Why DAOs Need to Adopt a 2-Treasury System

Blockchain infrastructure companies are trying to solve two complex and expensive problems: building sustainable protocols and dynamic ecosystems.

AccessTimeIconDec 30, 2022 at 2:16 p.m. UTC
Updated Dec 30, 2022 at 4:32 p.m. UTC
AccessTimeIconDec 30, 2022 at 2:16 p.m. UTCUpdated Dec 30, 2022 at 4:32 p.m. UTC
AccessTimeIconDec 30, 2022 at 2:16 p.m. UTCUpdated Dec 30, 2022 at 4:32 p.m. UTC

The rapid growth of the Web3 ecosystem has been driven by advancements in Ethereum scaling systems and the emergence of high-performance layer 1 blockchains. This has led to increased adoption of crypto technologies across the board – from internet startups to large enterprise companies.

However, the current model of Web3 ecosystem building has some inherent flaws.

Arjun Krishan Kalsy is the head of ecosystem at Mantle. This article is part of CoinDesk’s Crypto 2023.

Blockchain infrastructure companies are trying to solve two complex and expensive problems simultaneously: building the best-in-class infrastructure and building the largest and most dynamic ecosystem. Each of these efforts require specialized teams and significant spending of resources in order to be successful.

As a result, many blockchain infrastructure companies have seen their treasury funds depleted quickly. For example, the float for Polygon’s MATIC token is over 90% (all vesting included) and the float for Solana’s SOL token is over 85% (all vesting included). This means that most of the tokens from the ecosystem funds of major infrastructure projects have already been expended into the market.

This type of growth strategy, where an infrastructure company has to solve two different problems simultaneously, is not sustainable. This will eventually put a strain on the treasury funds of these projects and blunt the growth and adoption of Web3 technology as a whole.

Specialized layers – a different approach to building Web3

(Arjun Krishan Kalsy)
(Arjun Krishan Kalsy)

The optimal solution is to turn the one-treasury problem into a two-treasury solution, each with a focus on infrastructure or ecosystem building. By separating the responsibilities of building the best-in-class infrastructure and supporting ecosystem development, each treasury can focus on its specific goals and allocate resources accordingly. This can lead to more efficient and effective use of resources and a more robust and dynamic ecosystem.

(Arjun Krishan Kalsy)

Using a two-treasury system, the base layer would focus on building the necessary technical infrastructure such as the blockchain, bridging tools and other tooling. Meanwhile, the ecosystem layer will focus on supporting builders and entrepreneurs that are building Web3 businesses, applications and protocols.

Through the use of dual staking, it is possible to create value for both the infrastructure and business layers. The infra token would accrue value through staking and providing crypto-economic security, while the ecosystem layer token would accrue value through driving the economy of the ecosystem. In addition, the ecosystem layer would generate gas fees, which would transfer value to the infrastructure layer.

This is analogous to how Web2 infrastructure companies like Amazon Web Services act as the base layer while companies build businesses on top of its infrastructure to create value for the end user. Overall, this approach offers the potential for creating tremendous value for both the parties involved.

Decentralized organizations

DAOs (decentralized autonomous organizations) have several unique advantages when it comes to ecosystem building. A DAO is a decentralized network of participants governed by a set of rules encoded in a smart contract. This structure allows for a more open and inclusive decision-making process, as every token holder has a say in the direction of the DAO and can actively contribute to growing the ecosystem.

However, the decentralized nature of DAOs may not always be the best fit for making complex technology decisions. These decisions often require a high degree of expertise and can benefit from the focused efforts of a small, centralized team. Additionally, the presence of information asymmetry can prevent the general public from making optimal decisions in these cases.

By combining the horizontal structure of a DAO with the vertical structure of an infrastructure provider to create a larger ecosystem, increased value is generated for the community. This hybrid approach allows us to take advantage of the benefits of both horizontal and vertical structures for ecosystem building and technology decision-making.

In the past two years, the Web3 space has grown by leaps and bounds but we are still far behind when it comes to mass adoption. The total number of on-chain Web3 participants globally is still in the single-digit millions.

If we are to achieve mass adoption of Web3 technology, we will need to find new ways to optimize the resource allocation towards building both technology and ecosystem.

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Arjun Krishan Kalsy

Arjun Krishan Kalsy is the head of ecosystem at Mantle.