Tally: Fixing DAO Incentive Misalignment

Juan: Welcome back to another episode of StablePod, a podcast where we host conversations with the individuals who are shaping the future of decentralized systems. I'm your host, Juan Esquivel. Today's guest is helping shape the future of DAO governance. Denison Bertram is the co founder of Tally, a team building products and solutions, to help DAOs work.

In today's episode, we dive into the state of DAO tooling and UX. What key decisions the Tali team has made that has led them to be a clear market leader. Many of the problems plaguing DAOs and how Tali aims to solve them. And of course, the big news from the team, the Tali protocol. We go over what exactly the Tali protocol is, and of course, what it aims to unlock for DAOs.

Gustav: Yeah, I thought, it was really interesting talking to Dennis and I think he touched upon a lot of, really good points, especially in regards to the incentive misalignment we see in governance today. so I think it was a great opportunity to hear from someone who is, building, a technical solution.

to the problem. but at the same time has deep, intrinsic understanding and knowledge of, some of the mechanisms that we see in Dow governance today, especially the more faulty ones. it's also great to hear the plans for the future and how to aim to tackle.

you know, one of the main topics these days, which is, LSTs, but from a governance token standpoint. 

Juan: Yeah, totally. Tally team is of course, and I mentioned this in our conversation, it's a great team that we work with quite often. maybe a lot of our listeners know them from, that platform that is supporting Arbitrum, Lido, the list goes on for all these different protocols.

I think they're taking the next step up, in their journey by launching this protocol. there's a lot of exciting questions we have for what this actually looks like. I think in the current conversation, we go over when the test net is expected to go live.

So of course, you know, look out for that. but yeah, I think it was exciting to have Denison on. Denison is a very, charismatic individual. he's a good speaker. And of course, you know, we let him have the floor and he, gave us his tally thesis, which I think you'll find very enjoyable.

So without further ado, our conversation with Denison. Welcome to the podcast, Denison Bertram. Thank you. Thanks for having me. Denison. I think before we start this conversation, I just wanted to give you and your team a lot of props for being a pretty clear, leader in this subsector we call DAO tooling.

I think it's very underrated and it's very hard to build in this niche. So first off, before we start this conversation, I just wanted to give tremendous props to your team. And of course, you know, we enjoy thoroughly working with your team. 

Dennison Bertram: Thank you. it's been a real pleasure working with you folks as well.

it's so important, so critical, especially to our ecosystem. So it's nice to get a little recognition element. 

Juan: My first question to you, Denison, is how would you describe the state of DAO tooling itself in 2024?

Dennison Bertram: Well, DAO tooling in 2024 is much smaller. The Dow tooling in 2021 End Dow tooling in 2021. There was enormous number of companies that were building Dow tooling. Unfortunately, most of 'em are gone. I think, you know, that sort of boom was maybe a bit emblematic of the era where, you know, people were getting funded for things without necessarily much of a background in it or much like a deep connection to the space.

today though, there are fewer players in the data tooling space, I think probably only around four or five, that are really, substantial, but ironically DAOs are bigger than ever. what we went from was, you know, 2021 talking about DAOs and sort of incorporated everything under the sun to actually, one of our, theses during the last bear market was that everything in this cycle will decentralize and we were spot on about that.

So basically every infrastructure, every project, every protocol in the web through space is decentralized. Either already decentralized or on a decentralized roadmap. So in a funny sort of way, while there's only a few doubt tooling companies laugh, maybe doubt tooling isn't even really a great name anymore.

so even though there aren't so many of them left, we're now servicing an industry that has just become absolutely enormous Protocols that have become decentralized NRDAOs, they just managed all of the infrastructure of Web3, tallied today, it's over half a million users that, manage and govern, well north of 20, 30 billion in value, not to mention the value of these incredible protocols, like 7.

wormhole or ZK Sync or Arbitrum, any of these others, So it's pretty wild to see how right we were, but the market has definitely changed a lot. 

Gustav: I think that's an interesting point because, we work in a little bit different vertical of the DAO space, right?

It's been, an active participant and of course also use Tally. we saw a similar thing. back in 2021 and 2022, there was a lot more organizations trying to, work actively with governance, but a lot of them dropped off, And couldn't really make it work.

today we see much less, serious players in that vertical, right? the presumption that I've taken is that it is just really difficult to build a business around interacting with these, public, governance, frameworks.

so maybe you can tell us a little bit, you know, why is it that tally worked? what was it that made you guys different? what were some of the decisions that you feel like you took, that you saw other players? Because I totally agree with you. Kind of like the vision we had back then.

today we are fighting for a small piece of the pie. When we started, it was only maker that was paying for governance participation. where today, like 20 protocols and we're getting paid in every single one of them. So there's really also been like.

