Tokenomics of the DAO: Why Do We Need a Token In 2023?

Everyone needed a blockchain in 2017. It was the panacea for all ills, and the excitement surrounding it was incredible. Most people now realize that a blockchain isn't a panacea for all problems and that the method taken at the time was more akin to a hammer seeking for nails. Nowadays, I often get the same emotion when talking about tokens. Every project aspires to issue a token.

The reasons for this are numerous, and I'd like to investigate when a token makes sense and when it doesn't. Shares of a corporation are an excellent real-world analogy of tokens. The Australian Shareholder Association claims that the stock market serves two purposes:

This is a really accurate definition that also applies to web3 tokens. The main feature of web3 is that practically anyone may create a token and use it for the aforementioned reasons. Almost anyone can buy these tokens, offering retail investors equal access and reducing system friction. There is less friction because transferring ownership to anyone costs relatively little.

I'm not going to dive into the legalities of it, but issuing shares is regulated, whereas tokens are frequently unregulated. This is because tokens are classified as either securities tokens or utility tokens. To avoid securities legislation, most protocols will make an effort to verify that their token is a utility token.

Utility tokens are similar to gambling chips. They can be used as casino currency for playing games and tipping dealers, and then converted back to fiat/cash when cashing out. Chip holders do not have a share in the casino and are not entitled to any of the casino's earnings or revenues.

Security tokens, on the other hand, are similar to holding casino stock, or shares in the corporation. You win when the house wins. Security token owners have a stake in something that could pay out in the form of profits or distributions. In an ecosystem, utility tokens are used. Security tokens make you a part of the ecosystem.

Is there, however, more to a token?

We've seen how owning tokens can change people from agents to principals, incentivizing them to act based on their own self-interest, based on our recent ideas on how the principal-agent theory (hear it here or here). This is a significant distinction between token ownership and more traditional ownership arrangements now in use. Consider how you would treat your own car versus a rented vehicle. That's how token ownership affects contribution quality toward a project's or DAO's aim.

Fabric Ventures' Julien Thevenard has produced a fantastic post on tokenized ownership, which I highly recommend reading — it's jam-packed with useful information. In the picture below, I attempted to summarize some of his findings as well as additional qualities/benefits of tokens, demonstrating that a token is about much more than just ownership and money raising.

Let's go over the details of what a token may achieve for the Tokenomics DAO. I addressed market valuation, raising money, and ownership.

To raise funds, the most obvious option is to create tokens and distribute them to investors, as with shares.

Raise time is a notion that isn't as well-known in the traditional world, but it's used by many DAOs to compensate contributors for the time they spend working for the DAO. This same principle might be used by the Tokenomics DAO to motivate members to create value.

Represent ownership: Representing ownership would provide the Tokenomics DAO with a marketing department in addition to moving members from agents to principals. Members who have opted to put their money where their mouth is will tell others why they are doing so, bringing additional talent and attention to the community and its cause.

A token can be traded on exchanges like Uniswap for essentially no cost, with supply and demand determining the token's price. One of the disadvantages of adopting a token is that live price action forces holders to continually review their position. Price decreases may cause investors to question their investment and contributions to the enterprise.

Coordination: We've laid out our vision for where we want to take this tokenomics movement in the manifesto. The token will aid in the coordination of members toward this goal.

Governance: While token-based voting isn't required (learn more here), it can be a simple method to put tokens to work and let the community decide on DAO-related issues.

People value status, and having and keeping a set number of tokens can provide a sense of belonging, which, when combined with ownership, can increase the motivation to move an effort ahead.

There isn't much that can be said against the principle of using a token, since that is, after all, what makes up web3. We, the Tokenomics DAO, would be significantly limited in our ability to function in the web3 environment if we missed out on all of this. It's not that we need one; rather, we should have one in order to profit from the token's attributes.

To summarize, with all of the foregoing, it appears that using a token is a good idea. The majority of these features, on the other hand, do not contribute to a token's intrinsic worth or its ability to capture the value created by a well-coordinated and incentivized community.

What makes a token valuable?

To respond to this question, we must first consider the value we wish to produce. We discuss content in the manifesto to make tokenomics applicable to everyone. We can presume that if we as a community succeed in demystifying tokenomics and broadening knowledge in this sector, we will have produced significant value. After all, the tokenomics of many web3 applications contribute to their success. We believe it is a vital building block of web3 because of the benefits outlined above.

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