This blog post is Part 2 in a series about platform cooperatives and blockchain. Read the series introduction here.
For this post, let's imagine a platform coop that intends to build a ride-sharing platform like Uber. This is already a crowded space in the platform coop world (e.g. Eva and The Drivers Coop), but was chosen because the product is familiar. Let's assume the coop started with a hyper-local focus, building an app that only serves a small city. This was incorporated as a formal multi-stakeholder cooperative, with workers, drivers, and riders each earning the right to become members and vote to inform the product direction. As of now, the coop only uses traditional technology like Amazon Web Services and SQL databases, without any blockchain components. As they seek to scale, case studies have shown one of the biggest challenges will be fundraising. Can a pivot to blockchain technology help this platform coop fundraise?
Risks
Before a platform cooperative even considers blockchain technology, it is critical that they understand the risks. This is a nascent and experimental sector of the technology world that has an outsized share of hacks, scams, and unethical schemes. It would be wise for many cooperatives to simply steer clear, and seek traditional loans, crowdfunding, grants, or revenue-based financing options.
For those cooperatives that are familiar enough with the blockchain ecosystem to avoid the scams and hacks, additional risks need to be considered. For example, regulation of cryptocurrencies and blockchains are still being considered in most major jurisdictions, and there is a risk that entire parts of this sector will become illegal or otherwise hampered by new regulation. There is also a lot of uncertainty when it comes to tax liabilities, especially for more complex token designs. For a coop that is serious about adopting this technology, setting aside time and money for research and expert consultants will be necessary.
A final risk to point out is that governance with blockchain technology is still very experimental, both from a practical and a legal perspective. For example, while there exists legal precedent for enforcing coop bylaws, the enforcibility of blockchain snapshot votes is less certain. On-chain enforcibility via smart contracts ("code is law") may seem elegant, but there will undoubtedly be off-chain concerns that a platform coop needs to vote on as well. From a practical perspective, the pseudonymous design of blockchain identity makes it very difficult to ensure fair governance since a single person can spawn countless "wallets". Some of the biggest on-chain governance forums have received critiques for their drama and unclear power dynamics.
With those risks in mind, the rest of this post offers some ideas for how a platform coop can raise money within the blockchain ecosystem, while avoiding some of the biggest traps.
Capital availability
Building or buying the non-trivial app technology for ride-sharing or any platform is very costly, and traditional venture funding or bank loans are difficult for cooperative companies to acquire. Traditional grants, crowdfunding, and loans are scarce.
In contrast, the overall blockchain and cryptocurrency ecosystem is ripe with capital, even in the 2022 bear market. One extreme example of this is how the "meme coin" Dogecoin's market cap recently received an influx of $12 billion, and the overall market increased $100 billon, primarily from speculators that think Elon Musk's reorganization of Twitter could include a Doge-based payment mechanism. It's worth noting that the upswing was quickly erased when the crypto exchange FTX imploded. The capital availability brings with it massive volatility swings. Still, for platform coops that might only need a few hundred thousand dollars to build the initial version of their apps, this scale of money is astounding.
Issuing tokens for fundraising
One mechanism to raise money in the blockchain space is to issue a token representing your project. Theoretically, issuing a token is analogous to equity in the stock market, allowing a company to raise money now in return for the future value they may create. Unlike stock equity, this method is available to anyone with the technical know-how. Depending on the political philosophy of a cooperative, this idea of capturing future (Marx would call it "illusory") value may be uncomfortable, but the self-empowerment lends itself well to the cooperative principle of autonomy. This is a paradox that cannot be easily dismissed in a precarious economy.
Token-based financing was pursued greedily in the 2017 ICO (initial coin offering) craze, without any concrete connection between the token and the product (if there even was a product). Nowadays there is a bit more scrutiny. Projects tend to launch tokens along with an explanation of the tokenomics: how many tokens are given to whom, what is their vesting schedule, and how are they created or destroyed. Projects often publish a detailed roadmap that they can be held accountable to. Still, those that attract a lot of capital tend to use less than sustainable means, such as distributing a growing supply of tokens to incentivize users (not unlike the strategy that venture capital firms used to subsidize ride sharing costs and attract early Uber riders). It is only recently in the 2022 bear market that speculators have paid more attention to "real yield", seeking out tokens that directly distribute their product revenue to token holders and also where the token supply itself does not inflate beyond its revenue.
