Abstract
Token incentive programs by Web3 infrastructure projects today are unsustainable and inefficient, and Safe would not be able to accrue value from its ecosystem by implementing existing models. To address this, we propose a Value Alignment Program (VAP) that allows Safe ecosystem projects to pledge a portion of their tokens, equity, or revenue in exchange for Safe tokens, credibility, and ecosystem support. With VAP, Safe would be able to capture value from ownership and/or revenue generation of selected ecosystem projects, in return for providing credibility.
Proposal details
Purpose and Background
At the time of writing, 183 projects belong in Safeās ecosystem and 3,786 GitHub repositories depend on Safe {Core}.
The primary way in which Safe brings value to these projects is arguably through its composable security. As projects permissionlessly build on top of Safe contracts, they leverage Safeās battle-tested security to attract end-users assured by the protocolās security. For example, Coinshift and Castle leverage Safe {Wallet} to acquire DAOs and NFT collectors as users respectively.
Today, Safe is yet to capture the value that it provides to its ecosystem projects. However, capturing fees or ātaxesā on ecosystem projects would discourage ecosystem growth and encourage forks.
Hence, we propose a novel Value Alignment Program that allows Safe to sustainably capture the growth of its ecosystem projects without significantly sacrificing ecosystem development.
Value Alignment Program (VAP)
With VAP, Safe offers ownership in exchange for an equivalent pledge of ownership or revenue from Safe ecosystem projects.
This stands in stark contrast to other Web3 infrastructure projectsā incentivisation programs today, which offers tokens through liquidity incentives, airdrops, and grants programs with little in return.
Recipients of todayās token incentives are often mercenary. They typically sell the tokens as soon as possible, and leave whenever the incentives stop or are no longer attractive enough (caused and worsened by sell pressure). Even if native and loyal applications emerge, they may also leave to form an application-specific chain/rollup once they grow to a sufficient size. Hence, infrastructure tokens often rely on narrative and inflated metrics to justify value.
To prevent Safe from moving towards a similar path, we need clear and concrete value alignment between Safe and its ecosystem projects (e.g. DAO tools & smart account modules). Safe cannot be purely giving away ownership without receiving a fair commitment in return. Of course, the mechanism needs to also be fair to applications, and set up to be mutually beneficial by incentivising mutual success.
The VAP would allow Safe ecosystem projects the option to pledge, to Safe:
- a percentage of ownership (e.g. tokens, equity, or NFTs representing shares of the project); or,
- a percentage of revenue (i.e. fees encoded in smart contracts).
While Safe would benefit from capturing:
- A share of the ecosystem projectsā tokens and their upside; or,
- A share of their revenue; or,
- A share of equity ownership
Ecosystem projects that succeed in their pledge applications would gain:
- Credibility, branding, and legitimacy from being a verified partner of Safe (especially important when a project is in its early stages of development).
- Guidance from Safe towards high-potential primitives/verticals for product-market fit (for early-stage projects)
- Help from Safe in growing adoption and finding synergies within the Safe ecosystem (for growth-stage projects)
- Safe tokens
As a protocol offering arguably the most robust smart account security in the space, Safe is well-positioned to distribute legitimacy visibly in exchange for a pledge of ownership or revenue.
VAP Terms
While there are no standards for VAPs at the time of writing, we can refer to token swaps as precedents for inspiration, which are usually between growth-stage projects. The pledge or swap amount should be significant enough for both parties to be sufficiently incentivised to support one another, while maintaining a diversified ownership. That is usually 5-10% for early stage projects, or 0.1-5% for growth stage projects.
- Price: For liquid tokens, TWAP/VWAP of 20-90 days, or agreed number of tokens; For pre-token, valued at previous funding round, or agreed valuation
- Lock-up/ vesting: Promise to mutually hold/stake for 12-48 months
- Amount: 0.1%-10% of tokens, worth ~$100k-$10m, depending on project stage
- Use of tokens: Can be used for staking, governance, or in-app e.g. collateral, liquidity provision
- Non-token pledge: For early stage projects which are pre-token, or have alternative value capture mechanisms, ~1%-10% pledge of revenue, NFT supply, or even tokenised equity could be considered
One example to highlight is the agreement between the Cosmos Hub and Neutron, which has committed to distribute 25% of transaction fees to the Cosmos Hub for providing security.
Other References:
- Neutron <> Astroport
- Balancer <> Gnosis
- Balancer <> Aave
- Balancer <> Fei
- Alchemix <> Saddle
- GMX <> GammaSwap
- GMX <> STFX
Selection/ governance process
Governance for the Value Alignment Program may initially look similar to a grants program stewarded by a Grants Council, then transition towards an open system in the long run, similar to public goods funding led by the community.
- Timing: Cadence of once a quarter, 2 month application period, 1 month selection period
- Application: Initially permissioned by a Grants Committee/ DAO, transition to nomination with staking/SBTs/attestations, eventually scale up with subDAOs/ sub-verticals each with its own mechanism
- Voting: Initially simple token voting, transition to quadratic voting weighted by SBTs or on-chain identity
It should be emphasised that the VAP is meant to be selective for its social signalling to hold weight. Recipients should possess an outstanding team and a clear path to revenue generation and/or token value creation.