A big shift, I think, in the ability to actually work with DAOs, but maybe you can talk a little bit about your experience on that front. 

Dennison Bertram: Yeah, I think, you bring up a good point with how decisions that we've made sort of have enabled the success of Tally.

I think specifically, Tally thinks of itself as a very visionary, innovative company, but at our heart, we're very practical. And that, I think, has been the greatest challenge for a large number of people building tools for DAOs, where there's a difficulty translating division into practical ness.

And, people tend, or they don't as much today, but they used to really rag a lot on token holder governments, or, one token, one vote, because, there are some, inefficiencies in the system. But early on, we recognized that it was a really practical system. There's a really clear system.

It's a system that's easy to understand for people who are participating. You have one token, you have one vote. one of the things that we had really set as one of our core values was standardization of governance across the space.

You believed early that if we could build a framework that could be like the ERC 20, we could do for governance and operations what the ERC 20 did for DeFi, which is make it interoperable. The ERC 20 is not the best token standards you could possibly have. Far from it. But it's interoperable and it's standardized.

And what we saw with DAOs and governance is that people were coming up with wild designs. And that made it very hard for the people who participate in governance, the delegates, you know, service providers, to move between organizations. Because when they would move between an organization, they had to relearn an entirely new structure for everything.

And that was very inefficient because the delegates, the voters, the token holders, the service providers, these are the people that actually make these DAOs work, right? DAO itself is just smart contract code. it doesn't live. It just sort of sits, right? Intermediates the behaviors and actions of all these different parties.

But the parties have friction in understanding how they work. we can't scale these organizations, right? Like, you know, yourself, you mentioned that today you work across 20 protocols. Well, I would argue that probably wouldn't be possible if all 20 were radically different. And they require just a radically different understanding each one and how they operate and how the participation works and how the process flows.

So I think what, you know, the main decision that we made early, which was so critical to our success was thinking about how do we build something very practical. that services well enough all the participants in the system, such that we can scale consensus of the humans in the system, at a very high rate, a very high degree.

And that I think really stands out in. Our sort of business decisions over the past few years where we, you know, we really adopted governor and then we pushed forward the evolution of governor as the standard DAO framework, because it was really simple, because it was really easy to understand how it worked because it was easy to build on top of it.

It was very, very flexible, but very modular, but very like standard at the same time. And this is critical for its success, right? There have been many other governance frameworks out there. but they haven't gotten traction simply because the friction for the humans to participate in the system is just too high.

So I would say above all, that has been probably our primary winning strength. 

Gustav: Yeah. And I think like to the point as well, you know, about like us not being Possibly able to participate in that many systems if they were like radically different, right? That also means that like today, if someone works with Tally, it becomes much easier for us to transition and also work there, right?

So you could also kind of like, maybe view it from the angle that like, you know, Tally, apart from just being like a technical, Provider right to these systems, you also able to, you know, bring along, you know, like strong teams and strong participation because they're already familiar with working with Tally.

So for them to then onboard, it like decreases the barrier for them to entry into like a new protocol. 

Dennison Bertram: Yeah, this is really an underrated value prop of Tally. we call ourselves great distributors, right? We take great ideas and we distribute it across the ecosystem, but we also distribute things like the delegates, the operators, the service providers across the ecosystem.

And new DAOs that sort of build or design, new systems, sometimes they don't fully appreciate how big a list the transition to new designs is on the participants themselves. It's almost like web design where, the menu is in the upper right hand corner and it looks like a hamburger or, you know, there's some place that you know, to look for settings or your account, and when that doesn't exist, the tool is.

It's incredibly difficult to use, and it's mentally taxing just to understand, okay, what is this software? How do I even operate that? when people build these organizations, it's important to appreciate that the humans that take part in this have a limited lifespan.

And the limited amount of energy to learn these custom bespoke systems, even if sometimes these custom bespoke systems are better, it might not be enough to warrant the attention and participation by some of the best teams that participate. Because very small differences in operation can actually lead to very unexpected outcomes for participants such as yourselves.

And when you look at an ecosystem that might have, you know, maybe the first person that does something different, it's not so bad, but then the second person does something different. It's a higher tax on just your, your, your ability of efficiency of interacting. And then the third person really falls apart.