Issuing tokens comes with a lot of downsides, however. Most obviously is the connection to degenerate speculation, which can cause the prices of tokens to vary wildly. A project may raise a sizable sum that evaporates overnight. The other serious problem comes when the token is also used for governance, since the common one-token-one-vote model becomes a de-facto plutocracy.
Dual token model
This challenge of raising money with a token that is also used for governance reminds me of a problem that multi-stakeholder cooperatives already face outside of the blockchain world: how to align the interests of supporters and member-owners. A recent survey of shared-services platform cooperatives (PDF) includes a case study about The Mobility Factory (TMF) which offers an interesting solution in the form of a dual class share system. TMF has Class A shares for user-members, while Class B shares are for supporter-members. The different classes come with different governance rules, with the general idea being to find a balance between user interests (e.g. lower prices and higher wages) with supporter interests (e.g. sustainable revenue). This concept can be combined with the idea of revenue-based financing cited in Austin Robey's How to Start a Cooperative, to ensure that the Class of shares used for fundraising does not conflict with the Class of shares used for governance.
The above ideas give rise to a proposal for a dual token model. A platform coop could use one token for fundraising, and a completely separate token for utility in the form of governance. Such a model could be implemented on any smart contract platform but would receive additional flexibility and cost-savings if using an application-specific blockchain (e.g. built with the Cosmos SDK) that offers dApps maximum sovereignty in their token design.
It is also worth noting that the use of a dual token model where the fundraising token is strictly separated from the utility (governance) token can also help avoid certain legal headaches, making it less likely that the token is considered a "security" by the SEC and regulated as such.
The below table covers the proposal for how each token would be distributed, used, and what rights each gives:
The below diagram shows one example of how this could be structured. The primary idea is to keep the governance token and the fundraising token completely separate, and to prevent trading of the governance token. This would prevent the investors' speculation on the fundraising token from having any effect on the governance token, which can only be earned by using the actual platform product.
Note: The revenue split above (70 / 10 / 10 / 10) was chosen arbitrarily and is only for example purposes.
Fundraising token
One token is used for fundraising, and can follow a usual token distribution, e.g. allocations for team/DAO, marketing and incentives, airdropping to users, and made available on the open market using an IDO. There are various decentralized tools to ensure fairness and wide distribution (think crowd funding rather than venture funding) during an initial token bootstrapping, such time-weighted liquidity bootstrapping pools.
It is important to note that the primary method of actually fundraising -- getting funds into the hands of the team -- would be the team allocation of this token. The basic idea is that the team would have some fixed stake of a pie that would grow and contract over time, as the market valuation of the overall platform ebbs and flows. The team could sell those tokens in order to pay for their expenses like salaries, benefits, infrastructure costs, and more. It is worth reiterating that these funds will be highly volatile, and proper management of this treasury would likely be a full time job for a few folks in the coop team.
Importantly, this fundraising token will NOT have any governance rights. This will ensure the cooperative retains its ownership and follows the coop principle of autonomy & independence. No matter how much money an investor poured into the fundraising token, they would not be able to directly control the coop's decisions or strategy.
To attract investors, the fundraising token should have a smart contract enforced method of distributing platform profits to holders (e.g. 10% of profits); this "real yield" is what many cryptocurrency investors are expecting these days. A simple approach is to only distribute the revenue to token holders who "stake" the token in some smart contract controlled vault. More advanced designs exist, like "vote-locking" tokens, which allows locking tokens up for long time periods (1 - 4 years) in return for higher percentage of protocol revenues. GMX's approach is considered one of the best designs in terms of game theory, but is also extremely complex - offering NFT boosting, multiplier points, and escrowed rewards. Simplicity is probably the best approach for a platform coop, so that all investors and members can easily understand what is happening.
