Today we introduce cash flows for application tokens. 🧵 
Application tokens — which correspond to smart contract protocols deploying services on top of blockchains that relay rights in “distributed businesses” — have historically lacked economic models connecting the tokens to the cash flows of the underlying businesses they are embedded within.
There are three long-standing challenges to connecting cash flows to app tokens.
1. Governance
2. Value Distribution
3. Regulated Activity
1. Governance
2. Value Distribution
3. Regulated Activity
@0xMasonH, @milesjennings, myself and the @a16zcrypto team are proud to introduce a way forward, offering clear solutions to each of these challenges.
1. Governance Challenges:
For DAOs with significant U.S. operations, risks may arise if the DAO has control over protocol revenue or intermediates the economic activity of the protocol. To avoid these risks, projects can eliminate the control a DAO has by minimizing governance and making such activity programmatic. For DAOs where that isn’t possible, Wyoming’s new Decentralized Unincorporated Nonprofit Association (DUNA) provides a decentralized legal entity that may help mitigate these risks and comply with applicable tax laws.
For DAOs with significant U.S. operations, risks may arise if the DAO has control over protocol revenue or intermediates the economic activity of the protocol. To avoid these risks, projects can eliminate the control a DAO has by minimizing governance and making such activity programmatic. For DAOs where that isn’t possible, Wyoming’s new Decentralized Unincorporated Nonprofit Association (DUNA) provides a decentralized legal entity that may help mitigate these risks and comply with applicable tax laws.
2. Value Distribution Challenges:
Combining voting and economic rights may raise concerns under U.S. securities laws, particularly with simple and direct mechanisms like pro rata distributions and token buy-and-burns. These mechanisms look similar to dividends and stock buybacks, and can undermine arguments that tokens deserve a different regulatory framework from equity.
A favorable alternative to those mechanisms is stakeholder capitalism, in which token holders are rewarded commensurately for meaningful contributions to the project. As an example, individuals that actively delegate their voting rights can be compensated based on this logic. The design space is wide open here – I look forward to seeing what entrepreneurs and DAO members bring forward.
Combining voting and economic rights may raise concerns under U.S. securities laws, particularly with simple and direct mechanisms like pro rata distributions and token buy-and-burns. These mechanisms look similar to dividends and stock buybacks, and can undermine arguments that tokens deserve a different regulatory framework from equity.
A favorable alternative to those mechanisms is stakeholder capitalism, in which token holders are rewarded commensurately for meaningful contributions to the project. As an example, individuals that actively delegate their voting rights can be compensated based on this logic. The design space is wide open here – I look forward to seeing what entrepreneurs and DAO members bring forward.
3. Regulated Activity Challenges:
Protocols and users profiting from activity that is illegal in their respective jurisdictions creates regulatory and legal risk. This is a particularly challenging problem given the open, permissionless nature of crypto.
We have designed a mechanism to trace where fees come from, which would permit the curation of fee pools that are compliant with a respective jurisdiction's regulatory regime. This would provide token holders the ability to earn fees in a compliant manner and enable protocols to maintain compliance with their regulatory regime, all while preserving the open, permissionless nature of crypto.
Protocols and users profiting from activity that is illegal in their respective jurisdictions creates regulatory and legal risk. This is a particularly challenging problem given the open, permissionless nature of crypto.
We have designed a mechanism to trace where fees come from, which would permit the curation of fee pools that are compliant with a respective jurisdiction's regulatory regime. This would provide token holders the ability to earn fees in a compliant manner and enable protocols to maintain compliance with their regulatory regime, all while preserving the open, permissionless nature of crypto.
Here's an overview of the fee tracing mechanism from @0xMasonH
https://x.com/0xMasonH/status/1821566711776047171
The full article is below, detailing our solutions to each of the three challenges and some additional considerations. a16zcrypto.com/posts/article/…
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