In this guide, we’ll look at what it means to mint DAO governance tokens. This is closely related to other large topics - how to design your tokenomics, how to do a token sale, and how to set your governance. For this guide we’ll focus on two main questions:
First, does it make sense for you to mint DAO governance tokens? Since many large DAOs already have tokens, it's sometimes assumed that every DAO needs tokens—but that is not necessarily the case. In many ways, starting without a token may be simpler—for example, by avoiding the legal requirements that can exist from having a token, or by delaying decisions about the correct distribution of tokens until you have a clearer picture of your product or community. So, don’t think that you can’t start a DAO without a token—builders like you do it every day!
Secondly, we’ll look at determining the token supply. How many tokens should be created now vs. later?
This guide describes the pros and cons of minting tokens, as well as considerations of how many tokens to mint and when to do so. If you want to learn how to mint DAO governance tokens in the Aragon App, check out this guide!
“Minting tokens” means creating tokens—either from scratch at the beginning of your project, or increasing the supply to add more later. Similar to a central bank that prints money or a business that creates shares, you can “print” your tokens and distribute them. The difference is that your token is deployed on the blockchain, so it is created by software, and you own the keys to your tokens (rather than a bank or government).
Fungible Tokens or NFTs?
You may have heard of different token types. Fungible tokens (sometimes called ERC-20s) have the exact same type and value as each other. This is like dollar bills: every dollar is the same. For example, imagine I have 1 ANT and send it to Luisa. At the same time, I receive 1 ANT from Luca. At the end of the transactions, I have 1 ANT. In this guide, we’re going to focus on talking about minting fungible tokens (and we’ll just refer to them as ‘tokens’ for short).
On the other hand, there are non-fungible tokens (NFTs), where the tokens can have different value from each other, which is determined by factors such as visual appearance, age, and rarity score. In this guide, we won’t go into detail on NFTs, but we will see how they can be a useful alternative or complement when considering minting fungible tokens.
Tokens can be useful for raising funds and recording votes on the blockchain, but they may add unnecessary complexity to what you want to do. First, ask yourself what you want a token to do for your DAO.
Typical objectives include:
For cases where you are have a more complex tokenomics model in mind, you may want to reach out to some DAO experts to look at your situation specifically.
An important consideration to be aware of is that governments around the world may consider your token a security, and therefore subject to regulation and tax. For example, in the US you need to comply with the SEC securities regulations. The security status of your token is determined by the Howey test, which states that if your token has reasonable expectation of profits derived from the efforts of others, it may be considered a security.
You may be wondering if you should mint 100 tokens, 100 million, or anything in between. You’re not the first: this debate is similar to traditional companies determining how many shares to create. Technically, there is no hard requirement for how many tokens to mint. Even if you only minted 10 tokens, you could give out fractions of tokens to contributors.
Beyond technicalities, you may want to consider psychological effects. You may want to avoid giving out fractions of tokens or make sure the numbers are easily divisible (like working with a base 10 number). Another psychological consideration is the size of the numbers you’re working with. It could be more motivating to contributors if you distribute larger numbers of tokens. For example, it could be preferable to give out 1,000 tokens to a contributor from a pool of 1 million tokens (0.1%), rather than to give out 1 token from a pool of 1,000 tokens (still 0.1%, but with a different psychological effect).
Similarly, you may want to think about the psychology of prices. If you issue a very high number of tokens, you may have a very low token price on exchanges, and vice-versa if you issue very few tokens. So, you may want to think about a high enough number to be psychologically motivating and a low enough number to not be stuck with a very low price per token or need to mint more tokens (see next section for more on minting additional tokens).
10 million tokens is a common starting point, which is used for shares in the traditional startup world. But remember that every project is different. For example, Uniswap has a total supply of 1 billion tokens, ENS has a total supply of 100 million, and Friends with Benefits has a total supply of 10 million.
You may decide to mint a fixed supply so you won’t need to mint more tokens later. Or, you may decide to mint a variable supply, meaning you mint some tokens now, and leave open the possibility to mint more later. Remember that you don’t need to put all the tokens created into circulation at the beginning. Your token has a “maximum” supply (the maximum number of tokens that can exist—for Bitcoin, it’s 21 million) and a circulating supply (the current number of tokens in the market—for Bitcoin, it’s currently around 19 million).
In short, it’s generally recommended to have a fixed supply. In this case, DAOs typically mint the total supply up front and keep some tokens for reserves, or have a token buy back plan. However, this means that future incentives depends more heavily on the DAO having strong token reserves, or doing a buy back of the token.
In the other case, where you plan to create more later, the token holders would get their percentage diluted. There may be situations where the token holders are okay with having shares diluted; for example, to increase supply to incentivize more contributors to the project at a later stage. You may also want to consider a variable supply if you have a more complex tokenomics model, which relies on having a more elastic supply of tokens.
It is important to keep in mind that the DAO’s wallet address cannot vote. Therefore, if you have a total supply which is not fully distributed to members, then some of your supply remains in the DAO address. In that case, you must take take this supply difference when choosing your governance settings, such as quorum and pass rate. You don’t want to set a quorum based on the max supply, only to realize later that a large percentage of those tokens are locked in the DAO’s wallet.
For example, imagine you minted 10,000,000 tokens and only distributed the first 100,000 tokens to members (1%), and the rest (99)%) stayed in the DAO treasury. If you set a minimum participation threshold in your governance of 2%, no votes would be able to pass - including votes to change the voting threshold, or to distribute more tokens - thus locking your DAO permanently.
You can also choose how many types of tokens to mint. This decision is between:
It’s best to have a unique token name that will avoid confusion. Technically, there is no constraint on what you can name your tokens, because even if they have the same name, they will have different contract addresses on the blockchain. However, in practice, having the same name as another token would be confusing to the community, and could prevent you from listing your token on an exchange because exchanges won’t list duplicate names.
The most important practice to keep in mind is to have your token addresses displayed to your community on a trusted source, so they don’t mistakenly buy the wrong token. You could do this on your website or in a pinned Discord message.
You can mint DAO governance tokens onchain using the Aragon App! Check out this guide showing you how to create a DAO, and this guide on how to mint DAO governance tokens after you've deployed your DAO onchain using the Aragon App.
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