The State of Protocols

A recap on the various states and approaches of protocols in the space

Compared to theoretical discussions about governance in 2017 for base layer chains, DAOs are now governing billions of dollars in net assets across the board. What we didn’t realise is how quickly the table stakes would raise and how we’d be in a rush to rapidly find the answers to many hard pressed challenges faced today.

Before jumping into what those challenges are, it’s worth examining how protocols are rapidly different to companies and some of their unique properties. h/t to Dan Zider for writing this post which contains some crucial figures:

It’s pretty clear to everyone by this point that protocols and tokens are the future. The way tokens are launched, yield farming begins and access to liquidity is enabled for all stakeholders is nothing short of incredible. Although we’re in a bull market and things are pretty over-inflated, it’s still safe to assume that protocol unlock human potential in a way that has never been possible before.

The fact that all value in the world will be captured on-chain means that the collective capital held by individuals and DAOs will also start reaching some mind-boggling numbers.


In Dan’s post which I linked above, he starts off with a simple question: “Do Web3 protocols grow faster than their Web2 counterparts?”

The answer is obvious, but by how much is remarkable. Let’s take a look at two notable tables posted in the article:

In virtually every metric possible, DeFi knocks the closest CeFi/Web2 counterparts by a very large margin. While the data is impressive, I gave it a deeper thought as to why we see these trends occur in most dimensions. Now these aren’t rock solid but more so speculative theories I’ve been thinking about for a few months now:

  1. The optimal team size to reach a $1b+ valuation is around the 8-12 person mark. Compared to Web2 startups which require 50-100 employees to achieve the same metrics. Going a level deeper, the reason why you only need these many people is because two major scaling challenges are solved: support, sales + technical scaling. Combined with the fact that the wider the token distribution list, the more a network can scale beyond its core contributors. I think one downside of highly centralised teams is that their inability to step off the pedal and hand off control means that the community isn’t well adjusted to run and continue the protocol by-itself. Something that I thought about the other day was that if Uniswap started in 2018 and had 4 year vesting, that means that by 2022 theoretically the team isn’t exactly bound to the project. Now this isn’t to say that they won’t but compared to Synthetix, the path for protocol continuity is a lot more blurry. Same thing applies to Compound as well, albeit less so.

  2. The ease of being crypto native is unparalleled. For those of you here who are builders/investors, you know the logistical ease of protocol operations versus equity based company raises. When you start a company, getting your cap table setup, dealing with custody/legal issues, raising capital from investors and hiring employees is much slower and expensive in every dimension compared to a protocol. When you execute a pure, crypto native play many of these challenges are almost stripped to their bare minimum required complexity. Linking into the first point, since the costs don’t scale as much as they do with regular orgs you don’t actually need that much (relative) money to build something amazing. Compound probably has the largest raise at $33m of which they raised $25 after achieving $1b in TVL and right before releasing the token. Most DeFi teams can execute multi-year, ambitious visions with about $5m-$15m in stables. The other factor linking to teams is the fact that the management overhead for a 10 person team is exponentially less than the management overhead for a 100 person company. Having worked in both environments, 10 person teams are much more nourishing for the soul on many accounts.

DAO Treasuries

As mentioned before, the cash amounts required for most protocols is pretty tiny. However, once things start working the value of the token treasuries starts exploding in value. Let’s take a look at some of the largest DAOs and the collective capital they control:

That list and those numbers are absolutely wild. Sure they’re not directly 100% cash equivalents given the liquidity constraints, however a good portion of that could easily be sold if required. Okay so now that these DAOs control hundreds of millions, if not billions what are they going to do with them? Great question actually, no one actually knows yet. I’ve come across a few ideas but my general take is that slowly certain communities are waking up to the fact that idle capital in treasuries needs to be put to work otherwise it’s an extreme waste of potential to release into the world. There’s many avenues that treasuries can use ranging from:

  1. Selling directly for stables to hedge in a bear market. Although as mentioned before as long as the balance sheet holds approximately $5m-$15m in cash there’s probably enough to scale operations and development. There’s an argument for raising more if deep ecosystem integrations are needed although I don’t know the use case for liquidating $100m+ of token treasuries.