Right. Maker is kind of its own self contained ecosystem because it's one of the first ecosystems, but it's a very different ecosystem to any other. Ecosystems. And it has a somewhat high rate of churn over part systems because when the system changes or when people move between it, it's, it's, it's just a high switching cost.

I would argue that if you created maker today, it wouldn't get the traction and quality that it has today because the barrier to entry would be so difficult, participants such as yourselves have options on what to do with their time and a limited amount of time, There are many competitive, high quality ecosystems to participate in.

And to your point on tally, you can just work across all of them in one go. a lot of the new tooling that we'll be building in the following year Really capitalizes on your ability to move from DAO to DAO and understand what is going on, how to purchase space, how to bring value in a way that bespoke systems can sometimes prove very taxing and hard on the contributors.

Juan: So that was going to actually be my next question to you, Denison. we spoke a little bit about like, what were the decisions, the team had made, prior to enable their success. so just to quickly summarize those for the audience, make something practical, push for standardization. I think it was pretty big.

You were like a, you had some first mover advantage there and you pushed for some type of standardization. And then the also last one I kind of caught was enable distribution of knowledge and you're also a byproduct of that is creating a network of participants and of other, fully capable participants to, basically push them or, or, you know, push those resources towards new projects, as you kind of illustrated.

What is like, well, how would you summarize, and maybe you already kind of elaborated this. How would you summarize what Tally's main, what is the main problem Tally is aiming to solve in regards to this? 

Dennison Bertram: I think the largest problem that we're aiming to solve is making DAOs work, right?

decentralized organization is critical to the success of Web3 infrastructure. None of these things matter if you were just building them like you would build Facebook, right? Like, imagine Arbitrum as Facebook, or Uniswap as Facebook, right? None of these things would gain the buy in from the people who use them if they were decentralized entities.

None of these things would be safe to build on if you were not decentralized entities. a talk that I like to give is around, You know, I have this little talking point, like if you're building on Facebook, you're the next Zynga, right? Where you couldn't build many of the things that you build today without them being centralized because they're just not safe.

They're not safe for the users. They're not safe for the infrastructure providers. They're not safe for the ecosystem. So making these organizations work is really critical to scaling the entire web through vision, all of crypto. it is core of the vision. It's always been the core of the vision of blockchain.

Decentralization. So for us, we are always looking at the most pressing challenges of DAOs and thinking like, what can we do to solve these? And actually, even though tally is not perfect and token holding is not perfect, and we've definitely not reached the final state of DAO governance by any means, it's still very, very, very early.

It is good enough, right? It is good enough that it operates and it functions, but there is kind of a new danger on the horizon, which is Very, very, very important for DAOs to sort of understand, which is there's this kind of economic abstraction that's happening across the ecosystem. You see it with things like restaking, you see it with things like staking, and governance providers, governance protocol tokens have, they're, they're kind of locked in this.

Failure to represent their value properly and locked in this failure to really renumerate the participants in their system. long term what this is, what's happening is it's leading to a kind of inefficiency of these organizations and actually a structural collapse of them. Actually, like. It erodes their security in a very tangible way.

And a great example is, ENS right now is dealing with a problem where the, cost to purchase the votes necessary to steal the treasury, is substantially lower than the treasury itself. this sort of collapse of security has happened to many DAOs. Nouns had a collapse in security Eragon had a collapse in security, which was successfully exploited, a number of other organizations have gone through the same thing where the security of the DAO is locked in the token holders, DAOs rely upon token holders, the participants, the delegates to actively participate in the ecosystem to keep it safe. And what we see happening is that the failure to return value to these holders and to these members means that they are losing interest.

And this is subsequently eroding the security of nations. And that's the real problem that we have to solve. We have to realign the incentive model of decentralized organizations so that they can really. 

Gustav: So, I completely agree with some of the notions that I think there's definitely a big mismatch between the value creation around the token, right? In regards to, the value of the token is a security metrics, Which is also a little bit counterintuitive in some sense, right? Especially, some of these organizations have been, heavily discounted compared to what they have in the treasury.

But like, I really want to hear because, you know, like we come from kind of like trying to solve governance is like an operational problem, right? Like as a human problem, right? Like how do we tackle that? when you guys look at, the current state of governance, what is happening today where, I certainly see a lot of, other problems that are not necessarily tied.

to just, you know, like we might be like in a security compromise at some point. but just like in general, you know, participation, the quality of the participation, the quality of the initiatives, just everything that is happening. I think there's a lot of, issues that also ends up in the point where a lot of people feel that DAOs are very ineffective right at actually doing their purpose.

so how do you guys, look at those problems and when you build a new feature, how do you look at the problem you're looking to solve and then try to tackle it from the technical angle? maybe you can talk a little bit about that, 

Dennison Bertram: Yeah. So I think taking a step back, first of all, all of the problems you mentioned, right, Are the same problem. It is the problem of misalignment of incentives, right? Why should you have good quality participation if you're not incentivized? You think about things like Uniswap and you think about the token holders who operate the protocol.

