Governance tokens are carried interest. In traditional VC, fund managers earn a 20% performance fee on profits. In crypto, protocol founders and early contributors capture value through token vesting schedules and treasury control, aligning incentives directly on-chain.
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Why Governance Tokens Are the New Carried Interest
An analysis of how token-based governance and DAO-led investment vehicles are disrupting the traditional, opaque carried interest model of venture capital by distributing economic upside and decision-making rights.
introduction
THE INCENTIVE SHIFT
Introduction: The Carry Cartel is Crumbling
The traditional venture capital model of carried interest is being disrupted by transparent, on-chain governance token distributions.
The cartel crumbles with transparency. Opaque VC fund structures hide fee extraction. On-chain governance, as seen in Compound and Uniswap, makes every transaction and vote public, exposing and disincentivizing rent-seeking behavior.
Evidence: The a16z vs. Uniswap governance battle demonstrated that token-weighted voting shifts power from silent capital to active, aligned participants, creating a new meritocracy of contribution over capital.
thesis-statement
THE INCENTIVE ENGINE
The Core Thesis: Tokens Align, Carry Extracts
Governance tokens are the new carried interest, creating a direct, on-chain alignment mechanism that replaces traditional fund structures.
Tokens are the new carry. Traditional venture capital extracts value via a 20% carried interest fee on profits. In crypto, protocol governance tokens perform the same function, but the fee is transparent, perpetual, and market-priced via tokenomics.
Alignment replaces extraction. A VC's carry is a private, opaque claim on future profits. A token like Uniswap's UNI or Compound's COMP is a public, tradable claim on protocol cash flow, aligning holders directly with the network's success.
The fee switch is the distribution. Protocols like Uniswap and Aave debate activating fee switches to direct revenue to token holders. This is the on-chain equivalent of a fund declaring carried interest, executed via smart contract.
Evidence: Uniswap's proposed fee mechanism would direct ~$200M annually to UNI stakers, creating a direct yield from protocol activity that mirrors a GP's share of fund profits.
key-trends
WHY GOVERNANCE TOKENS ARE THE NEW CARRIED INTEREST
Key Trends: The Rise of DAO-Led Capital
The traditional 2-and-20 fund model is being unbundled by on-chain coordination, turning passive token holders into active capital allocators.
01
The Problem: Illiquid, Opaque Carry
Venture capital's carried interest is a 10+ year illiquid promise with zero transparency into underlying assets or decision-making. Limited partners are locked out of the deal flow process.
- Zero Secondary Market: Capital is trapped for a decade.
- Opaque Governance: LPs have no say in specific allocations.
- High Friction: Legal overhead for every capital call and distribution.
10+ Years
Lock-up
0%
Transparency
02
The Solution: Liquid, Programmable Equity
DAO governance tokens like $UNI or $MKR represent perpetual, tradable claims on protocol cash flows and treasury assets. Holders vote on grants, investments, and parameter changes in real-time.
- 24/7 Liquidity: Tokens trade on global DEXs like Uniswap.
- On-Chain Audits: Every treasury transaction and vote is public.
- Composable Capital: Tokens can be used as collateral in DeFi (Aave, Compound) while retaining governance rights.
$7B+
DAO Treasuries
100%
On-Chain
03
The Mechanism: Forkable Fund Legos
Infrastructure like MolochDAO frameworks, Syndicate, and Llama provide templates for launching an investment DAO in minutes. Smart contracts automate capital calls, distributions, and member onboarding.
- Instant Deployment: Clone a verified vault contract.
- Automated Carry: Programmable profit splits to contributors.
- Permissionless Entry: New LPs can join via token purchase, subject to DAO rules.
<1 Hour
Setup Time
-90%
Legal Cost
04
The Proof: From Meme to Multi-Sig
ConstitutionDAO ($PEOPLE) raised $47M in a week to bid on a historical document. While it lost the auction, it demonstrated the raw speed of meme-powered capital formation. Now, serious vehicles like Krause House (NBA team) and LinksDAO (golf clubs) are executing the playbook.
- Viral Fundraising: Capital formation as a social primitive.
- Specific Mandates: Capital is raised for a discrete, clear objective.
- Progressive Decentralization: Start with a multi-sig, evolve to full on-chain governance.
$47M
In 7 Days
10,000+
Contributors
05
The Risk: Governance Attacks & Regulatory Sabotage
Liquid tokens make DAOs targets for vote buying and flash loan attacks. The SEC's ongoing war on $UNI and $AAVE as unregistered securities creates a regulatory kill switch. Without legal wrappers, contributor liability is unlimited.
