Tokenized ownership & governance is a key cornerstone of this decentralized future in which we strive to create.
The industry will move beyond simple fungible “coin voting” — which has its risks of whale governance token holders dominating. And thus, the innovation in this space will shine.
Some recent examples include Optimisms’ Dual Token (SoulBound + Transferrable) model, or even thinking about the future state of Yuga as a result of their BAYC NFTs and $APE airdrop.
More projects will start to rethink their token design ideas to incorporate not only fungible/transferable tokens. The key question is, does this allow for a more flexible governance structure design? Let’s dig in.
Governance Tokens
Governance tokens are cryptocurrencies that represent voting power within a blockchain-based project. This helps distribute powers and rights to that project’s users via tokens.
Governance token holders can influence decisions with the project: such as proposing or deciding on new feature proposals and even changing the governance system itself.
Governance tokens allow for user control and true decentralization and democratization.
Fungible Governance Tokens
With most projects, the governance tokens are Fungible, which means 1 Gov Token = any other 1 Gov Token. They have “fungibility” meaning that they are divisible and are not unique. Each fraction of a token is equal to any other fraction of a token.
The standard approach to defining token governance is the declaration that each individual fungible governance token is equal to all other fungible governance tokens within the protocol. If a holder owns more fungible governance tokens, they have greater voting weight in that protocol and thus more say in its future decisions.
This is very much a “flat” governance structure that works well for most projects. Malicious actors can still perform activities akin to 51% attacks by accumulating tokens. With enough financial power, a whale can single-handedly create and approve decisions. Not good.
There are many subtle differences in the types of voting options used by DAOs — Check out Eric’s article here for more detail on the types and feedback from DAOs: https://medium.com/daostack/voting-options-in-daos-b86e5c69a3e3. All the rage for a short while were the later innovations like token vote locking via “Voter Escrowed ‘’ or veTokenomics, but even this has its own drawbacks.
We will trend toward more organizations with both Fungible and Non Fungible tokens in their ecosystem. As a result, what about experimenting around with the use of Non-Fungible tokens in a governance structure?
Non Fungible Governance Tokens (gNFTs)
Non Fungible Tokens (NFTs) are unique, 1 NFT does not = any other NFT (excluding ERC-1155s here). This uniqueness gives you a lot of flexibility and allows for a lot of creativity with your governance design.
Since gNFTs are truly unique, you could even assign traits or attribute-specific rights to your gNFTs — e.g. a more unique / rare NFT gets more governing power over the ecosystem than a more common / less rare NFT. Each Non-Fungible Governance Token could have varying levels of governance power.
In an ideal scenario, this could potentially help level the playing field of early adopters / strong value-add members having outsized protocol power versus the higher buy-in from investors.
Capital is no longer the scarce resource, and meaningful contribution is. Can we use Non-Fungible Governance Tokens to more equally distribute governance power? Perhaps distribute it in a more thoughtful way?
We’re seeing more experiments with gNFTs, one cool example from the Charged Particles Ecosystem was the Memphis Mural. The Memphis Mural is a massive 50 x 60 ft wall mural that was converted into a NFT containing $100k of Aave USDC, powered by Charged Particles, with the interest generated going to St. Jude Children’s Research Hospital via The Giving Block. As a lossless charitable mechanism, this is truly a gift that keeps giving. Visitors to the mural will be able to claim a proof of attendance protocol NFT or POAP. These POAPs act as a voting mechanism for where the interest accrued should be donated, making this a community democratic donation mechanism.
SoulBound Tokens (Non-transferrable NFTs)
There’s been a lot of talk of “SoulBound Tokens” and how these could be used in Governance.
Optimism is a good example of what this could look like — having BOTH SoulBound Tokens (“Citizens’ House”) and Fungible Governance tokens (“Token House”) in their model:
SoulBound or Non-Transferable Non Fungible tokens could be a potential solution to this, but in general non-transferable NFTs without consent layers are a dangerous precedent. What happens if someone sends you a non-transferrable NFT that is inappropriate? That wallet is forever tainted.
This is part of a much much bigger conversation on Soulbound v. Transferable tokens. If you’re interested, I’d highly recommend this great conversation on Bankless with Vitalik and Evin McMullen on SoulBound Tokens or this article from Drake Danner.
If gNFTs are transferable, then you have to think about someone accumulating gNFTs. Then, that actor would have an outsized impact on the governance of the protocol — the same exact hurdles as you have with Fungible Governance Tokens.
Every design decision comes with pros and cons, innovation and iteration is the only way to get us to the most effective token governance model.