Any other place in the world that a small group of people operate and maintain a financial service that does 1 trillion in volume per year. They would be really handsomely rewarded the participants in Uniswap by and large work for free and protocols like Uniswap and others have large VC funding, right?

They have large VC backing. So you have participants, token holders who are working for free to drive value to a protocol that drives value to investors. Why should you have good quality participation, right? Like in what world would you work for free forever, And this filters down through everything else, why isn't there even better tooling? Well, is there a good market and remuneration for good tooling? Not really. Why isn't there more participation? Well, why should they participate, There's no remuneration. There's no incentive model for participation. This is kind of the crazy thing about DAOs.

When you think about token price, right, which is, you know, not a great metric, but you know, let's use it as a metric as a kind of like a proxy for the success of the organization. Something that we talked about is tokens co mingle financial value with organizational utility. And that's very important when you bootstrap a network, right?

Kind of like finding people to be the stakeholders or kind of like incentivizing them to be stakeholders, right? But now let's think about it. If the token price goes to zero. The DAO is effectively dead, right? Token price is zero, it's arbitrarily cheap for attackers to just, you know, purchase tokens and destroy it.

But it's also a pretty good indicator that nobody's excited, nobody thinks this is going anywhere, therefore it's zero, it's dead. DAOs want to run their protocols well. They want to generate value somehow and they want the token to reflect that value, right? You would rather hold a DAO token that's worth a hundred dollars than it worth zero dollars, right?

So as a holder even you prefer a token that represents some sort of valuable DAO. But think of what happens For DAOs that don't, you know, thinking about how the incentives are misaligned here. For DAOs that don't return value to token holders. You have a token. At zero, it's worthless. You do nothing. But what happens when DAOs drive value to the token to infinity?

Or their maximum possible value? Right? Well, at a token's maximum possible value, let's just call it infinity just to make it funny, right, at its maximum possible value, you as a token holder, you as a participant in this DAO, what is the logical behavior for you? The only logical behavior for a token holder that holds token that has no expectation of being rewarded or sharing any of the rewards or profits of the protocol.

when the token's value is represented in the market at its peak, the only logical thing for you to do is sell that token, right? Because every moment after this, it just goes down in value. And that's the only thing you get out of this DAO is that value, right? The DAO doesn't pay you, they expect you just to be on the forums all night, late at night, like working hard, voting and hanging out and being attentive in case some malicious proposal comes and you need to vote no on it.

So at both ends of the spectrum, actually, you have collapse of DAOs. When the DAO token is maximally valuable, the opportunity cost for token holders is at its peak. You either make money on this token by selling it. Or you participate in governance, but the governance does nothing for you. it's just work on your side.

Right. So you sell the token, at maximum possible value for Dow tokens, everyone's token is for sale at the market. Nobody's participating in governance because the economic opportunity costs participate in that governance is at its peak. That's weird that you have failure at both sides of the spectrum because the Dow is trying not to go to zero, but now it's also kind of got to try not to go to infinity.

Right? Because what does it look like today with Uniswap? 168 percent of Quorum is for sale in centralized exchanges and DeFi. Right? That's a lot! And what that means is, is that Uniswap has to set security parameters based on what their expectation of participation is going to be. They kind of have to guesstimate how many people are paying attention and will participate in this governance.

Given that they aren't rewarded or remunerated for their work whatsoever, and that they have an opportunity cost of holding this token. This opportunity cost, this tension, this duality between the economic utility of the token and the organizational utility of the token, right, drives all the problems that you mentioned.

Right? Because now, your life juice, is limited, so you could participate in the DAO, but actually your life opportunity cost is that someone else should do it. And if the DAO is poorly managed, well, that actually even drives less participation on your side. Because now you don't even have the expectation.

Now there isn't even a speculative premium of some sort of like good thing happening in the future. So it's really like the incentives here are totally broken in a way that's very subtle for organizations. It's very subtle for organizations to sort of recognize this. Cause sometimes you have large insiders that have a large stake, right?

