DAO First Capital Formation

Transcript

all right hey everyone um so i'm going to be talking about uh dow first capital formation uh hopefully um some of you have read the article that i published uh like maybe a month ago or so a few weeks ago i'm going to try and give like a high level overview of that but maybe dig into a couple of topics and i'll leave some time at the end for questions if anyone wants to drill down further so i guess the starting point what is capital formation so you know traditionally capital formation was this idea of like accumulating capital um you know particularly around nation states um you know what uh what did you need to do to ensure

that uh you're building up kind of a sustainable pile of capital to be able to continue to operate i think it's kind of evolved and the term now is also you know used for just raising capital but with dows it's not just the process of raising capital that we care about we also care about ensuring that it's done in a sustainable way you know anyone in this room can probably put their hand up and raise a couple of million dollars at this point in the market cycle but we want to make sure that you don't just do that and then squander the money or you know not actually produce anything uh from that so there are obviously options and trade-offs now for most

of crypto history i think when we've been raising money we've raised it through traditional means so things like uh you know equity direct equity warrants all kinds of weird and wild instruments the idea of raising money directly into a dow probably uh you know other than the dow itself um you know hasn't really been something that i think people have been comfortable with until maybe the last like 12 to 18 months and it's kind of accelerated since then and there are a number of advantages but one of the reasons why i think people have been concerned about raising money directly into a dow is they think that investors or people that are going to provide capital

are going to be concerned with the idea of just sending money to some contract right and you know again there are obviously trade-offs with that but i think the reality is that most of the sophisticated investors particularly angel investors in the space the people who've been in d5 people who've been in crypto for a long time are very comfortable this idea um so a lot of the teams that i talk to are really worried they're like if i just you know give someone a contract address and say like send money to this is anyone going to actually do it obviously it's important that you build up credibility and that you know there's uh some you know confidence that people have in you um but ultimately a lot of the things that we build in the traditional system around equity grants and and you

know traditional capital uh raising is like a a false economy right it you know you're putting all of this structure in place to provide confidence to people which is not really there right yeah you know there isn't really much uh in the way of protections for investors it's not like someone's going to turn around and you know sue the average startup like andreessen doesn't run around suing startups very often unless you know they're directly uh you know defrauding people and so if you start with this dow first model you are much leaner and you're in a position where you're not going to be restricted in what you can do you're not going to be restricted in how you can engage with your community and how you can build a community and how you can create something that's

collaborative so this is kind of outside of the scope but a lot of the teams that i talk to have already raised capital and they've done it in some traditional way and they've created some issues for themselves almost all of these things you can unwind so if you're out there and you've raised a couple of rounds of capital and you're thinking you know what do i do with this how i've got you know cap table with a bunch of people that own equity and i don't know how to you know convince them to convert to some sort of dow model i think again a lot of the investors in space are very comfortable with this idea and basically what you need to do is you need to approach them and say this is the transition that we want to make you need to get buy-in from them

and you need to work out a way that you sort of discharge the obligations of some centralized entity that has equity or has some capital structure that exists and convert it into a dow it's not impossible to do it's very easy to do so if you're out there and you're worried about it and you want to grab me and have a chat about it i'm always happy to try and unwind really dumb things so you know let me know so um the pre-dao stage right as everyone knows you start off with an idea or or you know there's a couple people that are talking in a discord or a telegram channel and they want to go and build something right there's a million things we can build within crypto um the solution space is wide open uh

but you start off with just people that are kind of coordinating um you know over a chat or you know impersonal whatever and there's no rules there's no structure right and typically in a traditional environment what you would do is you get to a point where you say okay we want to incorporate this entity and we're going to agree on what the equity structure is and we're going to go to a lawyer and they're going to draft up all these documents it's going to be fun and whatever right spend a bunch of money doing that when you create a dow the opportunities you know to do the same thing but to do it in a much leaner way right and so that transition from the pre-dow phase where you've got you know three or four people in a room or maybe five people or maybe a small

