Insights and learnings from 50 DAO token swaps
Blockchains enable trust and transparency without a central authority, forming the backbone of a new digital onchain economy. Onchain organizations, most notably Decentralized Autonomous Organizations (DAOs), utilize this infrastructure to manage resources and achieve their goals in a peer-to-peer setting.
Over the past five years, DAOs have grown significantly in size, capacity, and complexity. Over USD 3 million addresses actively vote and participate in onchain organizations, with nearly USD 20 billion in assets controlled by DAO treasuries (source DeepDAO).
One major challenge many DAOs face is that their treasuries primarily consist of native tokens. This often leads to funding activities through distributing and selling these tokens, which creates an existential risk given the nascent onchain economy's volatility. As spending leads to native tokens being sold, downward pressure on the token price ensues, reducing the organization's available resources.
Diversifying DAO treasuries is a common strategy, where a portion of native tokens is converted into less volatile yet value-aligned assets such as Bitcoin or Ethereum. In other cases, native tokens or revenue are converted into stablecoins, often used to cover operational expenses.
Another approach to treasury diversification is the token swap, where two or more DAOs engage in a direct exchange of tokens, often swapping their native tokens in a DAO-to-DAO swap (D2D). While the initial driver is treasury diversification, token swaps can also be powerful collaboration tools, providing upside potential in a third-party organization and benefits like governance rights.
This report draws lessons from over 50 DAO token swaps between 2021 and 2023 to identify patterns leading to successful DAO-to-DAO coordination.
We are particularly grateful to ThankArbitrum for approving our Firestarter Grant and Token Engineering Commons for allowing us to participate in the Token Engineering the Superchain Grants Round: Summer/Fall 2024, which made this research possible. We also extend our appreciation to everyone who provided input for this report through calls or written contributions and to the pioneers of DAO token swaps for pushing the boundaries of our industry.
● Token Swaps are ecosystem enablers allowing DAOs to form alliances, share upside and costs, align governance, and hedge exposure through treasury diversification.
● Every token swap consists of three acts: the pre-swap (exploration), the execution (ratification), and the post-swap (relationship management).
● Product integrations, high talent retention rates, healthy onchain treasuries on both sides, active utility of the tokens being swapped, and clearly defined milestones are the ingredients of successful token swaps. L2 blockchains swapping with dapps should have follow-on programs to make the most of token swap initiatives.
● After removing outliers, the value of executed token swaps considered for analysis was $89.2 million. 10 DAOs accounted for 81% of the value, with Olympus DAO executing the highest volume of swaps at 21.8%
Since the emergence of the DAO (Decentralized Autonomous Organization) space in 2019, DAOs have sought effective methods to coordinate their resources toward achieving their goals. Initially, most first-generation DAOs focused solely on distributing resources through votes to fund development. However, it soon became apparent that better resource management was essential for DAOs to become sustainable and prosperous. DAO treasury management emerged as a solution, enabling more conscious handling of resources. This often involved budgeting and converting some native assets into less volatile assets, such as stablecoins, to facilitate better resource planning.
In 2021, leading DAOs like OlympusDAO, PrimeDAO, and Frax popularized a new approach to DAO coordination: the DAO-to-DAO (D2D) token swap. This method allows DAOs to directly exchange tokens with one another, diversifying their treasuries, participating in each other's governance, and forming strategic alliances. These alliances could increase their collective influence within the broader DeFi ecosystem. A key aspect of D2D swaps is that the tokens remain outside the open market, ensuring the exchange is strictly between the DAOs involved.
However, DAO token swaps go beyond financial transactions. They also serve as governance alignments, where DAOs gain voting power in each other's ecosystems. This integration allows them to participate in significant decisions that impact both parties, fostering a shared interest in each other’s success. By exchanging tokens, DAOs effectively invest in one another, aligning their communities and long-term goals. This strengthens the individual DAOs and contributes to
the overall stability and interconnectedness of the DeFi ecosystem. Through strategic swaps, DAOs can establish a network of alliances, amplifying their collective influence and ensuring long-term viability.