And they sort of feel like, no, we want this to operate. But think why do they want it to operate? Well, they're just waiting for the maximum opportunity cost to sell, right? So in a way, when you start to phrase it like that or frame it like that, DAOs start to look like meme coins. It's just some sort of dynamic between when is your personal opportunity costs too high, and then you exit.

Gustav: Yeah. And also like then on top of that, you add the fact that the most active participants often don't even hold the token. Right. So they're kind of on borrowed time from, the people who's delegating to them to the point where, they might go out and sell the token, 

And they could lose, all of their voting power. And, in some cases when there's public delegation programs, that pays right compensated, then, they would also have their potential livelihood taken away from them. In the same instance. so yeah, there's definitely very weird mechanisms.

And then. On top of that, I mean, if you look at, you know, how much work you put in as like a delegate, and like how low the compensation actually is, right? we just had to fight, for things like 6k a month in Uniswap for the top 10 delegates, like distributed, like you weren't secured 6k.

But then you also see the foundations that sits, on these huge, budgets, right? Like yearly budgets. So there's a lot of money being spent on the DAO. But it's just not going towards the people who's actually, managing these multi billion dollar protocols and implementing the changes for the future and doing a lot of the work on that front at least, right?

Dennison Bertram: Yeah, and what this leads to is extractive behavior, right? extractive behavior is the only logical for participants in AI. You must find a way to extract value because otherwise you're working for free, right? And over time, extraction becomes a very, very powerful force in organizations that eventually leads to their downfall.

Demise or collapse, right? Because there isn't any other mechanism to align their incentive. Their only incentive now is I shall operate this in order to extract from it because I am not compensated for operating it. 

Gustav: Yeah. And this is also like the trend we've seen with most of the past, delegate organizations to connect, try to take a crack at, just being purely a delegate.

Most of them have moved towards a service provider model, right? Where they're now only being a service provider because as a service provider, you can get a much higher budget compared to just being a delegate, right? even though the value they provide. can be less or even in some cases non existent.

Dennison Bertram: Absolutely. It's extractive. Extraction is the only logical behavior at that point, right? DAOs must return value to the token holders to create a feedback loop that incentivizes healthy active participation and that incentivizes delegation. Because otherwise, extraction becomes the order of the day.

And when enough people who aren't motivated enough for extraction, move their tokens and sell, or even worse, just don't participate, It forces DAOs to lower their security parameters. I have a nice chart showing that Uniswap has a billion outstanding tokens. Maybe like 300 million are in the treasury.

Something like, I don't know, maybe like 400, 200 million are delegated, right? so maybe like 600 million are in the market. Only maybe like 200 million are delegated. Only about 40 to 50 million participate in governance and the quorum is 40 million. So out of a billion tokens quorum is 40 million looks like this, right?

But the amount of tokens for sale on centralized exchanges is like this So Uniswap has to set its security parameters, not based on a billion tokens, not based on the fully diluted valuation of Uniswap, not based on the economic value of the system that it protects. Uniswap has to guesstimate its security based on.

200 million of delegated tokens and how many of those will actually show up? Because if they set the security parameters higher than how many people actually show up, nothing ever gets passed, DAO is dead. And if they set them too low, it's pretty easy to go to Binance, buy all the tokens and pass whatever you want, right?

And remember, once upon a time, Binance did delegate the tokens that they held on their exchange. Right. Of course, there's an accident, but you know, you can imagine that there's other dangers that work out there when people pull their tokens looking for financial incentive elsewhere, 

Multi bridge. I forgot the name. there was a bridge project that was in China that got raided by the local police and it turned out the bridge was mostly a multi sig and most of the signers keys were on the founder's laptop and the police seized the laptop, saw the keys and just took all the money out of the bridge.

Right? For DeFi protocols, there's an extreme danger of their security pooling in places that they don't control. What if 168 percent of Quorum was on that founder's laptop? Now some local jurisdictional police office? Owns the Dow as control over the Dow, right? Like it may seem far out, but that happens, right?

And this danger prevails and will continue to prevail because as you know, the value for Dow tokens goes up and more people sell because the greater the opportunity cost, the greater opportunity there are for third party malicious actors to get ahold of these tokens or just incentivize them pooling the security outside of the control of the Dow.

When we think about Binance. And like centralized exchanges holding uni tokens. Isn't it weird to think that theoretically Uniswap's greatest competitor centralized exchange hold the power to destroy Uniswap? Like they wouldn't of course, because it would just be like a shit storm, but. But isn't that a weird dynamic?

