons learned from SushiSwap, it is best for decentralized autonomous organizations to avoid disputes and conflicts in the community by pre-evaluating consensus and ensuring the participation of key stakeholders.

transaction size

In fact, selling tokens from the DAO community treasury turns out to be an optimization problem with multiple constraints, because for any DAO project, it is necessary to maximize funds raised and minimize the number of tokens sold, while at the same time Attract the highest quality investors who optimize their own economic constraints. More importantly, all of this must be done as quickly as possible so that the DAO can redirect its attention to concrete work related to real goals.

If the DAO sells too many tokens and raises too little money, it will damage the longevity of the project itself. For high-quality investors, they must understand this, so they will strive for the fairest token sale price rather than the lowest price. As an example, when ForeFront approached 1kx to raise funds, they initially hoped to value their project at a fully diluted network valuation of $3 (50% discount to the spot price) to raise $800,000, which is roughly their 30% of the total project token supply. We realized $800,000 wouldn't support the project much while causing them to sell a lot of tokens early in the project's life cycle. With this in mind, we decided to offer a $10 valuation to the ForeFront community (and subsequently raised the price to $20 to match demand), as this offer could benefit both us and the ForeFront DAO if we follow the However, the final return on investment may not be as we hoped.

If you are trying to decentralize selling DAO Treasury for the first time, you can set a simple goal, namely: raise enough stable coins to provide sufficient funds for the next 1-2 years of operating expenses, and doing so will free up resources to focus In order to achieve the established goals of the DAO organization, there is no need to worry about the operational pressure caused by the subsequent shortage of funds. Considering the above constrained optimization problem, you can increase or decrease the fundraising target to cater to the project development, but this "target financing amount" needs to be discussed within the organization.

Discounts and token distribution

DAOs should have appropriate token distribution terms in place to ensure long-term alignment with partners. For different decentralized autonomous organizations, the details and content of token distribution terms may be different, but the degree of token price discount and investor interest should be considered.

Generally speaking, the waiting period for token distribution is 1-2 years. If you want to extend the time, you can also, but you need to ensure that strategic partners and DAO can reach long-term consistency. On the other hand, if you want to prolong the token distribution time, you must pay attention to the project side to maintain a certain balance with market demand during this period.

If the DAO will already include future token distribution in the token sale transaction, that is, the tokens provided to investors are not a one-time distribution, the sales price will often have a certain degree of discount at this time, because this sales model The issue of the time value of liquidity must be considered. Let's take a simple example, assuming that there are two tokens in the secondary market, one with a 1-year lock-up period and the other without a lock-up period, as an investor, assuming that both tokens are fair traded, So which one would you choose to buy? The answer is very obvious, you will definitely choose the token with more liquidity, that is, "pay for it, pay for it", because lack of liquidity will not bring any net benefits.

So, what if tokens with a lock-up period get some discount on the price? Like the less liquid token is 30% cheaper than the more liquid token, you know, that means, no matter what the price of the token is going to be in 1 year, you will be making 30% more in 1 year than you are now. Therefore, DAO Treasury needs to consider this when selling tokens, especially when the transaction terms include a lock-up period, it is even more important to carefully formulate the discount rate to incentivize the potential risk of insufficient liquidity.

After the token sale transaction is launched, the more common token lock-up period is basically a few months. During this period, market fluctuations may lead to substantial discounts/premiums on the spot. All parties concerned are uneasy. What you need to do at this time is not to adjust the token lock-up period, but to adopt a more robust approach, unless you have to, do not easily change your token distribution plan.

Once the scope of the DAO's fundraising is clarified, the relevant constraints are determined, and a community consensus has been reached on the issue of sale requirements, the basic work will be over. Next, all you need to do is try to attract investors, and this may involve how to negotiate with investors. Due to the complexity and sensitivity of the negotiation process, you can delegate the negotiation of the DAO to a team of contributors (as Index Coop does with their BD working group), or to the core team itself (depending on how the project progresses). ). Decentralization of negotiation power is actually a very meaningful decentralized process. Ideally, the negotiation team will be composed of members with previous experience in business development or finance. It should be noted here that not all DAO members are qualified and capable Join the negotiation team, so the organization needs to choose carefully. In addition, please ensure that the negotiation work is in the charge of a small number of people so that decisions can be made quickly during the negotiation process.

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2. How to choose investors when raising funds

When DAO raises funds, it is very important to select token sale participants. The best investors for the project should be both project users and community contributors, while project strategic investors can enhance the project's advantages and make up for the project's disadvantages.

strategic investor

Some DAOs will seek investment from strategic partners to help them develop the protocol, these strategic investors can be investment DAOs (eg MetaCartel, Seed Club), institutional investors (eg 1kx) or angel investors and can bring experience and Expertise to help guide projects better from conception to execution.