A Blend of NFT & FT Governance Structure
We believe in a future that has the creative, thoughtful inclusion of both Fungible and Non-Fungible Tokens within a governance framework.
Thanks to the Yuga Labs $APE airdrop, every BAYC NFT received 10,094 $APE Tokens (>$150K at launch….). So going forward, each BAYC NFT Holder in the ecosystem now has a bag of Fungible Tokens as well.
As a community member, each Fungible $APE has a certain value and each BAYC NFT has a certain value — both monetarily and to the holder personally (e.g. Identity).
For the Yuga Ecosystem, wouldn’t Yuga Labs want to incentivize hodling & accumulating both BAYC and $APE? There’s value in a BAYC NFT, value in $APE token…. And value for having BOTH a NFT and $APE.
With the use of existing tools like Snapshot, the Yuga Ecosystem (or Ape Foundation) has started to roll out governance voting — with 1 $APE = 1 Vote. With Snapshot, you can easily allow for 1 BAYC NFT = 1 Vote as well, as many other NFT projects have allowed this.
This governance voting structure allows both $APE Fungible Token holders as well as BAYC Non Fungible Token Holders to have a say in the governance decisions that the organization makes.
Perhaps early on in the project and these Non Fungible Governance Tokens have diminishing weight as more fungible tokens are emitted? There are a lot of possibilities here.
Designing a Governance Structure with both Fungible & Non Fungible Tokens
What about reimagining governance structure design with NFTs as the base layer? I would imagine this is a decision that NFT projects will start to ask themselves as NFT Projects start issuing Fungible token to their NFT holders.
Reimagining the governance structure to encourage hodling of BOTH token as it provides for more influence within the organization.
Traditionally a hodler would hold both Fungible ($APE) and Non Fungible (BAYC NFT) separately in their wallets. What if they could be combined into one? What if your Non Fungible Token could serve as a basket to hold your fungible tokens?
With Charged Particles, you can enable your NFT to have its own smart wallet to hold additional tokens — Fungible or Non Fungible. Continuing to use Yuga as an example, this would mean that your BAYC NFT would hold your $APE Fungible tokens.
We believe that by combining $APE & BAYC allows for much more dynamic governance design.
By having your $APE nested inside your BAYC, perhaps that means that your voting weight is increased? Perhaps by time-locking your $APE in your BAYC for 6 months (forced HODL), this could increase your voting weight even more.
This is what it could look like:
- BAYC — gNFT. 1 BAYC = x Votes
- $APE — Fungible Governance token. 1 $APE = 1 Vote
- 1 BAYC + y $APE = z votes
- 1 BAYC + locked y $APE = z1 votes
This incentivizes the accumulation of BAYC + $APE, as well as locking your $APE away… if you’d like to have increased say within theYuga Ecosystem.
Additionally, by having your $APE nested in your BAYC, it’s like a big basket or bundle and you can easily transfer the entire bundle to a new wallet or sell the whole basket together — Liquid wrappers to the extreme.
These locked $APE tokens are “locked within a fully transferable” BAYC, BUT it turns that particular BAYC vessel into a bit of prediction market, what discount should be applied to BAYC + Locked $APE versus BAYC + unlocked $APE or just BAYC?
What governance design can be dreamt up to exist to support this framework?
We’ll likely see an explosion of new rights to NFT Holders — and likely more fungible token drops to NFT holders. We’re excited to see the continued evolution of tokenized governance design incorporating both.
Takeaways
Tokenized governance is evolving and using gNFTs (transferrable or non) is one just one additional method that could be used. There are MANY others, and many more will spring up. I’m particularly also excited about having on-chain reputation included as a voting multiplier as like what Karma is working on.
Currently, token-based governance is mostly plutocratic and manipulated by whales, but new governance models will emerge where contributions are properly valued over economical power. We’re getting there.
With Charged Particles, we’re enabling the creative inclusion of these pieces and we genuinely believe that the future of tokenized governance will include both Fungible and Non Fungible tokens.
We are big fans of NFTs, and have been beating the drum of “NFTs: More than just Art” for years now (e.g. check out my talk at ETHCC in July’21).
We are excited to continue to see creativity and a blend of both Fungible and Non-Fungible Governance Tokens allowing for the most creativity and flexibility with Governance Design. We’re here for innovation, providing the tooling and inspiration with Charged Particles.
If you’re interested in incorporating this into your governance model, please reach out!
About Charged Particles
Charged Particles is a protocol that allows users to deposit ERC-20, ERC-721, and ERC-1155 tokens into their existing ERC-721 NFTs. A scarce NFT can now be transformed into a basket holding tokens. Live on Ethereum and Polygon since Feb’21.