community that wants to go out and build something and wants to take in capital and kind of formalize it is basically finding a way that you can structure the the kind of distribution of governance and and control of that entity uh in a sustainable way um and so we've seen a lot of examples of this um i think one of my favorite is probably barnbridge so the barnbridge team they turned up there were i think four or five people initially and then it became like 10 or 15 people and they came up with this really good idea of we don't know what this is going to look like we don't know which investors are going to want to be involved but we want to put something in place where we can all kind of coordinate without having uh to you know

just discuss things on telegram right or or on a zoom call or whatever and so they created uh this like pre-governance token so they allowed some people to bring some money in create a pre-governance token and that created a coordination mechanism for everyone to agree on the rules and and start to structure things and we've seen other teams do that now luvium's done it spool has done it there's other dowels that have kind of come together and done it ultimately it doesn't matter exactly how you do that but you do need to kind of make a decision around that that break point where you think you've got enough momentum in a group of people that you're ready to kind of formalize things and then you need to come up with a coordination structure that will support that so that's

i think that's probably one of the most important uh aspects of this right that this is not a control mechanism you know so when we think about like traditional corporate governance it's really about control right there's you know a ceo there's a board there's all of these structures that allow for those people to control what can happen within the organization with a dow we ideally don't want anyone to be in control we don't want this hierarchical process where you know we feed up to a single person who's in charge of everyone else or you know a board that's in charge of the entire structure we want to make sure that we're creating a fair and legitimate process for everyone to coordinate and so this idea of creating these kind of pre-governance tokens or

some you know early governance structure is quite powerful because you can distribute that without handing over control to any particular person or any particular entity and again you know to use the barbridge example it worked really well i think there were probably 25 maybe people who held the original dow tokens and what that allowed them to do was coordinate around what the next phase would be and they were doing that coordination in a legitimate fashion right they they weren't having a few people that were making direct decisions about how the the system was going to be structured or what the transition was going to be which you know in a typical corporate structure you would have people who would effectively say this is what i think is going to happen

and i'm the ceo and i'm going to do this and you all have to get in line otherwise i'm going to fire you or whatever right and i think that that allowed them to create a community and an engagement in this collaborative atmosphere but still have a mechanism to make decisions because ultimately decisions need to be made right and i think one of the one of the aspects that really trips people up is kind of changing your mindset as a small team that's building something you you can't make the decision the community needs to make the decision it's not your decision to make you can guide people you can say this is what i believe is the best thing to do but if you have the control to be able to say this is what we're going to do then you've kind of broken the model

right so you need to advocate you need to go out and you need to make your case for why we should do x instead of y and so you know this is a this is i guess the the you know the process of building a community is hard right and this is something that i talk to teams about a lot they say you know how do you get a community that's bought in uh to what you're doing and i think there are a couple of things that are really important one is legitimacy so you need people to feel like the decisions that are being made within this entity this organization this protocol this project are legitimate if people feel like

they're being you know dictated to right if they feel like there's a dictator and i'd say that jokingly right because you know i was the dictator of synthetics for a long time but if you even as the dictator of synthetics i still had to take input from the community there was no process and the community oftentimes would overrule me i would say we should do this and the community would say no right um and so i think the the process of engaging community and and really getting them to believe that their input is important and that the decisions that are being made are being made in collaboration with them rather than being you know pushed on them is is really critical and important and if you don't do that then what you have is you know

essentially governance fatigue and all of the things that we see in in some of the uh you know places where we have let's say you know direct token voting uh or whatever i think another aspect is you need to actually be there you need to be where the community is and this is another thing that a lot of founders ask me about they say you know how do i get people interested in the project you know what should i be doing and i think you're going to attract people who care about the problem you're trying to solve if you're solving it with them out in the open and you're talking to them about the challenges and you're being very transparent and you know you're kind of walking them through the process and if you go back to the synthetics early days like the you know early 2019 period