DAOs should carefully consider whether they would prefer to have a lead investor, and if so, who to choose to lead the round. The benefits of having a potential lead investor include:

• Help DAO to fill investor vacancies during financing. There are usually some conditions for choosing external investors, such as investors’ specific advantages, industry experience or network. When other investors participate in the financing process, it can actually maximize the The value of DAOs, lead investors can help DAOs structure financing transactions in a way that helps to achieve the goals of the community.

• Serve as a link between the DAO negotiating team and the investor community. Typically, the lead investor negotiates on behalf of the entire investor community, minimizing negotiation time between all parties involved.

Because lead investors play a vital role, DAOs try to select lead investors that fit the spirit or vision of the project. If the DAO wants to expand into a specific vertical, finding a lead investor who has done something similar will undoubtedly bring the most value to the project. In addition, considering the potential risks of DAO, you can also find a lead investor who can reduce the risks in related fields.

Generally speaking, in order to make money, the investment goal of the main investors (usually VC funds) is to have ownership of the token network, so a large part of the capital may be required. Of course, whether to "sell" part of the network ownership depends on the community's final decision on whether the financing transaction can bring greater benefits to the community, rather than simply choosing to cooperate with different investor groups for the purpose of diversifying investment. On the other hand, choosing investors carelessly will also have negative effects on the project side, because you may cause the project to become highly centralized in order to introduce heavyweight investors. In addition, if the investment is too dispersed, it will cause investors to be indifferent to the project, and finally no one feels that they should be responsible for the project.

Of course, for DAOs, lead investors are not always needed, and sometimes potential customers can also help DAOs and can help DAOs complete their financing missions. If DAO tends to disperse financing and gain more actual control over the negotiation process, then it is completely acceptable not to choose a lead investor, and the most important thing is to make a choice that suits you.

If a DAO intends to seek investment from institutional investors, the investor's requirement that the DAO provide regular project reports should be considered. Requirements will vary depending on the investor, third party service provider (auditor/manager/accountant), jurisdiction and structure and may include:

• Details of the terms of the smart contract/token distribution (also facilitates written confirmation of the distribution mechanism by the smart contract auditor).

• Instructions on how to query the smart contract to see locked/claimable tokens, or provide a basic front-end UI that allows investors to connect to a wallet to view positions.

• A memorandum of understanding or term sheet, which, while likely not legally binding, outlines the parties' understanding of the DAO's mechanics and provides a single point of contact for investor audits (by the core of DAO and investor Contributor Signature).

For institutional investors, one of the main concerns is auditing. But unfortunately, there are not many mature auditors in the encryption industry at present, and most of them cannot verify the mechanism of smart contracts. In the traditional space, if the assets are held in custody by a third party, auditors will usually contact the project party to verify that the funds are kept safe and handed over to investors or under the control of investors. For smart contracts, this kind of operation seems impossible, so DAO needs to provide as much information as possible, so as to reassure investors.

community investor

Remember, the best strategic partners are actually members of their own community, a successful DAO Treasury decentralized sale should allocate a portion of tokens to the community, both Forefront and Index Coop did this in their recent round of inventory token sales a little.

Index Coop also allocated tokens to the community, and by reviewing which members received contributor rewards within the first three months of the sale, Index Coop finalized community contributors who were allowed to participate in the purchase under the same conditions as strategic investors Tokens, including a 6-month linear release period and a market price discount, are capped at a total investment of $100,000 per contributor.

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3. Create the final proposal

All DAO members should have a say in determining the terms of the final deal. Frankly speaking, community consensus is an ongoing process, and DAOs should do their best to manage consensus in an open and transparent manner. For this reason, we recommend drafting and having a DAO vote on a proposal before completing the sale, either by the project founder (as in Forefront), sometimes by the community (as in Index Coop), or sometimes is the lead investor. In any case, the purpose of doing this is to achieve agreement among stakeholders.

You can post proposals to the community forums to allow the community to engage in discussions and revise proposals to ensure token sale funding fits the overall goals of the DAO. In terms of proposal content, there are a few key points to consider:

1. Highlight specific financing goals

2. Clarify the specific terms of financing transactions (such as discounts, token release period)

3. Determine the way to participate in the community

In addition, enough time needs to be reserved for the community to analyze and evaluate proposals to ensure a well-thought-out proposal before the financing transaction is completed.

Undoubtedly, the decentralized sale of treasury tokens will open a new chapter for DAOs, allowing them to focus on their specific mission without worrying about subsequent operations being affected. In fact, this is also a good means of financing, which can not only ensure the reasonable distribution of DAO token inventory without affecting the price, but also encourage new stakeholders to coordinate with participation and promote DAO to complete the established goals.