DAOs are offering a democratic and transparent alternative to traditional organizations. But how can a DAO business ensure their tokenomics' long-term success and incentivize community participation?

Decentralized Autonomous Organizations (DAOs) are revolutionizing the way communities collaborate and make decisions. Unlike traditional organizations with centralized hierarchies, DAOs operate on a consensus-based model where decisions are made by token holders. This democratic method promotes transparency, inclusivity, and innovation.

At the heart of every DAO is its tokenomics, the economic framework that governs the issuance, distribution, and utility of its tokens. Effective tokenomics are crucial for aligning the interests of stakeholders, incentivizing participation, and ensuring the long-term sustainability of the DAO.

We’ve developed this guide in collaboration with our blockchain consultants to simplify the complexities of tokenomics DAO, using a real-world project from our portfolio as an example to demonstrate our approach. Continue reading to discover how to build a thriving decentralized community.

How to create tokenomics in DAO: key elements to consider

Token supply and demand

The total supply of tokens and the rate at which they are introduced into the market significantly impact their value. A limited supply can create scarcity, driving up prices. Conversely, an excessive supply may lead to deflation. Striking the right balance is crucial. Consider factors like the DAO’s:

Projected growth
Desired level of decentralization
Future fundraising
Introduction rate
Burning mechanism

For example, for one of our projects, Proleague, our task was to develop tokenomics for an esports application. We paid special attention to token supply and demand because these two factors are crucial for the long-term success of any blockchain-based project. To ensure a stable and sustainable ecosystem, we implemented the following models:

Demand models

Subscription: Users need to subscribe to the platform to participate in paid games.
Tournament participation fee: Players pay a fee to join tournaments.
Tournament setup fee: Organizers pay a fee to start a tournament.
NFT minting fee: Creators pay a fee to mint NFTs.
NFT reselling fee: The platform charges a fee when NFTs are resold.

Supply models

Referee reward: Experienced gamers can become referees and earn tokens for resolving disputes.
Referral reward: Gamers earn tokens for referring new users.
NFT trading: NFT holders can sell their NFTs on the Proleague NFT marketplace.

Token distribution

How tokens are allocated among stakeholders is another critical aspect. Common distribution methods include:

Airdrops: Distributing tokens to existing community members or holders of related cryptocurrencies.
Token sales: Selling tokens to raise funds for the DAO’s development.
Mining or staking: Rewarding users for contributing computational power or holding tokens.
Team allocation: Granting tokens to the DAO’s founders and core team.

The chosen distribution model should reflect the DAO’s goals and incentivize participation.

Token utility

A token’s utility determines its intrinsic value. While many DAOs utilize tokens to represent ownership or voting rights, others have more specific functions. For instance, Gala Games introduced $GALA tokens, which aren’t tied to any ownership stake but serve as digital rewards within their gaming ecosystem. A token with multiple utilities is generally more valuable and attractive to investors. An expert DAO development company will help you determine the most profitable utility options.

Governance voting

Tokenomics should support effective governance. One common approach is to allow token holders to vote on proposals and decisions. The voting mechanism should be fair, transparent, and resistant to manipulation. Consider factors like:

Quorum requirements: Determine the minimum number of token holders needed to participate in a vote for it to be valid.
Voting periods: Establish a reasonable timeframe for voting to allow sufficient deliberation.
Weighted voting: Consider whether to give token holders more voting power based on their token holdings.
Proposal submission: Establish guidelines for proposing new ideas or changes to the project.

Incentive mechanisms

Incentives are crucial for retaining community members. Consider implementing:

Staking rewards: Rewarding token holders for locking up their tokens.
Referral bonuses: Rewarding users for bringing in new members.
Governance rewards: Compensating participants for contributing to the DAO’s decision-making process.