DAO token swaps can be compared to strategic partnerships or equity swaps in traditional finance, where companies exchange shares or assets to align their interests more closely. In DAOs, these swaps are financial transactions and strategic moves that align governance, community objectives, and long-term goals.
1. Risk Sharing and Diversification: Token swaps allow DAOs to hedge their exposure to specific sectors or organizations, diversifying their treasuries and reducing dependency on a single market (e.g., a particular blockchain network). This increases resilience across the organization.
2. Governance Representation: Through token swaps, DAOs can gain decision-making power in another organization, enabling them to influence its direction and strategy. 3. Cost Sharing: DAOs can use token swaps to share the costs and benefits of capital-intensive projects. For example, two DAOs working on complementary technologies might use a token swap to balance their financial exposure, align their incentives, and reduce the financial burden on each organization.
4. Strategic Alliances: Token swaps can be part of a broader strategic alliance, where two or more entities agree to share profits, risks, market intelligence, or strategic direction.
While this report does not cover the full scope of potential joint ventures or mergers, token swaps can also serve as a testing ground for such collaborations. Before fully merging, two DAOs might use token swaps to align their financial interests and test the feasibility of deeper
cooperation. This can serve as a precursor to a complete merger or acquisition, allowing DAOs to work together financially while maintaining independence.
DAO token swaps have multiple stages, each involving varying degrees of DAO voter participation. This report divides token swaps into three main stages: the Pre-swap Stage, the Swap Execution Stage, and the Post-swap Stage, following the typical flow observed in DAO governance processes.
The first phase is the Pre-swap Stage, which is exploratory in nature. During this stage, potential DAOs for a token swap are identified, and initial high-level reasoning and draft terms are outlined.
DAO delegates or active contributors often take the lead in identifying potential partners. Typically, the evaluation begins with DAOs that already share some alignment, whether through joint missions, values, or product integrations. However, there are instances where a DAO may seek access to a third party's native token without an existing relationship, either for the benefits provided by the token (e.g., stability) or to gain exposure to the solutions being developed by that DAO.
After identification, the potential swap is discussed with stakeholders from both DAOs. This may occur through existing team structures, such as Working Groups or service provider networks, or public channels like DAO forums and chat groups.
If both sides express sufficient interest, negotiations move forward. At this point, dealmakers or representatives are often selected to lead the next phase of the token swap. For example,
Karpatkey might represent the GnosisDAO Treasury in negotiations. In other cases, the entire token swap may occur publicly, with no specific dealmakers appointed.
The representatives from each DAO then define and negotiate the terms of the token swap. The following elements are typically discussed:
● The specific tokens involved (e.g., the native tokens of each DAO)
● The network on which the swap will settle (e.g., Arbitrum Mainnet)
● The valuation method used for the swap (e.g., a 30-day moving average price) ● Token management guidelines, including how the tokens should be used, potential lock-ups, limitations on usage, and processes for selling the tokens
● Collaboration or additional swaps, such as product or marketing integrations, follow-up swaps based on certain conditions, or shared resources (e.g., the Cow AMM between BalancerDAO and CowSwap)
Once a high-level consensus on the terms is reached, each DAO must ratify the token swap through its internal governance process.
A governance vote is submitted in most cases, allowing all token holders to approve or reject the token swap. Sometimes, multiple options are presented, offering different quantities of tokens to be swapped, and token holders are asked to choose the option that best serves the DAO. Alternatively, a third-party service provider or an elected group may approve the token swap without requiring a full DAO vote.
Once both DAOs approve the swap, the respective treasury teams execute it. Currently, the timing of the approval vote and the execution of the swap often differ, which can cause friction and increase risks.