Does anyone sleep great at night? Like, imagine if, you know, 50 percent of stake ETH was not in Lido, but actually on some founder's laptop in Shenzhen. Would you feel safe? Right? so that's the kind of dangers that actually arise from this misalignment of incentives because the token holders, the delegates, they're kind of like, you know, one of our team members, he does a great job of explaining why DAOs are actually like Ethereum, why protocol DAOs are actually like Ethereum with staking and stuff like that.

The delegates are the validators, the token holders. Delegate their voting power to delegates who operate the protocol, and if they do a good job, the protocol prospers, and if they do a bad job, the protocol suffers, right? when the security of these protocols are being held by third parties that don't participate, could be malicious, and they're being held there because the economic misalignment of the incentives of the DAF pushes token holders towards that, you really get into a dangerous situation.

Juan: so to tie, this section up in a nice little bow for our listeners, Basically, we were arguing here or what that is suggesting is that there's a fundamental misalignment in incentives in token based governance because there's two utilities baked into the way we treat these tokens, which is governance utility, and of course, the speculative nature of these tokens and then everything we just went over is kind of like the secondary effects of tertiary effects of what The problems that that is causing and how we're trying to maneuver through all these, flaws in the system.

so just a, the final question in this section that I wanted to ask is, just pushing back on this a little bit, what's your take on the workarounds that some of these projects have come up with? what I'm referring to is like optimism, citizen house, like, is there anything on the organizational side of things that would, maybe it's just a bandaid.

I think CK sync also came up with like some, you know, three body Government kind of layout, is this still not really treating the actual root cause of the problem? Is this kind of just a temporary solution for this broken thing that we described? 

Dennison Bertram: You know, without commenting on any specific solution, I think that unless you return value to the token holders, it's not a long term solution.

Anything that asks the participants to work for free. And to operate something exceptionally valuable for free is not long term sustainable because it will optimize for extractors, right? you saw a bit of the argument around this for retro PGF and the OPE ecosystem where people kind of like the term like PGF mining, like retro PGF mining, where people operate specifically towards the incentive given, like do X, you'll get paid Y later.

And they build businesses around extraction, where people who aren't interested in extraction and want to, you know, just build things valuable. They now have to take a really unacceptable risk where they have to invest themselves first and then hopefully be renumerated. DAOs need to reward their operators for the work of governance.

Operating these protocols, as you folks know, is hard work. It is risky work and you need to be paid for it, right? You can't pay your rent with retro PGF. You can't say, Hey, landlord, you know, come September, there's going to be a big vote and a whole bunch of pudgy penguins are going to come together and maybe you'll get rent.

Then you can't build a business around that, right? But imagine a world, and I think part of the problem here is maybe airdrop methodology, right? Like Dallas giveaway. Tokens to people who maybe aren't really well meaning actors and then they have a really deep sense of regret around maybe like paying them money for like being there, right?

If they aren't properly compensated, because a world in which you show up at work, do work and get paid is a different world. Fundamentally, then log in, look around, see if there's some sort of grants you can get.

Maybe there's some sort of funding. Maybe you can get paid for being a signer on a multi city. I mean, how many? Projects are multi sigs holding money, paying the signers for like sitting on the multi sig. One of the whole reasons why we use committees to pay out funds is because we know we can't rely upon the DAO to do it because people Aren't motivated to participate enough.

You burn social capital every time you do a proposal. So the only way to get proposals passed is to sort of like slice up the pork of the pig to figure out who needs what to participate in. We need long term, well renumerated structures so that the people operating the protocols have proper incentives to operate the protocols so that the protocols can be successful.

And I know the industry sometimes talks about like, Oh, there's a lot of short term ism, but the short term ism exists today because that's the only thing that has any value, of course, people are like, Oh yeah, well, people are just, trying to extract value short term. It's like, of course there's no value longterm.

Dow's explicitly says there's no value here longterm. They say the governance token is worthless. There's no value here longterm. Right. So what is everyone's organizational freedom of reference to participate? Well, let's figure out how to get value out of this pig while it's still alive and then move on.

And there's plenty of DAOs in the ecosystem that are based on great ideas. So, I certainly enjoy that people are experimenting with new models. I think that's super important and there's really a lot of opportunity.

But at the end of the day, you know, things that are worth billions or tens of billions or in the future, hundreds of billions can't operate off of. People working for free and it doesn't even make sense when many of these things have investors that actually benefit to such an extreme degree on the effort put in by delegates like yourselves, right?

something we didn't talk about here is, is that actually there is some mechanisms coming that sort of fix this or, or the step in the right direction. Do you want to give a shout out to. A16Z's work with Wyoming on the DUNA legislation, which does allow DAOs to register and specifically enumerates how DAOs can return value to token holders, which is to basically pay them for the work of governing the DAO.

