The Future of Dilution: Dynamic Equity in DAO-to-DAO Rounds

Today's DAO treasury deals are binary events. A DAO receives a lump sum of tokens, creating immediate sell pressure and misaligned incentives post-deal. The capital is static, unable to adapt to protocol performance.

• Vote-locked tokens create governance attacks, not alignment.
• One-time valuation ignores post-investment execution risk.
• ~$1B+ in dormant treasury assets sit unproductively in DAO vaults.

Replace lump-sum grants with token streams that vest based on real-time metrics. Think Sablier or Superfluid for equity. Capital flows only as the recipient DAO hits milestones, creating a continuous funding round.

• Aligns incentives using verifiable on-chain KPIs (e.g., revenue, TVL).
• Reduces dilution for underperformers; founders keep more equity.
• Enables "tranching" of capital based on smart contract triggers.

Dynamic equity requires a live, trust-minimized valuation feed. This isn't a board vote; it's an oracle problem. Protocols like UMA or Chainlink can power continuous valuation functions based on revenue, governance activity, and liquidity depth.

• Automates follow-on rounds without manual negotiation.
• Creates a secondary market for streaming equity claims.
• Mitigates governance attacks by tying voting power to ongoing contribution.

The primitives exist. Element Finance's PT/YT tokens separate principal from yield. Olympus Pro's bond mechanisms create continuous liquidity. Dynamic equity composes these concepts for governance and capital.

• Borrows from TradFi's earnouts and milestone financing.
• Executes via DeFi's composable streaming and bonding curves.
• Future-proofs DAOs against regulatory scrutiny on static securities.

A DAO's cap table becomes a dynamic, on-chain substrate. Its equity and debt positions are continuously priced and rebalanced, turning the treasury into an active, yield-generating engine.

• Enables on-chain M&A via token stream acquisitions.
• Attracts institutional capital with transparent, algorithmic risk models.
• Shifts VC role from gatekeeper to liquidity provider and oracle curator.

The system's strength is its attack surface. Malicious actors will game valuation oracles. Over-engineered vesting schedules create opacity. The legal status of streaming equity is untested.

• Requires robust oracle design with slashing mechanisms.
• Demands simpler, auditable milestone contracts.
• Needs clear legal wrappers (e.g., OpenLaw, LexDAO) for enforceability.

Traditional fundraising forces DAOs to sell a fixed equity stake upfront, creating permanent dilution regardless of future performance. This misaligns incentives and undervalues successful projects.

• Permanent Capital Cost: A 10% token sale at launch is a 10% cost forever, even if the DAO's value grows 100x.
• Investor Misalignment: Early backers are rewarded for speculation, not for providing ongoing strategic value.
• Valuation Battles: Negotiating a single, static valuation is a high-friction, zero-sum game.

Protocols like Ondo Finance and Syndicate are pioneering vesting-based token swaps where the final equity transferred scales with tangible outcomes.

• Performance Vesting: The number of tokens a DAO receives from an investor DAO vests based on hitting KPIs like TVL, revenue, or user growth.
• Two-Way Alignment: Both parties' upside is tied to the same metrics, creating a true strategic partnership.
• Continuous Valuation: The effective valuation is determined over time by performance, not a single negotiation.

Inspired by Olympus Pro, DAOs can use programmable bonding curves to allow continuous, algorithmically priced investment, smoothing out dilution over time.

• Anti-Dilutive: New capital enters at a price that automatically adjusts for treasury growth, protecting existing holders.
• Liquidity as a Service: Investor DAOs provide deep liquidity in exchange for a stream of tokens, not a lump sum.
• Market-Driven Pricing: The bonding curve formula replaces backroom valuation talks with transparent, on-chain math.

This model creates a new class of investor, like The LAO or MetaCartel Ventures, whose treasury is composed of dynamic stakes in a portfolio of protocol DAOs.

• Portfolio Synergy: An investor DAO can actively foster partnerships and integrations between its portfolio projects.
• Governance-as-a-Service: Investment comes with committed governance participation, measured by voting activity and proposal quality.
• Compound Returns: The fund's value accrues from both portfolio performance and its own governance token, which captures the network effect of its ecosystem.

Traditional equity rounds create permanent, rigid ownership stakes that misalign incentives post-investment. DAOs are dynamic entities whose value is driven by active contributions, not passive capital.

• Permanent Dilution: Founders and early contributors are penalized for future fundraising.
• Inert Governance: Large, passive equity holders can stall progressive proposals.
• Valuation Mismatch: A one-time price doesn't reflect a DAO's evolving utility and revenue.

Replace static token allocations with continuous, conditional vesting contracts. Equity becomes a flow, not a stock, tied to measurable outcomes like revenue, TVL, or governance participation.

• Dynamic Dilution: New investment drips in as milestones are hit, protecting early stakeholders.
• Performance Alignment: Investor payout velocity is directly coupled to DAO success metrics.
• Composability: Streams can be tokenized as NFTs (e.g., Superfluid, Sablier) and traded in secondary markets.

A hybrid of convertible notes and streaming payments. Investors provide capital via a continuous stream (e.g., USDC/month) in exchange for a future token claim that amplifies based on performance triggers.

• Capital Efficiency: DAOs access funds as needed, reducing treasury drag.
• Downside Protection: Investors can structure streams to revert to a simple debt claim if KPIs aren't met.
• Precedent: Adapts models from Rolling Funds (AngelList) and Revenue-Based Financing for on-chain execution.

The infrastructure for dynamic equity already exists in DeFi primitives. Index Coop's methodology rewards, Curve's vote-locked CRV model, and Olympus Pro's bond mechanisms all tie compensation to contribution and commitment.

• Vote-Escrow: Proven model for aligning long-term incentives via time-based multipliers.
• Bonding Curves: Enable continuous, price-discovery-based fundraising without traditional rounds.
• Composable Stack: These lego pieces can be reassembled to create the equity streaming primitive.

Dynamic equity exists in a legal gray area between securities, debt, and derivatives. The winning model will minimize jurisdictional surface area through clever structuring.

• Off-Chain Legal Entity: A Delaware LLC or Swiss Association acts as the security issuer, managing the streaming contract.
• On-Chain Execution: All performance tracking and disbursements are automated via smart contracts (e.g., OpenZeppelin streams).
• Regulatory Strategy: Frame the instrument as a Profit-Sharing Agreement or Limited Recourse Note to avoid the Howey Test.

With dilution managed dynamically, successful DAOs can run continuous funding rounds, evolving into permanent capital vehicles that strategically acquire and incubate sub-DAOs and protocols.

• M&A as a Service: Use treasury streams to acquire teams and protocols, integrating them via token mergers.
• Reduced Governance Overhead: No more episodic, high-stakes fundraising votes distracting from core operations.
• Network State Proliferation: Enables the Balaji Srinivasan vision of competitive, opt-in network states funded by their own citizens.