- Economic Capture: A whale can swing a vote for personal profit.
- Regulatory Uncertainty: The Howey Test looms over every token distribution.
- Liability Exposure: DAO members can be personally sued for protocol actions.
$100M+
Attack Value
High
Regulatory Risk
06
The Future: Autonomous Capital Vehicles
The endgame is Algorithmic Investment DAOs where code, not committees, allocates capital. Imagine a Yearn Vault that doesn't just optimize yield, but executes seed investments based on on-chain metrics and AI-driven deal flow from platforms like Gitcoin Grants.
- Token-Curated Registries: Voters stake to signal quality deals.
- Programmable Mandates: Capital automatically deploys based on hitting KPIs.
- Fully On-Chain Carry: Profit distributions are immutable smart contract functions.
24/7
Execution
Code is Law
Governance
CAPITAL ALLOCATION MECHANICS
Carry vs. Token: A Structural Comparison
A first-principles breakdown of how governance tokens structurally replicate and surpass the economic function of traditional venture capital carried interest.
| Structural Feature | Traditional Carry (20%) | Governance Token (e.g., UNI, AAVE) | Protocol Implication |
|---|---|---|---|
Claim on Future Cash Flows | Contingent on fund liquidation | Direct via fee-switch governance | Tokens enable real-time, programmable revenue capture |
Liquidity & Exit Horizon | 7-10 year lockup | 24/7 on-chain markets (e.g., Uniswap) | Continuous price discovery vs. binary maturity event |
Governance & Control Surface | Limited LPAC rights | On-chain voting over treasury, upgrades, parameters | Token = direct instrument for protocol steering |
Valuation Mechanism | Net Asset Value (NAV) appraisals | Market cap = discounted future fee stream | Speculative premium funds protocol development pre-revenue |
Dilution & Sourcing New Capital | Follow-on funds dilute GP attention | Treasury emissions or new token sales (e.g., Maker Endgame) | Protocol-owned liquidity replaces fundraising rounds |
Regulatory Surface Area | SEC 3(c)(1)/3(c)(7) fund exemptions | Howey Test scrutiny; utility vs. security | Global, permissionless access vs. accredited investor limits |
Performance Fee Automation | Manual calculation, annual distribution | Programmable, real-time fee accrual (see: GMX esGMX) | Eliminates GP-LP friction and audit costs |
deep-dive
THE NEW CARRY
Deep Dive: How Tokens Re-Engineer Venture Economics
Governance tokens are replacing traditional carried interest by programmatically aligning investor, builder, and user incentives on-chain.
Governance tokens are liquid carry. Traditional venture capital locks carry for 7-10 years. A token like $UNI or $ARB provides immediate liquidity and price discovery for the protocol's future cash flows, compressing the venture timeline.
Programmable equity creates new incentive loops. Unlike static equity, tokenomics embed continuous alignment. Protocols like Aave and Compound use emissions to bootstrap liquidity and governance participation, paying users directly for network contributions.
The cap table is now on-chain. Traditional equity obscures ownership; token transfers are transparent. This transparency forces meritocratic distribution, as seen in Optimism's retroactive airdrops to active users and developers.
Evidence: Uniswap's $UNI airdrop created ~$6,500 for each early user, a direct wealth transfer that traditional venture models cannot execute without a liquidity event.
protocol-spotlight
ALIGNMENT, LIQUIDITY, EXIT
Protocol Spotlight: DAOs Eating Venture
Venture capital's 2-and-20 model is being unbundled by on-chain governance, turning illiquid fund stakes into programmable, tradable assets.
01
The Problem: Illiquid Fund Stakes
Limited Partners (LPs) are locked in for 7-10 years with zero secondary market liquidity. Their capital is trapped, unable to react to market shifts or personal needs.
- Zero price discovery between funding rounds.
- Massive administrative overhead for capital calls and distributions.
- Opaque portfolio valuation until a liquidity event.
7-10y
Lock-up
0%
Liquidity
02
The Solution: Tokenized Carry (e.g., Syndicate, Karpatkey)
DAO treasury yields and protocol fees are distributed directly to governance token holders, creating a continuous, transparent revenue stream akin to carried interest.
- Real-time yield distribution via Compound, Aave, and Uniswap v3 LP positions.
- Programmable profit-sharing rules enforced on-chain, eliminating GP-LP disputes.