The most common method for completing a token swap is a direct transfer from treasury to treasury. However, early solutions like Hedgey and Prime Deals offer escrow services, where tokens are only swapped after both parties have provided the agreed-upon quantity of tokens by a specific date.
After the token swap is executed, the process enters the Post-swap Stage, which focuses on monitoring and reporting on the collaboration.
If the swap includes specific deliverables or follow-ups, DAO representatives track progress and ensure the agreed-upon terms are met. This stage may sometimes include additional commitments or a second token swap triggered by certain milestones. For example, CowSwap and BalancerDAO have a prospective agreement involving resources to a shared solution, with direct token swaps tied to collaborative milestones.
This stage also allows the respective DAOs to use the swapped tokens to participate in the governance and operations of the partner DAO. Sometimes, a DAO may appoint a representative to use the received tokens to engage in the partner DAO's governance. An example of a DAO appointing representatives is Arana Digital, representing Uniswap's interests within the Arbitrum DAO after Uniswap received ARB from the initial Arbitrum airdrop.
In many cases, DAOs do not clearly define how the agreement will be managed or how it can be ended or revoked. As a result, most token swaps that have concluded so far ended without significant decisions or announcements. However, in some instances, DAOs have agreed that
the original intent of the partnership and token swap is unlikely to materialize and have mutually decided to revoke elements of the agreement. For example, PrimeDAO and Aragon unwound their agreement by executing a reverse swap.
Analyzing DAO Token Swaps
Our team analyzed 50 Token Swaps between 2021 and 2023 to understand DAO Token Swaps better and draw lessons for the next wave of DAO agreements.
A total of 46 different DAOs were involved in these swaps. Most DAOs in our dataset (25) only swapped with another DAO once.
The majority of swaps, 38 in total, were executed on Ethereum Mainnet. Arbitrum Mainnet is the second most used network for Token swaps, with 7.
When using the token value and quantity of tokens transferred on the day of execution to value these swaps, the total value swapped is USD 560,8M. However, BitDAO and FTX created a significant outlier, making the largest token swap with a paper value of USD 496M on the day of execution. When removing the swaps executed by these two organizations, the remaining value of executed DAO token swaps is USD 89,2M.
The top five DAOs by total value swap account for nearly 63% of the dataset, while the top ten DAOs account for almost 81%, showcasing that the majority of value was coordinated between a handful of DAOs.
The total number of swaps executed per DAO does not directly follow the value swapped. PrimeDAO, which swapped around USD 1,5M, has completed the most swaps (10), followed by OlympusDAO and GMX DAO with 7 swaps each. Overall, only eleven DAOs completed three or more swaps.
To get a deeper insight into the partnerships and collaborations often surrounding token swaps, each swap has been labeled with a status based on the remaining activity between the two DAOs in Q2 2024.
The following statuses have been defined:
Revoked: The token swap was partially or fully canceled or withdrawn.
Dormant: No significant activity or indications of intent to revoke or terminate the partnership. Soft Ended: The partnership quietly concluded, with one or more parties selling or gradually disengaging.
Ended: The partnership has officially concluded, with complete disengagement or sale by one or more parties.
Active: Ongoing meaningful activity and coordination between the parties. Optimal: The collaboration is thriving, with increasing engagement and solid results.
After labeling the status of each of the 50 swaps, the following distribution, which interestingly closely resembles a normal distribution, becomes visible.
Diving deeper into each of these swaps, we can identify patterns that influence the success and failure of DAO Token Swaps.
When digging deeper into the revoked or ended partnerships, patterns emerge. - About 25% of the partnerships ended because one entity ceased operating. Interestingly, two entities that stopped operating were stablecoin-related initiatives: FEI and FIAT. A takeaway can be that specific verticals are more volatile and, as such, more risky to swap with.
● Between early 2022 and late 2023, the overall cryptocurrency market was in a tough spot. This led to a treasury decision to sell the partner tokens around mid-2023 when market conditions had not picked up yet, and treasuries started to run low. This shows the importance of ensuring swap partners have a sufficient runway and the reality that market conditions have an outsized impact on Web3 startups. An example is PerpDAO, which diversified its treasury from being primarily PERP and partner tokens to mainly WETH and USDC in 2023.
