Cooperative Model

In a cooperative model, network security is a collective responsibility. Participants run nodes or stake tokens to achieve Byzantine Fault Tolerance (BFT) consensus, ensuring the ledger's integrity. This decentralized approach makes the network resilient to attacks, as compromising it requires collusion from a significant portion of the cooperative, not a single entity.

• Example: In Proof-of-Stake (PoS) networks, validators stake their own tokens as collateral to propose and validate blocks, with penalties for malicious behavior.

Rewards, typically in the form of newly minted tokens or transaction fees, are distributed based on a participant's contribution to the network. This creates a direct economic alignment between individual effort and network success.

• Staking Rewards: Validators earn block rewards and fees proportional to their staked amount and uptime.
• Fee Sharing: Protocols like DeFi yield aggregators or liquidity pools distribute fees to liquidity providers based on their share of the total pool.

Cooperative models often implement on-chain governance, allowing token holders to vote directly on protocol upgrades, parameter changes, and treasury allocations. This ensures the network evolves according to the collective will of its stakeholders.

• Voting Power: Typically weighted by the number of governance tokens held or staked.
• Proposal Process: Includes submission, discussion, and execution phases, all recorded transparently on the blockchain.

To ensure honest participation, cooperative models use cryptoeconomic incentives. Validators or stakers have "skin in the game" through bonded capital, which can be partially or fully slashed (burned) for malicious actions like double-signing or extended downtime.

• Deterrence: Slashing disincentivizes attacks and negligence.
• Insurance: Some protocols feature slashing insurance pools to protect against accidental penalties.

The purest expression of a cooperative model is a DAO, a member-owned organization with rules encoded in smart contracts. DAOs manage treasuries, govern protocols, and coordinate collective action without centralized leadership.

• Key Functions: Treasury management, grant funding, parameter voting.
• Examples: MakerDAO (governing the DAI stablecoin) and Uniswap (governing the UNI protocol).

Participants pool resources—such as computing power, capital, or data—to create services no single actor could provide alone. These pooled resources become composable building blocks for the broader ecosystem.

• Liquidity Pools: Provide the foundational trading liquidity for Decentralized Exchanges (DEXs).
• Oracle Networks: Pool data from multiple nodes to deliver tamper-resistant price feeds to smart contracts.

In decentralized finance (DeFi), liquidity providers collectively form the backbone of Automated Market Makers (AMMs). This cooperative dynamic involves:

• Pooled capital: Users deposit token pairs into a shared liquidity pool, earning fees from trades.
• Governance tokens: Protocols like Curve and Balancer distribute governance tokens to LPs, granting them a say in fee structures and pool parameters.
• Risk and reward sharing: Impermanent loss and trading fees are distributed proportionally among all pool contributors, aligning incentives.

Proof-of-Stake (PoS) and delegated networks operate as cooperatives for network security. Participants cooperate to achieve consensus and share rewards.

• Staking pools: Individual stakers pool resources to meet minimum staking thresholds, sharing rewards proportionally (e.g., Lido, Rocket Pool).
• Validator sets: In networks like Cosmos or Solana, validators cooperate to produce blocks and finalize the chain, with rewards distributed based on performance and stake.
• Slashing risk: The cooperative bears collective risk; malicious actions by one validator can lead to penalties for the entire pool, enforcing cooperative discipline.

These cooperatives pool decentralized physical resources, creating shared marketplaces.

• Storage networks: Projects like Filecoin and Arweave involve storage providers cooperating to offer a global, persistent data storage layer, rewarded by the network.
• Compute markets: Render Network and Akash Network create cooperatives of GPU and server providers, respectively, offering decentralized computing power at competitive rates.
• Oracle networks: Chainlink operates as a cooperative of node operators who collectively fetch, validate, and deliver external data to smart contracts, with reputation and rewards tied to reliable performance.

Some protocols adopt a cooperative model where the treasury, often funded by protocol revenue, is owned and governed by the token holders.

• Protocol-Owned Liquidity (POL): Instead of relying on mercenary LP incentives, protocols like Olympus DAO pioneered owning their own liquidity pools, reducing dependency on external providers.
• Revenue Sharing: Protocols such as Synthetix distribute fees generated from trading and borrowing directly to stakers (SNX holders) who collateralize the network.
• Strategic Asset Management: The cooperative collectively decides, via governance, how to deploy treasury assets (e.g., investing in other protocols, funding grants, buying back tokens).

NFT-based cooperatives enable creators and collectors to co-own and govern artistic projects and platforms.

• Generative art projects: Art Blocks curators and artists form a community that governs the platform's artistic direction and fee structure.
• Music NFTs: Platforms like Sound.xyz allow artists to launch songs as NFTs, with collectors forming a cooperative fanbase that shares in secondary sales royalties.
• Media DAOs: BanklessDAO and Forefront are cooperatives of writers, designers, and developers creating educational content and tools, funded and directed by their member communities.

Staking is the process of locking crypto assets to participate in network consensus (Proof-of-Stake) or a protocol's services, often integral to cooperative reward models. It enables:

• Network security by having skin in the game.
• Yield generation through staking rewards and fee distribution.
• Governance rights, as seen in many DeFi protocols where staked tokens confer voting power. This creates a direct alignment of incentives between participants and the system's health.

A liquidity pool is a smart contract containing token pairs that enable decentralized trading, lending, or other financial services. It is a foundational cooperative financial primitive where:

• Liquidity Providers (LPs) deposit assets and collectively form the market.
• Fees are distributed proportionally to all LPs, creating a shared revenue model.
• Automated Market Makers (AMMs) like Uniswap use this model to facilitate trustless trading without order books.

Yield farming is the practice of earning rewards, typically in governance tokens, by providing liquidity or staking assets in DeFi protocols. It incentivizes participation in cooperative ecosystems by:

• Distributing ownership via token emissions to early users and contributors.
• Bootstrapping liquidity and network effects for new protocols.
• Creating complex strategies across multiple protocols ("DeFi Lego") to maximize returns.

Tokenomics refers to the economic design of a cryptocurrency or token, defining its supply, distribution, and utility. It is the blueprint for a sustainable cooperative model, encompassing:

• Token distribution: allocations for community, founders, and treasury.
• Value accrual: mechanisms like fee sharing, buybacks, or staking rewards.
• Governance utility: using the token to vote on protocol upgrades and parameters. Effective tokenomics aligns incentives between developers, investors, and users.