- Instant composability with DeFi for leveraged staking or as collateral.
5-20%
APY Target
24/7
Settlement
03
The Problem: Misaligned Incentives
Traditional VC fund economics prioritize management fees over fund performance. GPs get paid regardless of returns, creating a principal-agent problem.
- 2% annual fee on committed capital, not deployed capital.
- Carry only paid after a high-water mark is reached.
- GP decision-making is opaque and slow.
2%
Fixed Fee
Opaque
Decision Flow
04
The Solution: On-Chain Governance & Delegation
Token holders vote on treasury allocations, grants, and protocol parameters, directly aligning economic upside with governance power. Platforms like Snapshot, Tally, and Boardroom enable this at scale.
- One-token-one-vote with delegation to experts (e.g., Gitcoin's Stewards).
- Forkable governance reduces platform risk (see Compound to Venus).
- Transparent proposal and voting history for full accountability.
~60s
Vote Cast
Immutable
Record
05
The Problem: Concentrated Power & Access
Top-tier venture funds are gatekept, requiring minimum commitments of $5M+ and exclusive networks. Retail and accredited investors are systematically excluded from early-stage tech upside.
- Geographic and network bias limits deal flow diversity.
- High minimums create a wealth-tiered investment class.
- Slow capital deployment cycles miss crypto-native speed.
$5M+
Min. Check
Closed
Network
06
The Solution: Permissionless Participation DAOs (e.g., The LAO, MetaCartel)
These entities pool capital into an on-chain LLC, allowing members to vote on early-stage investments with fractionalized, liquid membership rights represented by NFTs or tokens.
- Global, 24/7 deal flow sourced from public forums and DAO networks.
- **Check sizes as low as ~1 ETH for membership.
- Secondary markets for membership NFTs provide optional liquidity, unlike a traditional LP stake.
~1 ETH
Min. Entry
Global
Access
counter-argument
THE REALITY CHECK
Counter-Argument: The Liquidity & Legitimacy Trap
Governance tokens fail as carried interest because their value is decoupled from protocol cash flow and diluted by mercenary capital.
Governance tokens lack cash flow rights. Traditional carried interest pays out from actual fund profits. DAO treasuries, like Uniswap's, hold billions but distribute zero fees to UNI holders, creating a fundamental misalignment between ownership and economics.
Protocol revenue is not profit. Protocols like Lido and Aave generate fees, but these accrue to the treasury, not token holders. This creates a sovereign wealth fund problem where value is trapped, unlike the direct distributions of private equity.
Token liquidity invites mercenary capital. The 24/7 market for tokens like COMP attracts short-term speculators, not long-term governors. This dilutes governance legitimacy and divorces voting power from protocol expertise, unlike the locked, illiquid stakes of fund partners.
Evidence: The veToken model from Curve/Convex directly addresses this by locking tokens for boosted rewards and voting power, proving the market demands a stronger link between stake and benefit than simple governance provides.
risk-analysis
GOVERNANCE TOKEN ECONOMICS
Risk Analysis: Where the New Model Breaks
Treating governance tokens as carried interest creates systemic fragility by misaligning incentives and concentrating protocol risk.
01
The Liquidity Mirage
Protocol treasuries are often denominated in their own volatile token, creating a reflexive risk loop. A price drop triggers forced selling to cover operations, accelerating the decline. This is the DeFi equivalent of a bank holding its own stock as primary capital.
- Real Yield Dependency: Protocols like Uniswap and Compound must generate fees in stable assets to be sustainable.
- Treasury Runway: A 50% token devaluation can halve the operational runway overnight.
>80%
Token-Denominated Treasuries
2-4x
Volatility vs. ETH
02
Voter Apathy & Extractive Delegation
Low voter turnout (<10% is common) cedes control to a few large holders or professional delegates like Gauntlet or Chaos Labs. This creates principal-agent problems where delegates optimize for their own consulting fees or token holdings, not the protocol's long-term health.
- Delegated Plutocracy: MakerDAO and Aave governance is effectively controlled by <10 entities.
- Proposal Inertia: Complex upgrades stall, while trivial fee-change votes pass easily.
<10%
Avg. Voter Turnout
$500K+
Delegate Annual Grants
03
The Regulatory Mismatch
The "carried interest" model assumes tokens are pure utility, but regulators (SEC, CFTC) view them as securities. This creates existential risk: successful fee distribution could trigger enforcement, while avoiding it makes the token economically worthless. Protocols are trapped between regulatory Scylla and Charybdis.
