Thread by @boironattorney

1. I'm excited to share my new article. It is a playbook on how to decentralize off-chain activities in a manner that allows a DAO to operate efficiently while remaining "sufficiently decentralized."
variant.fund/articles/suffi…

2. Quite a bit has been written on the topic of sufficient decentralization from a technical perspective, with the @a16z article @milesjennings wrote being top of mind: a16z.com/wp-content/upl…. However, very little has been written on decentralizing off-chain activities.

3. @billhinmanDC's “sufficient decentralization” concept is a proxy for the last prong of the Howey test, looking at whose and what efforts people rely on for a crypto-asset's profits to determine whether the crypto-asset is, or is part of, an investment contract and a security.

4. People think that decentralizing a protocol and related tech is enough for a crypto-asset associated with the protocol not to be a security. But, people can expect value just as much from off-chain activities, including the people who are driving those activities forward.

5. The range of off-chain activities include:
• protocol development
• business development
• growth and marketing
• intellectual property
• governance decisions

6. People always want to know whether any one activity is problematic for decentralization. It is the wrong question. All activity in the aggregate should be considered. When an action is performed, it either helps or hurts decentralization, but it isn't determinative on its own.

7. This is because decentralization isn't binary. More efficiency requires more centralization; more diverse value creation requires more decentralization. A balance is necessary to maintain decentralization but increase efficiency.

8. Decentralization for purposes of the Howey test is difficult. Communities must strike a balance between two extremes. Close coordination leads to centralization but no coordination leads to chaos. The right balance is somewhere in between.

9. But how are off-chain activities decentralized across the 5 categories outlined above? The playbook gets into concrete steps in significantly more detail but below are some highlights.

10.
(a) Protocol Development
A strong foundation is needed for protocol development to decentralize: all deployed protocol code should be open source; code should be clean and properly documented; and robust development and governance guides should be created.

11. Those efforts need to be bolstered with grants (identify, request and fund development from the community) and bounties (identify and reward development that reward high quality contributors who did not receive grants).

12.
(b) Business Development
This is the toughest area to decentralize because it is relationship based. Keys are: full-time roles, clear goals, appropriate financial resources, and certainty as to distribution of financial resources to close deals with counterparties.

13.
(c) Growth and Marketing
They are the off-chain activities most easy to decentralize.
First, code that can easily integrate with other protocols (i.e, composability) is the best way to grow. It requires open source, clean code with clear documentation and useful tutorials.

14. Second, grants and bounties can also be used for growth and marketing to (a) pay for integrations that may not naturally occur, and (b) pay for conventional approaches to growth and marketing.

15. Third, community members can be empowered to engage in traditional growth and marketing with their own capital and time. Members in the Bitcoin community have sponsored race cars and created podcasts, which increases awareness and education around Bitcoin.

16.
(d) Intellectual Property
Decentralizing IP like copyrights and trademarks to prevent a single party from creating value can be legally complex. Abandoning IP or transferring it to community controlled legal structures removes a single person's power to use IP offensively.

17.
(e) Governance Decisions
Governance does not have enough exploration. Governance systems need new appropriate crypto-asset ownership thresholds for quorums, proposals and voting; to simplify mechanics for proposals; to create benefits for participation in governance; (cont.)

18. to eliminate multi-sig wallets that hold broad authority over protocols; and to improve tools for communications and crypto-asset payments. Developers should create code for basic, repeatable proposals to increase the participation of less sophisticated crypto-asset holders.

19. To achieve decentralization across these off-chain activities, structure of the community is important. Each of the activities above can exist in a separate subDAO supported by operating subDAOs:
• Finance
• Legal
• Recruiting
• Admin
They can also be combined.

20. The subDAOs must communicate effectively. But web3 communities must not become too similar to companies. The key is public communication to provide context to the community without private coordination.

21. When each subDAO communicates in a public domain, members of each subDAO and the community more broadly can access the information contained within their messages.

22. The communications can include daily chats in subDAO on public channels; timely, detailed updates on completed projects posted in writing or video; and roadmaps of future projects and the status of those projects. Proper tooling is also important to effective communication.

23. Communities should consider creating alignment on a common mission, vision, and set of values. These can assist with decentralization by reducing the amount of close coordination necessary among contributors who understand guiding principles and goals.

24. Entities like foundations and trusts can protect the community or benefit specific community members. They do not directly contribute to decentralization and can lead to centralization. Entity structures that minimize centralization are important but they all have tradeoffs.

25. The use of trusts is just one example that ensures continued decentralization. But, trust cannot be put entirely in one trust. SubDAOs should be created for all of the subDAOs that are creating independent value. dydx.foundation/blog/legal-fra…

26. One of the best ways to decentralize off-chain activities is for communities to support one another. Communities that openly share tooling and best practices on procedure and communication strategies benefit the whole web3 ecosystem. The same is true for VCs doing that.

27. If each community shared output of off-chain activities with other communities, activities would decentralize more quickly as each community would not have to reinvent the wheel. More direct contributions are welcome too. They would form of web of value across communities.

28. This all helps with increasing the involvement of initial development teams. When communities take over significant off-chain activities, those teams can engage in more activities as communities are less likely to reasonably expect profits by relying on those teams’ efforts.

29. Initial development teams need to pay attention to a whole lot more as well:
(i) Don’t create an expectation that crypto-assets transferred to the initial development team incentivizes them to increase the value of those crypto-assets. It will not always be the case.

30.
(II) Don’t promote the success of the initial development team’s activities without equally promoting all the activities of community members to reflect the value they add.

31.
(iii) Don’t make statements regarding centralization that implies a reliance on a centralized party’s efforts. A balance should be struck between openly disclosing the risks of a protocol and disclosures that result in potential liability.

32.
(iv) Don’t discuss off-chain activity or the on-chain protocol operations in a way that implies the initial development team performs certain activities. The passive voice accurately describes on-chain activity and avoids creating any expectation of profits in any group.

33.
(v) Don’t post or share social media content without an expectation that the content will be attributed to the team sharing it. If teams do not agree with the content of tweets they retweet, then they should make that clear.

34.
(vi) Don’t refer to initial development teams in terms that imply an increased importance relative to others, such as “lead” or “core” teams. Instead, they can be referred to as “initial contributors.”

35.
(vii) Don’t participate in protocol governance. When initial development teams participate in governance, crypto-asset holders continue to rely on the teams to create value by making decisions that are included in proposals, rather than allowing the community to make them.

36. There is a lot of nuance and specific ideas set forth in the playbook so take a look at the complete playbook. Special nuance is in the footnotes for all the lawyers out there so the piece could remain readable by the builders.
variant.fund/wp-content/upl…

37. Thanks to @milesjennings,
@RebeccaRettig1, @Rob_Stevens_, and Josh Watts for their contributions. And massive thanks to the @variantfund for hosting the article on its site. Of course, if you disagree with anything in the article, blame it entirely on me.

Of course, none of this is legal advice. Make sure you retain counsel when thinking through these issues.