● None of the ended and revoked partnerships included a product integration that is still actively used. This showcases the relevancy of aligning product integrations with token swaps.
● The size of the swap amount and the market caps of the involved DAOs do not significantly affect the current status. A high market cap at a given point does not directly translate into being a better partner, but it does influence the size of the token swap, where DAOs with a higher market cap often swap a higher amount of tokens.
When analyzing the dormant and soft-ended partnerships, the following patterns emerge that influence the liveliness of a token swap:
● Most stagnating partnerships do not operate in the same vertical, showcasing that projects resembling one another are more likely to continue an active partnership, either because it is easier to integrate or because they operate in the same market.
● L2 networks (Gnosis or Celo) that completed a token swap with a project that launched a dApp on their chain but haven’t actively built programs around this collaboration afterward, showcasing the importance of integrating token swap partners into other grant or funding programs on blockchain networks.
● When projects complete a relaunch or other significant re-org (such as a merger or team change), previous partnerships are often abandoned or remain unutilized; we saw this with BarnBridge, Sushi, and BitDAO.
Highlight the patterns of active and optimal collaborations.
- Organizations with high talent retention rates and healthy onchain treasuries are likelier to remain active partners. An organization's market cap and overall team size do not significantly impact the likelihood of a successful partnership.
- Direct integration of solutions significantly improves the relevancy of collaboration, as intertwined products and services create value for both DAOs and the best partnerships. A good example is the AaveDAO and BalancerDAO token swap, where AAVE utilizes Balancer technology to create deep liquidity for some of its pairs, including its main AAVE / ETH liquidity pool, and Balancer utilizes AAVE’s lending markets in its products to enhance user returns. A full case study of this partnership is available in Appendix A.
- The active utility of tokens for governance and other forms of value generation, such as staking, have contributed positively to the livelihood of partnerships. A good example is the GnosisDAO and BalancerDAO token swap, where Balancer is deployed on Gnosis, and Gnosis actively participates in the veBAL markets. An entire case study of this
partnership is available in Appendix B.
- Clearly defined, milestone-based partnerships provide clarity to both parties and improve the level of conversation. A good swap offers complete clarity on the mechanism used to value each token, the process for completing the swap, and potential additional agreements and processes aligned by both sides.
This year, new standards for token swaps are being explored by, for example, GMX, which conducted swaps in esGMX tokens intended to be staked to generate revenue. The generated revenue is used within the partner DAO's ecosystem to fund grants, pools, or competitions. These deals provide an upside for GMX because the DAO received advantageous valuations for early-stage projects, particularly those that intend to or are already building on top of the GMX infrastructure, contributing to platform fee generation. These token swaps show a deeper level of alignment and could have a higher success rate, although it's still too early to conclude.
Most early token swaps did not have an outsized positive impact on the involved DAOs. They were more of a marketing / PR gimmick, leaving many elements, from the method of swapping to the process for managing the token swap, open.
Over time, the various elements associated with token swapping became more apparent. For example, the mechanism to properly value tokens involved in a swap, such as the 90-day moving average, improved.
The maturity of a DAO’s organization, products, and associated native tokens significantly impacts the success of a Token Swap. Clear roles, proper accounting, product revenue, and token utility are the primary factors influencing the likelihood of an active collaboration.
The size of the deal and market cap of the associated project are not leading. The right token swap size should represent the size of the collaborative opportunity and depth of integration based on shared KPIs, such as TVL, in a mutually beneficial protocol.
While some early tools have been created to facilitate the token swap, most activity still happens between the involved teams and DAOs before and after the swap.
When appropriately executed, a DAO token swap can accelerate a DAO collaboration by further aligning the roadmap and incentives, resulting in more value for both parties.