most of the good ideas that came out of synthetics then did not come out of the team at the time they came out of you know individuals within the community you know people on twitter complaining about things and saying this is a bad idea and you know the community then responding to that it was a very collaborative and open process it wasn't uh this kind of closed-door decision-making that was then pushed on people and i think that if you're a founder and you're building some let's say take an options protocol right you're building an options protocol and you're you know obviously there's a lot of work to do there's a bunch of things you need to do and you're building that uh kind of behind closed doors the people who are really interested in

those hard problems that you're trying to solve then can't engage with you right it's really hard for them to engage with you so if you're in your discord or wherever it is you know discord is quite good because you can kind of thread exactly you know the different discussions and different things that people are interested in and people will be interested in different things right some people will be interested in mechanism design some people will be interested in price some people will be interested in you know governance decisions but if you are there in the front lines talking to them you'll have a much more vibrant and engaged community than you would have if you just you know push out an update once a month and say this is what we've been doing in the background relinquishing control um this is a hard

process uh so for those of you who followed synthetics um you know this is very much an iterative thing uh you you need to experiment with it um and every project has its own kind of idiosyncratic uh challenges that it's going to uh going to face um you know there's some projects uni swap's a great example where um you know all three versions have kind of been built and then pushed out to the community and then the engagement process has kind of been post design right so like there will be a design and implementation it's pushed out to the community and then everyone comes and discusses it and then they go back and they iterate and they push out a new version and they're immutable right there's no changes whereas you've got other

projects uh where there's multiple changes happening all the time whether they're kind of uh changes to do with parameters or the fundamental protocol changes and i think that uh for for all of these things you really need to understand at what time is it appropriate to hand over control so in our case with synthetics we made a decision to hand over the parameter control um to a group of people that were essentially voted in by the community um previous to that we actually had direct democracy on these on these changes right we had you know essentially a discord poll would decide every single change and we'd roll them out

and then we realized that the engagement was you know not as high as we wanted and we wanted to ensure that people were going to have the ability to kind of dig into what the implications of these changes were going to be so we handed over parameter control and then we tested it we iterated on it we realized you know what was working what was not working and then we eventually handed over full protocol control but that's not every aspect of control of the project there's also long-term strategy there's treasury management there's all of these different components and so my my personal view and i think the view that we've had with synthetics is you need to just iteratively experiment and you need to be willing to realize when you something up and you need

to roll it back so one of the examples is obviously within the core contributors me stepping back and saying okay core contributors go off and let the the spartan council control you uh was not uh a success let's just put it mildly um but it wasn't to say that it was an abject failure it was just it wasn't as efficient as it could have been right and so we ran that experiment and we realized that that experiment didn't work and so i came back to say okay what can we do to kind of experiment and what changes can we make what tweaks can we put in place to ensure that this is a sustainable process and this is something that you know will work long term and like again i cannot stress for every single project you need to be willing and open to experiment in public

to accept the wins and the losses and really own them and you know iterate on them and if you do that i think again you know it creates a sense of legitimacy in the process that the community feels that you know they feel like they're they have you know a say in what's going on with the project so token distribution um so if we go back to the this kind of pre-dow to dow transition right so you've got um a group of people in a room or virtually or you know overzoom or whatever that are all agreeing that they're going to uh have some input into a process for some people it might be capital for some people it might be engineering work for some

people it might be community building and all those people get together and they say we're going to distribute tokens in this dow and then we're going to roll it out and start building a community around it and so there's a number of different aspects of this i guess um you need to make sure and this again comes back to capital formation that there is a treasury that remains within the dow so that it can continue to operate um you know a dao is going to in this environment probably cost you at least a couple of million dollars a year um to to be able to uh function and you know by the time you factored in engineering salaries and all that sort of stuff um it's pretty expensive to hire solidity engineers at the moment and so you need to ensure that you've

got the ability to retain tokens within the treasury um the range is pretty wide but something on the order of like 10 to 30 of tokens retained within the treasury that you can then distribute later on maybe via otc deals maybe via like a balance or smart pool or something like that and again this is where having a pre-dial can be quite valuable because these decisions are fairly fraught and they're very critical and if a sort of nascent community feels like they're being pushed on them and that someone just writes a blog post and says hey guys here's the token distribution this is where a lot of starts to get painful right within communities