That's super critical because you can imagine a future where you are paid for the work of governing and your remuneration is based on how hard the job is and the more you work, the more you're compensated, right? And that's really exciting and a really great step in the right direction. 

Those things are going to be the longer term fix because once years go by and these doubt protocols and the initial excitement has faded and, you know, the sort of like, you know, let's go pump fandom telegram group dies down and. Now, guys have to really operate day to day on their own success of like how the delegates are managing the system.

then we really do need to look at making the incentives for these organizations online. 

Juan: So Denison, I know your team, hinted at this, before in the conversation, your work, your team's working on. Some innovative solution here. I do want to make sure we cover, before we wrap up this conversation, you've described it as a plan to save DAOs.

could you elaborate, what is your team hard at work working on and, curious to learn more. 

Dennison Bertram: So we are building a protocol. depending on when this recording comes out, you'll either already be able to go ahead and read the white paper on it, or you'll be hungrily waiting for us to launch the white paper on it.

But we are building a liquid staking protocol for DAO governance tokens. We are splitting the economic utility from the organizational utility. We're eliminating the opportunity costs that speculative token holders have over participating in the DAO. We are returning the security of DAOs to their own control.

And we're doing it in a way that's DAO aligned, that does not capture these organizations, that drives long term value to the token holders, to delegates. And most importantly, enables the use of DAO protocol tokens in restaking, which is actually going to emerge as a huge competitive challenge for DAO tokens.

So we're really very excited about this. I'm happy to talk in the sort of remaining minutes, about it. If you have any specific questions. 

Gustav: So, I mean, maybe I'm interested here just from the standpoint that like, you know, I mean, today, you know, like DAO tokens, you know, almost none of them, you know, is something you're able to stake.

I think maybe like, you know, Avis, maybe like, you know, one of the few that you can stake and earn some rewards for staking into the safety module. most of the tokens don't have a native staking that actually gives a return on it, right? Yeah. So how do you guys see, because this would be the main thing, are you actually able to do things that would benefit the DAO, the operations of the DAO, the governance, and would you be economically incentivized to do it?

So maybe you can talk a little bit about how are you guys, planning to innovate around the economic return or incentive to actually do this? 

Dennison Bertram: Yeah, so what's interesting about our protocols is it's actually a layer. It sort of sits on top of the native staking that DAOs may offer or may not offer.

I mentioned a little bit while earlier, the DUNA legislation, this is really opening up staking for DAOs. So Uniswap is launching Unistaker, which is sort of setting a precedent for a lot of other organizations to launch staking. This problem of returning value to token holders, especially for protocols that earn revenue, is actually very well addressed.

DAOs are very receptive to this. They understand the problem and there's many DAOs that own revenue. you look at the ENS, ENS earns revenue in ETH, arbitrary, sequencer earns revenue in ETH, right? So these are organizations that understand that there is a necessity to return value. the protocol works as kind of a wrapper on top of existing staking designs.

And so we'll start with Unistaker, but we'll be working with other teams on their own specific staking requirements. And it basically acts as an efficiency layer on top of staking. Where you, you know, Unistaker, for example, you come and you stake your token, it's locked in the contract. And then every now and then you get to claim rewards, teleprotocol wraps that so that you stake in and you actually receive a liquid stake token back, which represents the underlying, uni that is in the unistaker and the auto compound rewards that are happening on that.

So you hold this, this token that represents The underlying token, plus the rewards that it's earned. For DAOs that don't return value. And actually before it mentioned that there's actually a couple of different ways that DAOs do return value. That is they share a portion of the revenue, or they give out inflationary rewards and inflationary rewards are basically, if you don't do any work, we will dilute you out.

We will continue emitting more tokens and only the people that do the work of helping to operate, get them. The inactive holders are very slowly diluted out, which is a very fair system, but there's something else that's really important here that the Tali protocol does. Uniswap, and sorry, Uniswap, we're always using the example, I love you guys, Uniswap can only pay token holders as a share of the revenue generated by the protocol.

And to be clear, when I say pay, it is for the work of governing, for operating the protocol, right? No one gets rewards for doing nothing, They are getting rewards for the hard work of operating the protocol. Some DAOs don't earn revenue. Right. But in Uniswap's case, they can pay you as a share of their revenue.

