This post reviews the current structure of POOL token governance and researches if adjustments might be beneficial based on how token governance has evolved.
POOL Token Governance:
Decentralized governance of the protocol began with the launch of the POOL token two years ago. The POOL token is a governance token with two major facets. The first is managing protocol parameters and second is managing the further distribution of POOL tokens (source).
In the 2 years since the POOL token has launched these two purposes have not changed but we have seen a large evolution in what this looks like practically.
POOL as Distribution Management
At launch the POOL distribution management function was limited to only the distribution of the POOL token itself. However, roughly 4 months after launching POOL the first non-POOL assets came under token holder control. This came about with a treasury diversification proposal voted on in late May of 2021. At that time, $5,950,000 of USDC was transferred to the protocol by accredited investors.
In addition to this treasury diversification two other things happened. The first was that more assets incidentally accrued to the protocol via airdrops or token incentives. The second was that the community showed an interest in managing these assets to ensure a stable and large treasury was available to help the PoolTogether protocol grow.
It’s important to note that although the composition of the treasury has changed, the purpose of the treasury has always been clear – to serve the security and growth of the protocol. In this sense, it has acted similar to an on-chain foundation or non-profit making distributions to benefit the protocol and the depositors in the protocol.
To summarize, since the launch of the POOL token, the function of POOL token distribution has (through well-intentioned community proposals) developed into a desire to grow and maintain a PoolTogether treasury. These changes warrant an assessment on the best structure for the PoolTogether treasury.
As of today, people who contribute to the protocol do so through various affiliations or capacities (for example, I contribute via my work at PoolTogether Inc) but there is no entity that represents the protocol itself or the protocol treasury.
For protocols like PoolTogether with tokenized governance, the absence of a formal legal entity structure may well be sufficient. The PoolTogether protocol is decentralized both in terms of how it operates and also the distribution of the POOL token, making a legal entity structure potentially unnecessary. This is particularly true since the protocol has a very limited foot-print of contributors in the United States. Most legal structure analysis is optimized for the United States. So there does not seem to be a real operational or governance-related need for an entity to represent the protocol.
However, even though there is not a need to create an entity for the protocol, there are potential benefits that can be realized by creating an entity for the protocol treasury.
- Having an entity can clarify contributor goals and structure. Look at the role the Ethereum Foundation plays as an example.
- Because no entity exists specifically to steward the protocol, many people incorrectly view PoolTogether Inc as being this entity. This leads to confusion on the role PoolTogether Inc and its employees play in the ecosystem.
- Having an entity offers the ability for that entity to enter into contracts and otherwise deploy treasury funds off-chain.
- Having an entity offers legal and tax risk mitigation for the use of treasury funds in an evolving regulatory environment
These things become especially important in relation to the evolving role of the POOL token as it relates to the treasury. The changing composition of assets controlled by POOL token holders warrants a closer look at potential tax and or regulatory requirements that need to correspondingly be addressed.
Given this, it is our view that having some type of structure for the protocol treasury would benefit the overall community and provide more clarity around the goals of the treasury.
PoolTogether Inc has spent some time researching different options to be able to present something that best aligns with the ethos of the PoolTogether community.
If the community wanted to elect to create an entity that represents the protocol treasury there are many possible structures this could take.
Before discussing entity types, it’s important to note that we’re only talking about moving a portion of what we know as PoolTogether today. We’re proposing that the Treasury be wrapped in an entity, while the protocol itself will expressly not fall within an entity and instead remain immutable, autonomous, and on-chain.
In researching options for legal entities, we used a16z’s entity selection framework and Paradigm’s DAO entity matrix as overviews and guides for proposing the best fit for PoolTogether. These are a great starting point for the community to dive deeper on the topic.
In assessing these structures, we took into account a few key facts about the community and history of the protocol. Though there are many options, our research narrowed to a notable few that we felt were worth highlighting for the community:
Description: UNA stands for “Unincorporated Nonprofit Association” and is recognized
by state law in the United States. It can offer limited liability similar to corporations and LLCs while also retaining some of the fluidity and anonymity of token membership.
Formation Costs and Complexity: Relatively low, <$50k
Discussion: Most flexible option that would be minimally disruptive to how the treasury is run today and relatively simple/cost-effective to set up. Does locate the treasury under US jurisdiction and tax law which is not most reflective of how the activity operates today.
Ownerless Cayman Foundation
Description: A foundation is formed (often in the Cayman Islands or Switzerland) and a treasury is transferred to it. The foundation is “ownerless” but controlled by a board that has fiduciary obligations to the community.
Formation Costs and Complexity: Relatively high, ~$100k for set-up and >$10k annual maintenance.
Discussion: This would be more expensive and time-consuming up front but has advantages in that it can 1) limit and clarify the use of the treasury to align with the original purpose and 2) has been widely used in the industry for comparable situations.
Marshall Islands Non-profit DAO LLC
Description: The Marshall Islands has passed legislation encouraging DAOs to register (with a non-profit option that fits PoolTogether’s circumstances). Registration does require a few members to KYC, but otherwise treasury operation can remain largely on-chain and as it functions today.
Formation Costs and Complexity: Relatively low, <$50k
Discussion: This option is newer (legislation being approved as recently as last year). It offers a similar profile to offshore foundations with a lower upfront cost and express recognition of on-chain entities in the legislation.
Based on our analysis, we believe the Marshall Islands Non-profit DAO LLC is best suited as an entity for the protocol treasury. This is for a few reasons.
- The non-profit model aligns with the protocols social good purpose and stated mission
- The structure a flexible membership model allowing for anonymous members and the ability for people to seamlessly transition in and out (up to 25% of token ownership)
- The protocol’s token holders and contributors are not predominantly located in the United States
- While relatively new, we like that the Marshall Islands has created a registration process expressly for on-chain entities indicating a willingness to evolve with the industry.
- People contributing to the protocol will benefit from structural and regulatory clarity
- The LLC can enter into contracts and mitigate concerns around tax treatment for treasury funds.
We believe this recommendation strikes the right balance for the community with significant weight being given to 1) The degree of protocol contribution activity outside of the US and 2) the ethos and structure of the existing community 3) the non-profit purpose of the protocol treasury 4) a forward-looking structure that allows for flexibility.
Overall, although the treasury remaining entityless is a valid option we believe the benefits that come from having an entity representing the protocol outweigh costs.
What Would Change?
After reading this, you might be wondering what this would look like practically. If the Marshall Islands Nonprofit LLC entity was adopted, practically speaking, very little would change. It would primarily be enshrining the purpose and structure of the treasury legally.
The governance process around voting to make distributions would not change. Some members of the community would be required to interface with the Marshall Islands and/or advisors, to setup the entity. The entity would need to adhere to the laws and reporting requirements as outlined by the Marshall Islands
This post is intended to inform community members of our research so far and invite feedback.
Ultimately, PoolTogether Inc will not take the lead on implementing this structure. We are happy to continue to give our input and help in the process but we believe it’s important for the community to take ownership of this.
The first practical next step is seeing if there is alignment.
Do people see value in creating an entity to represent the treasury? Would people like to suggest alternative options or paths? Our hope is this post is a springboard for that conversation.
If there appears to be alignment, we would recommend the following next steps:
- A token holder vote to provisionally approve adopting the entity for the treasury subject to further research, delegation of the authority to certain community members to confirm tax analyses and interface with MIDAO to form the entity and other independent lawyers to confirm the analysis.
- These delegates will continue to provide updates on research and the rapidly changing legal treatment of DAOs/protocol entities as we move towards a final structure.
- A final vote ratify the outcome of step 1.