people don't like the distribution they don't agree with it they're not bought into it and so when you start to kind of formalize this uh my personal view is that it needs to be done in collaboration with the community and it needs to be uh again like a legitimate process so you say you know we're going to stop putting out you know a token distribution of some kind here's the breakdown and then take feedback from the community because if you don't take community community feedback a you'll probably get it wrong right because the community is going to have a sense of what this needs to look like in a way that maybe a couple of people might not right so the first issue is you might get it wrong the second issue is that even if you get it right people are going to be

pissed off because they feel like they're you know just being told what's going to happen and don't have any input into it you also need to retain some tokens uh this is a controversial topic i guess but for the early contributors the people who are you know initially contributing to the dow um unless you're andre in which case you know obviously you can uh you can do a fair launch but i think we've even seen uh with wire and that you know they've gone back and and realized that not having any tokens in the treasury to be able to give to contributors is poor incentive alignment right so um i think even the the idea of like a pure fair launch maybe uh is starting to kind of lose way and then yield farming you need to have tokens for yield farming

it's one of the best ways to distribute tokens it's the best way really that you can bootstrap a protocol so you need to make sure that you retain a big chunk of tokens to incentivize early usage and then depending on how you form the dow if you had early investors then you obviously need to have some tokens for those early investors to capture this brings up another point which is that if you do raise money initially into the dow please raise that money in stable coins um don't raise it in you know a volatile asset as much as i love eath and i'm very happy for people to hold eath that first chunk of you know one to two million dollars like just hold it in something that you know you've got some continuity

when you then subsequently do like a balance or smart pool or something like that or you do you know some kind of auction mechanism to do a wider distribution by all means hold each go nuts but the initial uh the initial capital really should come in stable coins so yeah just to reiterate initial capital formation stable coins make sure that you take stable coins i cannot stress that enough particularly in the part of the cycle that we're in now regardless of you know whether you're bearish or bullish or whatever um you need to de-risk the the project and if you raise a bunch of money in a volatile asset and you find yourself in six months time running out

of capital it's not a fun experience for those of you who are around in 2018 you know what i'm talking about again it's it's something that i think you know cannot be stressed enough the final topic is governance um so there are a ton of different ways that you can govern a protocol um so with synthetics we've chosen to take the approach of like a number of different dowels and delegated democracy and the reason why we went this delegated democracy approach was kind of it was again like iterative experiments um but what we found is that our discord voting

created an environment where uh regardless of your token holding it was one person one vote right and that actually wasn't it wasn't like an intent like it wasn't an intentional thing right it was just kind of an organic thing that emerged and everyone it turns out really likes that maybe the whales don't like it that much but you know there's a lot more non-whales than there are whales and so as we started to shift that towards token-based voting we were trying to balance this idea of how do you ensure that you don't go from you know this one person one vote model to you know whale control or plutocracy or whatever and the way that we balance that was to basically say you can vote for an individual member on this council you can kind of delegate

towards this person who's going to make decisions on your behalf but even if you're a whale best case you can get one person on the council right out of eight people in our case right now you might have three people five people 20 people it doesn't matter the number but what it does is constrains the power of whales even if they're colluding together it makes it much harder for them to just vote things through without you know any oversight now again there's snapshot there's uh you know compound governance module um you know obviously maker governance there's a whole range of different ways you can approach this and people are also skeptical of delegated democracy they're worried about you know career politicians and things like that um you know again the i think the balance

uh appears to be that having a delegated democracy is is something that's quite powerful um and does and does really strike a balance between uh having you know too much powerful whales and uh not enough buy-in from people but watch what everyone else is doing look at the experiments experiment yourself um you know and make sure that when you are doing something it's not something that you can't walk back right so you know small experiments and and testing and rapid iteration and yeah this this is dynamic right like this this whole idea of uh

