by Mara Schmiedt, Global Strategy and Business Development Lead, ConsenSys Codefi
This is a two part article. Part 1 can be found here.
- The emergence of delegate work entities present a critical development to drive broader end-user adoption and participation, simultaneously posing new challenges to decentralization and token distribution in the evolving chapter of on-chain governance
- Token distribution strategies, as a result of the above, have seen a proportional increase in use-focused distribution mechanisms including proof of use and interactive airdrops
Trend 3: The New Kids on the Block
THE EVOLVING ROLE OF VCS AND DELEGATE WORK ENTITIES
With the rise of Proof-of-Stake, on-chain governance and other protocol-native work functions, networks require active user groups that have both the expertise and/or technical resources required to provide network-specific services and infrastructure. At the same time, these productive crypto-assets present new value accrual opportunities for entities with crypto-native business models that play an active role in network participation and adoption.
On one hand, traditional venture models are increasingly evolving into crypto-native hybrids. Capital providers with long-term holding strategies such as Multicoin Capital and ConsenSys Labs recognize the opportunity to create additional alpha by supporting networks in their portfolio through the provision of infrastructure and performance of crypto-native operations. These entities are uniquely positioned to support teams that are building decentralized protocols to bootstrap and jumpstart network effects.
Well designed agreements and incentives can ensure that all token holders involved in early stage project funding in the protocol’s development lifecycle can be valuable supporters that earn rewards from their own and ongoing participation and contribution to the network.
On the other hand, there has been a proliferation of another stakeholder group – so called ‘delegate work entities’ (see article by Ben Sparango). Delegate work entities are network stakeholders elected by a token holder to perform network-native work functions, such as staking and voting, on their behalf.
The premise of earning rewards on productive crypto-assets in exchange for contributions to the network is an attractive one, yet not all token holders necessarily have the time, desire, or technical ability to perform the required tasks themselves. This is where delegate work entities come in. Today, delegate work entities including non-custodial (Staked, Stakefish) and custodial (e.g. Binance, Coinbase, Anchorage) providers are largely focused on providing staking services to both institutional and retail clients. I believe custodians, exchanges, funds and independent delegate work entities will play a critical role in driving broader institutional and retail adoption of productive crypto-assets.
Source: PoS Bakerz, 2020
Recent developments such as Katalyst, Kyber’s 2020 protocol upgrade, reveal the increasing relevance delegate work entities will play in the governance realm either as direct actors in the voting process or by offering proxy voting functions on a token holder’s behalf.
I expect to see further growth and diversification in delegate work entities and other service providers as the Proof-of-Stake landscape continues to expand and believe these entities will continue to play a critical role in driving broader adoption and maturation of the industry. A research study conducted by ConsenSys in March revealed that across almost 300 active token holders 41.4% would like to participate in on-chain governance directly while 28.2% would like to delegate their vote to a representative.
Source: ConsenSys Codefi
It is important to note, however, that delegate work entities, particularly custodians, exchanges and funds with large and accruing token allocations, could result in centralization risks particularly as Proof-of-Stake systems increasingly co-evolve into on-chain governance.
Trend 4: Evolving Token Distribution Strategies
THE FUTURE OF USE-FOCUSED TOKEN DISTRIBUTIONS
As network participation data indicates, having a broad distribution is not enough and it is critical that distribution aligns incentives amongst all network stakeholders. Healthy networks have a representative and actively engaged network of stakeholders.
How have the aforementioned trends manifested themselves as design considerations in more recent token distribution models?
There has been a proportional increase in public token distribution mechanisms focused on targeting actively contributing users.
Source: Smith & Crown, 2019
These have come in the form of both interactive airdrops, such as Livepeer or Edgeware, as well as different implementations of proof-of-use enabled token distributions such as NuCypher, Solana and SKALE that are focused on distributing tokens to actual users.
I believe that designing distribution models that factor in self-selected productive efforts beyond capital contributions in a sale or (pseudo)-random selection in a passive airdrop is essential to:
- Maximize regulatory compliance by ensuring that a token is being used for its intended purpose on the network, rather than a speculative holding.
- Filter for participants most likely to participate in the network to disincentive short-term speculation, price volatility and dumping.
- Effectively bootstrap the network at launch, whilst enabling early adopters to familiarize themselves with the network and earn token-based rewards for their efforts.
With the technical maturation of token-powered networks, particularly in the context of rising Proof-of-Stake adoption, the industry is leaving its adolescent, wild west years behind as it enters the chapter of ‘actual’ use and utility.
The chapter of use also creates a new window of opportunity for stakeholders with crypto-native business models, including VCs and delegate work entities, that play a critical role in the adoption and maturation of productive crypto-assets and the decentralized networks they are a part of.
While there is still a lack of formal regulatory guidance on the blueprint for compliant token launches, I believe the emerging discourse, setting of industry best-practices and increasing focus on use-focused token distributions are steps in the right direction.