Breaking from DeFi norms, a project could also consider applying the revenue-based financing model of terminating after some fixed return on investment. With smart contracts, it would be easy to implement a token that burns (read: destroys) itself after it has accrued certain revenue. This burning mechanism might even produce a flywheel effect for speculators that are attracted to deflationary monetary policy, while ensuring that the platform's revenue doesn't leak to speculators who are no longer investing in a project.
Overall, the space of designing fundraising tokens is very crowded with a lot of options. In a DeFi market full of increasingly convoluted financial products, a platform coop with real world revenue that gets distributed to stakers would be a welcome investment for many.
Governance token
The second token would be used for governance. The token would NOT be available on the open market and would only be minted with use of the platform itself. The goal of this would be to accrue governance power to actual users of the platform, in line with the platform cooperative principles. In this way, it would follow the model set up by "play to earn" games like Axie Infinity or StepN, where various in-app and/or real world interactions produce tokens. In a ride-sharing app, you could imagine that this token might accrue based on the number of miles ridden and driven (with weighting set up so that drivers and riders receive an appropriate split). StepN is a good example to follow because it leverages mobile phone GPS to track the amount of distance you walk or run, and also uses this GPS mechanism to prevent cheating. Unlike such apps, these tokens would NOT be tradable and so there would be no need to solve for the economic sustainability problems that these inflationary tokens usually face.
One experimental approach to non-tradable tokens is further explored in a recent whitepaper co-authored by Ethereum founder Vitalik Buterin. This paper introduces the concept of "Soulbound tokens" (SBTs). Many of the implications covered in that paper are outside the scope of this blog post, but the relevant concept is that reputation could accrue to a specific digital identity in a way that cannot be traded. For a cooperative, this form of reputation tracking would ensure that actual users of the platform are receiving voting rights commensurate to the value they produce. This technology also aligns with the 6th cooperative principle about cooperatives supporting other cooperatives, since the adoption of SBTs by cooperatives will help all other cooperatives with things like bootstrapping Sybil resistance and facilitating composability . If implemented properly, SBT-based reputation would also allow for transparency and portability that platform cooperatives strive for, e.g. allowing drivers to see how and why they earned certain reputation, and to be able to bring that reputation to a different platform if desired.
As the DisCO principles warn, reputation value accrual should not be strictly determined by what profits the platform, but should be based on real needs, accounting for social and environmental impacts. In our ride-sharing example, users with more financial means would be more able to take more rides. If we took a naive approach for this governance token minting, then such users could effectively buy votes even without the token being traded on the open market. This could be solved for with more complex minting logic, or could be solved in the voting mechanism, e.g. by using quadratic voting. As described in the soulbound paper, quadratic voting can be combined with SBTs to further prevent abuse, e.g. by discounting the vote weight for any like votes where the souls voting hold similar SBTs. In this way, the governance system would give more weight to more diverse individuals. That said, these uses of SBTs is experimental and uncharted territory, and so in the interest of short-term practicality, a much simpler approach could be taken -- simply not implementing a transfer function for the governance token contract.
One additional detail that would need to be worked out for this governance token is how to make sure all the relevant stakeholders are able to receive the token. In the ride-sharing example, both riders and drivers could accrue the token by using the app. But how would the workers building the app earn tokens? How would municipalities receive a vote? One approach that could be taken is using the on-chain voting itself to mint further tokens. For example, every 2 weeks the platform coop could submit a value accounting for all of the workers that contributed to the platform, alongside an algorithmic proposal of how many governance tokens are earned by such work. Once this algorithmic method is voted on and approved by existing holders, the biweekly process could skip voting as long as some method of trust is built with the value accounting methods. To give non-user/non-worker stakeholders some voting rights, it could be a simple vote - e.g. granting 100 governance tokens to each city representative where the platform operates.
Conclusion
As covered at the beginning of this post, there are a lot of risks and challenges associated with the blockchain sector. For platform coops willing to navigate these risks, there is a lot of capital available that can help bootstrap a new platform or scale an existing platform. By leveraging a dual token model, a platform can access this fundraising capital while keeping full ownership in the hands of the platform's users. On-chain governance can also help scale to wider audiences and stakeholder groups than otherwise available.