- Howey Test Failures: Profit expectations from governance participation are a key SEC argument.
- Precedent Risk: Uniswap UNI and Compound COMP are prime targets for reclassification.
100%
Of Top 10 Tokens Under Scrutiny
$10B+
Potential Liability
04
The Fork Escape Hatch is Closed
The classic "code is law" defense fails when value accrues to a governance token. A malicious upgrade can't be forked away because the forked chain lacks the treasury, brand, and liquidity locked to the original token. This makes governance a single point of failure, a lesson from the SushiSwap vs. Chef Nomi saga.
- Social Consensus > Code: Value is in the social layer, which the token controls.
- Permanent Risk: Once governance is adopted, it cannot be removed without collapsing the token.
0
Successful Value-Accruing Forks
$13M
Sushi Hack (Governance-Enabled)
future-outlook
THE NEW CARRY
Future Outlook: The Hybridization of Capital
Governance tokens are evolving into a synthetic form of carried interest, aligning protocol success with stakeholder incentives.
Governance tokens are synthetic carry. They represent a direct claim on protocol cash flows and strategic direction, mirroring the economic and control rights of traditional venture capital's carried interest.
This creates superior alignment. Unlike passive equity, tokenized governance forces active participation in value creation, as seen in Compound's and Uniswap's fee-switch debates, where tokenholders directly vote on revenue distribution.
The model outperforms traditional equity. It offers liquidity, composability, and programmable incentives that static shares cannot, enabling real-time reward distribution via mechanisms like Aave's staking or Curve's vote-escrow.
Evidence: Protocols with active governance, like Optimism's RetroPGF or Arbitrum's DAO treasury, demonstrate capital allocation at a scale and speed impossible for traditional corporate boards.
takeaways
GOVERNANCE AS A CORE ASSET CLASS
Key Takeaways for Capital Allocators
Protocol governance is evolving from a community signal into the primary mechanism for capturing protocol cash flows and strategic direction.
01
The Problem: Protocol Value Leakage
Traditional equity-like structures fail in decentralized networks, leading to value accrual to external liquidity providers and layer-1 blockchains instead of the protocol treasury.\n- Value captured by Uniswap LPs and Ethereum validators dwarfs UNI token revenue.\n- $10B+ TVL protocols generate fees for others while their own token remains non-cash-flowing.
>90%
Fee Leakage
$0
Direct Yield
02
The Solution: Fee Switch & Treasury Diversification
Governance tokens enable direct protocol fee capture and strategic capital allocation, mirroring a GP's carried interest.\n- Uniswap governance now controls a ~$4B treasury and a fee switch mechanism.\n- Protocols like Compound and Aave use governance to direct treasury yields and invest in strategic assets, creating a flywheel.
$4B+
Treasury War Chest
100%
Fee Control
03
The Problem: Inefficient Capital Deployment
Static token treasuries earn zero yield and are exposed to native token volatility, limiting a protocol's runway and strategic options.\n- MakerDAO's shift to real-world assets (RWA) like Treasury bonds was a governance decision.\n- Without active governance, treasuries become a liability, not an asset.
0% APY
Idle Capital
High Vol
Treasury Risk
04
The Solution: Protocol-Controlled Value (PCV) & DAO Ventures
Governance tokens grant rights to deploy treasury capital into yield-generating strategies and strategic investments.\n- Olympus DAO pioneered PCV, using treasury assets for liquidity provisioning and bonding.\n- DAOs like BitDAO (Mantle) act as venture arms, allocating billions to ecosystem growth, directly increasing the protocol's footprint.
5-10%+
Treasury APY
VC-Like
Deal Flow
05
The Problem: Fragmented Protocol Politics
Early-stage token distribution to users creates a politically fractured governance base, leading to stagnation and inability to execute complex financial strategy.\n- Low voter turnout and whale dominance plague major DAOs.\n- Complex proposals (e.g., Curve's crvUSD parameter tuning) require deep expertise absent in broad communities.
<5%
Voter Turnout
Whale-Driven
Decisions
06
The Solution: Delegated Governance & Sub-DAOs
Capital allocators can acquire tokens and delegate to or become professional delegates, centralizing expertise and driving value-accretive decisions.\n- Compound and Uniswap have established delegate systems, creating a market for governance influence.\n- Aave's risk and treasury sub-DAOs professionalize specific functions, mirroring a corporate board's committee structure.
Professional
Delegates
Sub-DAO
Specialization
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