  2. Investing into other public protocols. This is one that I really want to see happen. Most protocols are started by builders who believe that everything can be built by one person or a collective. I’m a strong believer in focus is crucial and that rather than trying to do everything, simply collecting a stake in what’s valuable is more powerful and simple. Yahoo owns 11% of Alibaba which is funnily enough worth more than all of Yahoo. This model should be embraced as it follows nature’s flow of life.

  3. Borrowing stables against native gov token. TLDR: use Maker/Compound to deposit volatile governance token then borrow at a safe borrow % and use stables to farm for yield or as YFI did, pay for hacks that happen. This is plausible although is much higher risk given the price volatility unless something like a 1000% c-ratio is used, which could still generate enough liquidity. Although repaying this loan is going to required hard cash if push comes to shove.

  4. Early stage investing. I’ve found that this pretty controversial in the context of a DAO and can often lead to extreme capital misallocation as building is a very different skillset to allocating capital into new early stage projects. There are ways to significantly mitigate this but overall this area feels very under-explored.

For more ideas checkout this tweet storm by CometShock:

Governance Structures

I think by now we have a pretty good grasp of the kinds of governance structures a protocol can run with. At a high level it feels like there’s 3 main buckets for governance that can be adopted (minor config changes but more or less the same):

  1. Every holder decides on every decision. This is what many classic OG governance processes look like. I find with this it usually benefits those with the largest concentration of wealth in the network but pretty terrible for actually moving fast and making informed decisions. There’s many variations on this structure whether it’s through vote locked tokens or some form where tokens transition into some sort of governance state. Those additions are usually more for safety but they still primarily base their core assumption that those with capital can make the best decisions for all the decisions in the network. A major problem with this model is that it very quickly creates voter apathy. To get started this is a perfect structure but should not be relied on for more granular, technical and frequent updates

  2. Rough consensus with multi-signatures to execute. This feels like the most lightweight and flexible process that gives communities a way to express their preferences while still having a safe backstop against governance attacks. The fact that it relies on certain individuals to do the right thing by the community can be a little tricky but given you acquire enough credibly neutral people this shouldn’t be an issue. I like to think of this model as the most pressing decisions are surfaced, discussed and agreed by the community with people-as-oracles to verify the sentiment.

  3. A democratically elected group makes all the decisions. I’m pretty sure this is where most governance structures will land up given this is what most of humanity relies on (dictatorships pose significant legal risk so less of an issue in crypto). The first to really pioneer this model was Compound with the delegates although the Spartan council really nails this well and strikes a good balance between flexibility, decentralisation and speed. There’s still more exploration to be done here and maybe we might find multiple democratic bodies in a network each with varying degrees of importance + checks & balances.


The DAO space is probably one of the next major legs of innovation given the large treasuries and ever increasing reach of these networks. That being said capital allocation and effective decision making processes are in their early stages and will need rapid improvements if we want to see DAOs become powerful forces in the world. I’m confident that we’ll reach there given the rapid experimental nature of crypto and how many experiments run in parallel. My personal predictions for how these two problem spaces will evolve look a little like:

  1. DAOs will become the new endowment funds. Why take money from private investors when the largest crypto networks will give you capital, talent and community in one hit. How capital is allocated will need to be figured out but don’t be surprised when you see ARCx playing in this region ;)

  2. Democracy via protocol politicians will become a major job. Some of the highest paid positions in crypto will be to be a protocol politician. I’m willing to bet that in a few years the best protocol politicians will be paid in excess of $1,000,000/year.

Okay that’s enough with grandiose predictions, time to get back to work. I’m going to write and analyse more DAO activity in the coming weeks since there’s some pretty interesting stuff going on in this arena.