of you know kind of capital formation and governance uh it's changing every day um you know there's new experiments every single day uh and so you know monitoring what's going on and trying to stay abreast of it i know it's hard um is probably the best way to kind of ensure that you're that you've got all of the tools in place uh to kind of you know implement uh the best governance your best governance system and capital formation for your project that's it thank you i think there's time for some questions

yes do you have any questions guys there was an interesting talk yesterday by the clearest talk by the clearest team about how the best dallas have a sort of an independent supreme court which very deliberately the token holders have absolutely no input to what are your what's your opinion on that i think it's again it's an interesting experiment um i think there there's definitely a risk with token holders making the wrong decisions based on kind of you know their own interests right um and not necessarily having like the best long-term alignment um and so having a sort of independent credibly neutral

body that makes decisions on behalf of people uh can work i i guess my sense is that token holders especially early token holders the incentive alignment is very strong right and so they're going to have an awareness uh of what's happening within the project and all the different trade-offs and considerations that an independent body that's supposed to be kind of outside of that may not particularly when you're talking about you know a body that's overseeing multiple different things right that's not a specialized body my view is that having like different specialized bodies that are focused on aspects of protocols but individual protocols at least in the early stages is is much more powerful

hi um so i read the blog post before uh and like try to reach out and listen to this there's i'm like right at the pre-dial stage basically and it doesn't quite uh make sense so like how do you flow from like predator from like the investor standpoint because you know ideally i don't want to exist in any jurisdiction i don't want to have like you know any legal entity and the funds are okay with like you know just standing stable coin but then they want to like receive something back so let's say you meant the pre-dial token and you give them but like where's that guarantee for them personally to go from pre-dial token to the there's no guarantee there's no

guarantee and this is you know where again like the guarantee of a piece of paper that says like here's your equity in this thing like it's right yeah yeah so like it gives them comfort well if they need that i mean you know in the like in the post like i kind of jokingly said right like we're not in the business of trying to give comfort to a bunch of boomer investors right like the if they can't get that having a pre-dial token that converts into a token in the future is the best kind of guarantee that they're going to get then there's probably poor alignment i would argue yeah but like then like how many of those tokens do you mean to them versus like to you like how do you distribute let's say like controlling the pre-dial stage yeah because yeah there's obviously like me

core contributors like kind of like the team but then you don't want the investors to like steer the project um well again this is where you know control right like it's a coordination mechanism so you know obviously if you have uh the initial contributors of the dow going to have tokens in the pre-dal right early investors assuming you're bringing capital in will also have control uh the rest of the tokens will probably be sitting there earmarked for certain things like yield farming but not votable right now depending on what the breakdown of those tokens are you may not be able to have like a clear majority right but arguably even within the contributors assuming you're all colluding together

right you don't want to have a direct majority because if you have a clear majority you have control right so it needs to be about coordination if you are not confident in the early stage of the people that you're bringing capital in from that they're not going to be aligned with the project and that you're going to have like governance issues in terms of decision-making processes not reaching consensus stay away from those people right like you this is a really important thing like these are people collaborating in a dow yes they're only bringing capital but you need to make sure that you have confidence in their decision-making ability and that they've got confidence in you so i guess like should they be signers on the multisig yeah definitely yeah i mean it's it depends on the structure that you choose right if you choose a multi-sig

structure or if you choose like an aragon dow that's a pre-dial that converts later um you know there'll be voting distribution or they might be you know they might have one signing ability or you know whatever um that's i guess up to you to kind of negotiate with them right in most the cases i'm not seeing investors wanting to be signers sometimes you'll get angels that are willing to be signers for the signaling you know capability like i'm all right yeah um yeah so like you know like i'm a signer and a couple of dows right like early dows because they want to make sure that there's someone who's got skin in the game that's not going to rug people or whatever so you know there can be a signaling aspect to it i guess as well but ultimately that initial distribution