Restaking services can outbid Uniswap for their own security. And what that means is, is that restaking can pay Uniswap token holders as a share of the total economic value of their system. Because remember in restaking, you are basically using the economic value of something as basically a stake, saying that here, I'm going to do some sort of operation and this is a bond that I put up to say that I'll do it correctly and if I do it wrong, you can take my bond.

Right? So they can take any sort of economic collateral, right? Unitoken is one of them, but they value Unitoken as a share of the economic value of the system. Which represents, you know, the TPL, the volume, the profit, the revenue, right? That's always larger than what DAOs can pay because the DAOs can only pay as a share of revenue.

So for token holders, that economic opportunity cost becomes very large, right? And this is new, right? Restaking is new. This hasn't been a significant problem before. Before, token holders only had to choose between the opportunity cost and DeFi for selling the token. But now there's the opportunity cost of putting in restaking, which is subsidized by points, which is kind of like pulling the future value of restaking forward, right?

So it's like a big deal. In that case, DAOs want a liquid state version of their token to maintain their own security. Because if you hold a DAO token in a DAO that doesn't even make any revenue, maybe it's just like early days and you're just working hard on it. Then the DAO itself can't organize, it can't operate, right, because again, you're stuck in this problem with guesstimating your security parameters based on how many tokens are not going to be stuck inside of restaking.

So, for DAOs that don't return value, they want the liquid state version of the token, because what the tally protocol does is, the speculative holders, Get access to the economic utility, but the organizational utility, the voting power of the token gets returned to the protocol itself for redistribution according to how the DAO redistributed it.

So the Tali protocol actually gives DAOs control over their own security while eliminating the opportunity costs that token holders have for like. Finding some sort of reward or remuneration elsewhere. And this is really important. So that means that for guys that do return value to token holders, token holders can now enjoy the reward of participating in the doubt and the reward that they may find somewhere else for dows that don't return value.

Token holders can participate in that DAB. It doesn't return any value, but that's cool because they can go get rewards somewhere else. the more people use the liquid state version of the token. The more security is returned to the DAP. So now the DAO security parameters can actually reflect the reality of their outstanding token supply, while the economic opportunity of the token holders can now reflect the value of the whole system.

Not just the revenue, if there's any of the Dow, right? So we're really unlocking Dow's just opportunity and value, right? So it's going to make Dow stronger and it's going to make token holders more participatory because now you want to hold a Dow token because it's a productive asset. You can use it in productive things.

And what's interesting is we also now have a feedback mechanism for good governance. And the feedback mechanism is that token holders can concretely look in their wallet and see, are my rewards going up, or are my rewards going down? If rewards are going down, somebody's not operating the protocol right.

And who is that? Well, it's probably you folks, the delegates, right? You're not doing a good job. Why are my rewards going down? Today, it's not really possible for token holders to really get a good grasp of how their delegates are working, right? There is no feedback. Now there's also feedback.

You know, when you think about something like Unistaker and Uniswap, right? And you think about holding a liquid state union token on the tally, Uniswap does a trillion dollars of value of volume a year. What an incredible asset to hold. If you get exposure to a portion of the fees on that trillion dollars a year, and you can participate to make that trillion go to 2 trillion, that's a fantastic asset, 

If you look at Uniswap today, only 40 million people show up.

They do a trillion dollars in volume a year and only 40 

Dennison Bertram: million votes show up, right? And the number of individual addresses is really abysmal, right? Yeah. Yeah. We fix that. Suddenly you can say to the world, Hey, we have a protocol that does a trillion dollars in volume and you can hold a Claim on participating and operating this thing for free.

To get a piece of that trillion dollars, that is an incredible unlock of value. That's an incredible unlock of value. All right. You can be directly responsible for its success and your success is directly related to your own work. That's what we need across the ecosystem. Alright, you're doing something for L2s, you make Arbitrum great, and on top of that there's 40 other L3s built, and those make those things great, right?

If you are a serious, sophisticated, institutional participant, These tokens make DAOs really come into the round. It finally unlocks their true value. 

Juan: You sold me, Dennison. I do want to call out the time, gentlemen. I think we could spend more time here diving into, what your team is hard at work building.

I'm excited to learn more as more information comes out in the coming weeks on Liquid Staking for Governance Tokens from the Tali team. Thank you so much for joining us, Dennison. We'll let you go. My pleasure. 

Dennison Bertram: Thank you so much, everyone. It's been a pleasure here. Thank you. 

Juan: Thank you, Gustav.

We'll see everyone on the next episode of SablePod.