Monetary policy

Monetary policy refers to the management of the token supply and its circulation. Key considerations include:

Inflation: Introducing new tokens to the market can create inflation, potentially diluting existing holdings.
Deflation: Reducing the token supply can lead to deflation, potentially increasing prices.
Token burning: Removing tokens from circulation to reduce supply and increase value.

The chosen monetary policy should align with the DAO’s long-term goals and the desired level of price stability.

Liquidity

Liquidity refers to the ease with which tokens can be bought and sold. A lack of liquidity can hinder the token’s price stability and discourage participation. To improve liquidity, DAOs can:

Create decentralized exchanges (DEXs): Facilitate peer-to-peer trading of tokens.
Partner with centralized exchanges: List tokens on established exchanges.
Provide liquidity incentives: Reward users for providing liquidity to DEXs.

Value capture

Value capture refers to the DAO’s ability to capture and distribute value generated within its ecosystem. This can be achieved through:

Transaction fees: Charging fees for transactions within the DAO’s network.
Revenue sharing: Sharing revenue from services or products offered by the DAO.
Token appreciation: Increasing the value of the token over time.

DAO fees

DAO fees are essential for funding operations and development. In our projects we pay attention to:

Fee structure: Determining the types of fees and how they are calculated.
Fee allocation: Deciding how fees will be used (for development, community rewards, or treasury reserves).
Fee transparency: Ensuring that fees are clearly communicated and audited.

What are the benefits of effective tokenomics in DAO?

Community engagement and participation

Well-designed tokenomics can incentivize community members to actively participate in the DAO’s governance, decision-making, and development. By rewarding contributors with tokens, DAOs can foster a sense of ownership and encourage ongoing involvement. Also, token holders that have voting rights, feel their power to influence the DAO’s direction and future.

Resource allocation and funding

DAOs can use their native tokens to raise funds for projects and initiatives, providing a decentralized and efficient way to allocate resources. Tokenomics can help manage the DAO’s treasury effectively, ensuring that funds are used for their intended purposes and that the DAO remains financially sustainable.

Ecosystem development and growth

DAO tokenomics can incentivize the development of applications, services, and tools that enhance the DAO’s ecosystem. As the DAO’s ecosystem grows, the value of its native token can increase, attracting new users and participants.

Security and resilience

Tokenomics can be designed to prevent Sybil attacks, where individuals create multiple identities to gain undue influence. A well-structured tokenomics model can help protect the DAO from economic risks and vulnerabilities.

What are the challenges of creating effective DAO tokenomics?

Preventing token concentration and whale effects

Token concentration, where a small number of holders own a significant portion of the total token supply, can lead to market manipulation, governance control, and liquidity issues. To mitigate these risks, DAOs can implement strategies such as:

Fair launch mechanisms: Distributing tokens evenly among participants through liquidity mining or airdrops.
Vesting schedules: Preventing early investors and team members from selling large amounts of tokens immediately.
Governance token caps: Limiting the number of governance tokens any single entity can hold.
Incentivizing small holders: Encouraging participation in governance and decision-making processes.

Navigating regulatory challenges

DAOs operate in a complex regulatory environment that varies across jurisdictions. Key regulatory concerns include:

Securities regulations: Classifying tokens as securities can subject them to strict regulations.
Tax implications: Token transactions may have tax consequences for both the DAO and its members.
Anti-Money Laundering (AML) and Know Your Customer (KYC), and Know Your Transaction (KYT) regulations: DAOs may be required to implement AML and KYC measures to prevent illicit activities.

To address these challenges, DAOs can:

Seek legal consultation: Engage with experts specializing in cryptocurrency and blockchain to understand the regulatory landscape.
Maintain transparency: Operate transparently to build trust with regulators and the community.
Develop adaptive governance models: Create governance structures that can adapt to changing regulations.
Educate the community: Inform members about regulatory issues and the importance of compliance.