References:
- Gitcoin Passport, Aqueduct, and Grants Protocol
- Uniswap Grants Program
- NounsDAO Funding Proposals and Prop Houses
Mid-Long Term Implications
Mutual ownership of each otherās tokens breeds:
- Mutual alignment & contribution to the success of one another: Due to Safe token ownership, ecosystem projects would be incentivised to support the success of the Safe, and Safe would be incentivised to support the projects that they have ownership of / gain revenue from.
- Social provenance and governance curation: Beyond recognising verified partners of Safe, the VAP curates SafeDAO governance participants.
- Implied Treasury Value & Diversification: Once enough pledges and assets are accumulated into the SafeDAO treasury, the Safe token morphs into a pseudo-index of selected Safe ecosystem projects. The value of the selected ecosystem projects would contribute to token value.
Risks & Mitigation
Risk 1: Off-chain value capture - It may not be feasible for projects to swap a portion of their off-chain revenue/equity for Safe tokens today.
Two ways to mitigate:
-
Start the VAP with on-chain token swaps, while monitoring for suitable mechanisms to reflect off-chain equity/revenue on-chain in the future.
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Reflect the off-chain revenue/equity share agreement in the form of an NFT/SBT. Distribute the agreed amount of Safe tokens to an escrow contract and vest to the ecosystem project when the equivalent amount of revenue/equity is verifiably sent to the escrow contract. Meanwhile, the ecosystem project benefits from recognition that they were a Safe token swap recipient.
Risk 2: Tokens cannot yet be swapped between Safe and projects who have yet to launch a token.
Mitigation: Similarly, the token swap agreement may first be represented with an NFT/SBT which certifies that the ecosystem projectās tokens will be distributed in the future, similar to a SAFT agreement.
Risk 3: Legal constraints - Token swaps from the VAP may be seen as an āinvestment-likeā activity.
This could be mitigated by a clear mandate/ constitution for the swap program, including conditions for liquidating/ distributing the accumulated assets (not legal advice).
Risk 4: āFavourableā selection of verified partners
If one ecosystem project successfully receives tokens through VAP, the social validation may result in a competitive advantage over similar players. It is true that a successful applicant to the VAP may gain a credibility edge against competitors, but the benefits arguably outweigh the costs here.
In the long run, the curation of token swap recipients would be delegated from the Grants Council to the community to reduce the perception of bias from the core Safe team.
Alternative Solutions
Other methods of Safe token value accrual may of course be explored in future proposals, including:
- Directing and extracting MEV from exclusive order flow
- Platform fees from a potential Safe smart account module registry
- Fees from decentralised paymasters
- Freemium Safe {Wallets}
This proposal acts as an additional channel for value capture, rather than a replacement.
Token Value Capture through Transaction Fees
Turning fee switches on for Safe transactions and TVL would encourage forks of the protocol that erode Safeās moat.
Value Distribution via mining & Value Accrual via transaction fees
As expressed in the VAP section above, Safe token distribution via usage-based mining does not result in long-term token value sustainability and encourages sell pressure once rewards dissipate. Current iterations of Grants Programs are often inefficient allocations of capital as recipients do not often follow through on their projects, but they may still exist and VAP may represent the next evolution of Safe Grants in Wave 2.
Technical & Operational Implementation
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Provide a platform for Safe ecosystem projects to apply and pledge a share of ownership or revenue to Safe. Ecosystem projects may propose terms for Safeās Grants/VAP Council to review and accept.
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Token swaps should be executed via on-chain smart contracts, while off-chain token/equity/revenue shares is to be determined (e.g. release Safe tokens via escrow contract for every dollar shared on-chain).
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Exclusive non-transferable NFTs can be distributed to successful applicants of the VAP for them to showcase Safeās legitimisation.
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Applications may first be reviewed by the Grants Council. One or two members may be added to the Grants Council if required.
Open Questions
- For ecosystem projects: While there is some validation that some ecosystem projects would be willing to share token ownership or revenue with the underlying infrastructure project they use (e.g. Neutron distributing 25% of transaction fees to Cosmos Hub in exchange for security), it would be helpful to hear from Safe ecosystem projects directly on the extent to which they would be willing to exchange their tokens or revenue in return for Safe security, brand value, and ecosystem support.
- For legal experts: How the VAP can be implemented in a legally-compliant manner.
- For community members: How off-chain equity or revenue share agreements can be implemented
Bottom Line
The VAP allows Safe to accrue value from ownership of its ecosystem projects, and provide credibility in return.
Notes:
To learn more about VAP, read this article.
Vitalik has also hinted at similar ideas in his piece, Legitimacy. Though he writes in the context of public goods funding, he mentions that:
- āSome institutionā could āblessā NFTs in exchange for some guarantee that some portion of revenue goes towards charitable causes
- NFTs can be made more visible on peopleās social media profiles, giving buyers a way to show the values that they committed to
You may comment on this proposal on the Notion doc here
