How to mint DAO governance tokens

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?

What does "minting" a DAO token mean?

“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.

When does it make sense to mint a token?

Is a token necessary for your objective?

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:

Governance - Tokens are a way to tie governance rights to economic value. You could do this with token-based voting, but there are other ways, too. For example, you could create and sell NFTs, and then add NFT holders to the list of approved voters. You can see a comparison of token-based vs. wallet-based voting in the guide on how to set your governance. In summary, you'll want to create a token if you want to have token-based voting. And, you may want token voting if you want voting power to be tied to how financially invested members are, or if you are worried about the sybil-attack problem of wallet-based voting (described in this guide).
Access - Tokens can be a way to gate access to platforms such as Discord, your forum, or other content. You can set token gates for fungible tokens or NFTs by using tools such as guild.xyz and collab.land. The main difference between fungible tokens and NFTs is that fungible tokens can be simpler and easier to manage because you can set a certain threshold for number of tokens to access given content. NFTs could give a richer set of options by using different NFTs for different use cases, but this may require more human intervention and management.
Raising funds - You may see tokens as a way to raise funding for your DAO via a token sale. However, you do not necessarily need to raise funds via a token sale, and there may be simpler ways, especially for early stage projects —such as an NFT sale, VC investment, or grant. A token sale may be preferable to an NFT sale if you have more advanced tokenomics plans for your token in the future.
Distributing profit - You may see native DAO tokens as a way to distribute the DAO’s profits to token holders. Again, there are other ways to achieve this objective - for example, you could simply send profits to the wallets in your DAO, like you might send a salary. Or, you could give NFTs to certain members of your DAO, and send them profits depending on the NFTs they hold. In short, you may want to use tokens rather than NFTs to distribute profits when you want more flexibility than an NFT, like relating the profits with a token-holding share, or for those rights to profit to be bought and sold on the market more easily.
Incentivize contributors - Tokens are a way to incentivize contributors towards the long-term value of your DAO. Similar to offering shares in a startup, these can be distributed to early-stage employees to motivate them over the long term, while also decreasing the short term need for giving out resources. If this is your objective, then you may want to assess whether your token will be able to justify itself to these contributors - do you have enough signals already that your token will eventually have trading volume? Do you already have community, or reasons for people to believe your project will reach this level?
Incentivize community-led growth - Tokens are a way to incentivize a community to grow your project further. You may want to do this if you already have product-market fit and are ready to focus on growth.

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.

How are tokens classified under the securities law?

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 can read more about this here. If you are unsure of this topic, you may want to consult a legal expert or forgo minting a token and use other governance methods instead.

How to mint your tokens

How many tokens should you mint?

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.

Minting now or minting later - fixed supply and variable supply

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.

How token supply impacts the minimum participation threshold in voting

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.

Having different types of tokens - governance and utility

You can also choose how many types of tokens to mint. This decision is between:

Single token - have one token to use in governance and everything else, such as incentivizing contributors and raising funds. This is the most common option for DAOs that don’t have advanced tokenomics strategies.
Multiple tokens - you may wish to have multiple tokens because of your tokenomics strategy. These could be exclusive - for example, MakerDAO has the MKR token for governance and DAI as the protocol’s currency and the product of MakerDAO. Or these could be interdependent - like Balancer using BAL as Singleton, but now extracting its governance to veBAL, which could be acquired through staking BAL/ETH in 80/20 on Balancer. These are more advanced tokenomics strategies that require additional tokens.
Token and NFT combination - You may want a bicameral governance method, such as the Optimism Collective and jokedao. These methods use two different types of tokens: one ERC20 (traditional token) and one ERC721 (NFT). This method is good for DAOs that want to create a small working group governed by different parameters from the larger DAO (think of a product team that’s focused on shipping and needs full control over the vision) and DAOs that want to have decisions made in separate "houses" governed by different parameters.

How to name your tokens

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.