Balancing decentralization and efficiency

DAOs aim to achieve a high degree of decentralization, but this can sometimes lead to inefficiencies and slow decision-making processes. Striking the right balance between decentralization and efficiency is crucial for the success of a DAO. Strategies to achieve this include:

Modular governance structures: Using different governance mechanisms for different types of decisions.
Delegated governance: Allowing members to delegate their voting power to trusted representatives.
Quorum requirements: Setting appropriate quorum requirements to ensure that decisions are made by a sufficient number of participants.
Time-bound voting: Implementing time limits for voting periods to avoid delays.

Addressing sustainability and long-term viability

Ensuring the long-term sustainability of a DAO requires careful planning and consideration of various factors. Key challenges include:

Revenue generation: Developing sustainable revenue streams to fund the DAO’s operations.
Talent retention: Attracting a professional dApp development company to contribute to the DAO’s success.
Adaptability: Ability to adapt to changing market conditions and technological advancements.

To address these challenges, DAOs can:

Explore revenue-generating opportunities: Consider options such as fees, token sales, or partnerships.
Stay updated on industry trends: Continuously learn about new technologies and market developments.

PixelPlex real-life example: Mantra DAO

PixelPlex isn’t just about theoretical blockchain expertise. An excellent example is our collaboration with Mantra DAO, a community-governed DeFi platform. We provided targeted assistance across various aspects of their development, helping them build a robust and successful platform.

Mantra DAO’s tokenomics: a community-driven approach

At the core of Mantra DAO’s tokenomics is a strong emphasis on community involvement and reward. The platform features two primary components:

Staking rewards: To ensure the security and reliability of the Mantra chain, a portion of block rewards is allocated to validators who secure the network. These staking rewards are issued on a regular basis, incentivizing participation and contributing to the overall health of the ecosystem.
Community participation: This allocation is reserved for community-driven initiatives and projects. Members of the Sherpa community can propose and vote on grant proposals, directly influencing the future direction of Mantra chain.

PixelPlex’s contributions to Mantra DAO’s success

PixelPlex has played a pivotal role in supporting Mantra DAO’s growth and development. Our contributions include:

Deployment of 60+ staking pools: We have facilitated the creation of a diverse range of staking pools, providing users with various options to participate in the network, earn rewards, and support Mantra DAO’s tokenomics strategy.
Development of Zendit launchpad: Our expertise has been instrumental in building Zendit, a launchpad platform that enables projects to raise capital and distribute tokens.
Migration to Staking Pool V2 and Token Swap: We oversaw the smooth transition from Staking Pool V1 to V2, incorporating features such as auto-generated staking rewards to enhance efficiency of a complex Mantra DAO’s tokenomics.

Thanks to the effective development of smart contracts, staking pools, and tokenomics, Mantra DAO has achieved notable success in the DeFi market. The platform has garnered a substantial market capitalization (the current market cap of Mantra Dao is $1.32B), and a significant number of staked assets, demonstrating its popularity and community support.

How PixelPlex can help with DAO and tokenomics development

Building a DAO or crafting a robust tokenomics model for your blockchain project requires specialized knowledge and experience. PixelPlex is here to bridge that gap and empower your vision.

We understand the intricate nature of both DAO development and tokenomics. With over 11 years of direct blockchain experience and a proven track record of helping create 3 unicorn projects (valued at over $1 billion!), we possess the expertise to guide you through the entire process.

Our team of seasoned and certified blockchain developers and consultants are equipped to tackle any challenge your DAO or tokenomics design may present. We have a deep understanding of the nuances involved and can tailor solutions that perfectly align with your project’s goals.

PixelPlex doesn’t just boast expertise, we have a portfolio to back up our tokenomics development services. We’ve successfully developed tokenomics for projects in a wide range of industries, from engaging games to revolutionary DeFi protocols and even streamlined supply chain solutions.

PixelPlex is your one-stop shop for all things DAO and tokenomics. Let us help you navigate the complexities and unlock the full potential of your blockchain project – contact us today.