needs to be agreed upon before you form that pre-dial and even if it's a multi-sig you know a four or five multisig or whatever and it's just the cash that's going to sit in there um that's fine they probably don't need to be a signer on that yeah i mean because like you know let's say we want to like keep deploying contracts and stuff like i don't want to wait for like you know so this is this is a a separate aspect i guess right like control of the protocol so yeah let's assume you're going to you know have like a proxy architecture where you're going to need to deploy changes the protocol right you probably don't want uh an investor or just a you know a capital person being on that some of them are happy to be and it might be good for you know again for

signaling to make sure that people are confident that changes the protocol are not going to go against consensus right but if you're changing the protocol then you need to have a mechanism to ensure that everyone who's got uh governance power is have participating in that right like they need to be able to participate in that decision that's where snapshot comes in so if you've got pre-tokens everyone votes in snapshot you reach consensus you say this is the upgrade we're about to make you deploy that upgrade the people who actually sign the multisig to do that again sometimes having you know angel investors like a robert or stanley or whatever can give people confidence but it can just as easily be the engineers working on it right um it doesn't necessarily need to be external parties

so i guess yeah i mean i love the idea and i really wanted to do it this way but like there's like a lot of these like small questions that there are a lot of small questions yeah and i mean maybe i need to uh follow up that post with like very specific recommendations the problem is it's it's hard to make specific recommendations because every you know every case is kind of different um but you know i think ultimately uh in in the early phase it's going to be a lot of kind of meat-space coordination right like it just is going to be that's just the way you need to kind of have that expectation um also in the early phase no one gives a right like there is maybe a small community you're talking about you know maybe a few million dollars like um until you get to a point where you've

deployed you know something that's got like a ton of tvl or whatever the stakes are fairly low right so i think you can afford to be a little more flexible um as the stakes get higher then you need to add more control mechanisms and and you know uh checks and balances et cetera all right cool yeah thank you it's uh very cool like inspiring cool awesome did any anyone split their tokens in order to have more votes and if if so what did you do what would you do if that happened so i think we were lucky uh in synthetics because

there was a fairly high cost to civil attacks because you need to claim every week when you claim the tokens are locked for a year um so the cost of setting up a new address is basically like the you know the yield cost right so you know at that early stage it was like 40 a year or something like that which meant you know like obviously for a whale the the transaction cost is fairly low but there's just an overhead cost right of having multiple wallets so we've actually seen more wallet consolidation from large wallets than people splitting it out to sybil attack but you know it definitely was a concern but we haven't sort of seen it in practice so i would say it's something to consider you know do you have some kind of natural anti-sybil

measure that you could implement within the protocol and if you can then you should do it thank you no more questions do you want to share a little about how you view accountability for the people who are like in control of a protocol like how what's your perspective on your plans of how we should attack that and other recommendations people you can give people when you say accountability like in what aspect or like visibility into like like when you have like elections like this like how do you know people are doing good uh if people aren't holding their weight how do you you know surface that stuff like that yeah i think that's

something that we haven't solved yet um you know we we don't really have good sort of decentralized ways of ensuring that people are kind of uh committing um i think uh carl's talk yesterday about this like retroactive public goods thing is is kind of an interesting model at the moment with synthetics we pay people up front and there's a process where if there's consensus that someone is not you know participating or not contributing then that person can be removed but it's retroactive right the idea of you know maybe getting everyone to go out and do stuff and then making a decision about how well they did and then paying them after the fact it's quite interesting i don't know how many people would be willing to to kind

of sign up for that necessarily they want you know maybe a little bit more certainty around the fact that they're going to get paid but i do think you know again all like every single aspect of this that i've discussed there are experiments and um and things playing out in different projects that the only way you can kind of even approach getting this right is to just continue to monitor those experiments and kind of cherry pick the things that are working and not working um you know we pulled stuff from balancer we pulled stuff from maker we pulled stuff from you know ave from all different places to kind of you know try and uh create something that kind of works for synthetics but for your project again there's a whole bunch of places where you know there's tools that you can pull off the shelf

and use really easily thank cooking you