Tokenomics 101: Cult DAO
A unique investment DAO for the public
TL;DR: Read the summary on the Tokenomics Hub
In April last year, while most projects suffered a significant slump in value, the Cult DAO was shining in the bear market with its 360x price surge in just one week. Unfortunately, it didn't take long for Cult DAO to fall back to square one. However, a lot of crypto professionals including Matthew Morris & Dominic Ryder, Henry Emordi, Joe King, etc. still have faith in its future and believe it's not the end of its story.
What is Cult DAO
Cult DAO is a fully community-owned Venture DAO, advocating fairness, justice, and freedom with a mission to build a decentralized society.
“We must declare our virtual selves immune to your sovereignty, even as we continue to consent to your rule over our bodies. We will spread ourselves across the Planet so that no one can arrest our thoughts.”
Staying true to its belief, Cult DAO invests in projects that advance anti-centralization, pro-decentralization, and strive towards a sacred cause (e.g. liberation). Not surprisingly, Cult DAO also has an interest in supporting projects that catalyze radical and revolutionary changes.
The above flow chart illustrates the tokenomics of $CULT. Cult DAO has an interesting tokenomics design where the governance model tries to achieve a balance of fairness and efficiency. A zoomable version of the diagram can be found here.
$CULT is the governance token of Cult DAO. Holders of $CULT can stake and receive $dCULT to obtain governance rights and earn $CULT.
Guardians and The Many
The top 50 $dCULT holders are Guardians who have the right to submit proposals. The rest of the $dCULT holders, namely The Many, can participate in voting to pass a proposal.
Cult DAO owns a Treasury funded by a 0.4% tax on every $CULT transaction on-chain. When the value of the collected $CULT in the Treasury exceeds the equivalence of 15.5 ETH, the contract will burn 2.5 ETH’s worth of $CULT and send 13 ETH’s worth of $CULT to the wallet address of the approved but unimplemented investment proposal project. In return, the Cult DAO treasury will receive a certain share of project tokens.
The return benefits the holders of both $CULT and $dCULT. When the invested project token is unlocked or during the project’s payback period, the Guardians will exchange the tokens into $CULT on the market and then send it back to Cult DAO as the investment return. Half of these $CULT tokens will be sent to the null address, and the other half of $CULT will be distributed to the holders of $dCULT as returns. Under this mechanism, there is a potential moral hazard from Guardians, for which reason Cult DAO is now promoting multi-sig wallets to reduce the potential risk and to improve management.
Cult DAO’s governance model separates proposing rights and voting rights and allocates them to different groups (Guardians & the Many). For DAOs, there is a dilemma of setting the thresholds for proposals - if there is no threshold for proposals or if the threshold for proposals is too low, a lot of unprofessional low-quality proposals are created. However, if the threshold is set too high, the proposing whales will vote in favor of the proposal proposed by themselves or jointly initiated by other whales, resulting in their proposals getting passed easily without including the voices of the majority, which violates the principle of decentralization.
The governance model of $CULT instead gives the proposing rights to Guardians (mainly composed of professionals) to set a threshold for the proposal, ensuring its quality. Guardians are directly responsible for the proposed project and the professional proposals of guardians with a good reputation are easier to get passed. At the same time, the voting rights belong to The Many so the approval of the proposal is in the interests of most community members.
We may wonder whether efficiency and fairness are incompatible, in other words, whether there is no way to balance them. Efficiency without fairness will ultimately result in some parties of the ecosystem being exploited and suffering losses in the long run. Cult DAO in this sense, has attempted a significant experiment.
Distribution and Unlocks
At the end of January 2022, Cult DAO launched a pre-sale and public sale on Unicrypt in three rounds. The hard cap for the project was 250 ETH while the soft cap was 125 ETH. Cult DAO raised a total of 178 ETH of which 60% of the ETH will be locked for 264 years to pair liquidity.
The max supply of $CULT is 6,666,666,666,666. The number 666 is identified as the Number of the Beast in the Book of Revelation (13:15 – 18) and the occurrence of “666” is sometimes viewed as an invocation of Satan and regarded as cursed.
50% of the tokens were planned to be distributed to the community in three rounds of sales, but only 71.36% of them were sold. According to CultDAO Medium and on-chain data, the actual token distribution of $CULT was as follows:
35.68% (71.36% X 50%) were allocated to community members who participated in the sales event
24.52% were burned at the beginning of the project’s launch, which comprises the unsold tokens and a portion of $CULT
20% of tokens were used for providing liquidity
10% was reserved for the development team, unlocked linearly for 12 months
5.17% of $CULT was gifted to some well-known figures as initial Guardians
The shares of the team and Initial Guardians were distributed through Unicrypt.
The distribution as of 15 Nov 2022 is shown below. The percentage of tokens locked for $dCULT has reached 40.1% of max supply, which has gradually increased since launch and has become the largest demand factor at present. The amount of burnt tokens has gone up slightly from the initial period to 26.74%. Tokens on Unicrypt are gradually unlocked, and their percentage has decreased to 4.63%. Liquidity on Uniswap has gradually stabilized to 4.21% while the share of Treasury has reduced to 0.19%.
In general, the distribution of $CULT demonstrates Cult DAO's faith in the community manifested in the fact that they did not introduce investors but allocated most of the tokens to the community and initial Guardians. This avoids the scenario where investors get a lot of cheap chips and then dump them on the community when the tokens get unlocked. Therefore, the changes in token prices in subsequent stages can more accurately reflect the intrinsic value of the project as well as its market popularity.
The demand for $CULT mainly comes from two aspects - returns and control rights.
The main business of Cult DAO is investment. Token holders believe that with the burning of $CULT and the investment returns, the price of a single token will increase. As long as they do not trade their $CULT, they can benefit from the ecosystem without paying any principal. The drop in the token price far outweighed their gains in $CULT.
$CULT represents the control right over the community. Token stakers can propose and vote to govern Cult DAO, a highly appealing, premium-quality community with excellent managers. Guardians can initiate proposals for investment projects, some of which are even closely related to the proposers themselves. It means that Guardians could leverage resources that do not belong to themselves to serve their own private interests. While The Many participate in voting on investment decisions, striving to bring considerable returns to $CULT stakers. In general, Guardians have stronger incentives to hold $CULT than The Many because of the leverage of governance.
Value capture and analysis
The flywheel of $CULT has its objective factors. Firstly, Guardians are composed of crypto celebrities such as Bankless DAO community managers, vEmpire DDAO CEOs, and Web3 influencers, which makes it easier for subsequent publicity. Secondly, profits from Falcon 9 and vEmpire DDAO make the outside world more optimistic about the development of Cult DAO, and thirdly, if invested by Cult DAO, it will be good marketing for the projects themselves.
Last but not least, the tokenomics model of Cult DAO is very attractive. Here is how it works:
$CULT transactions fill the treasury
→ Funds are allocated to investment projects that have passed the proposal
→ $CULT is part burned and invested in projects
→ Projects pay their token in return
→ $CULT is burned and distributed to stakers
→ Token price rises
→ More people buy and sell
→ The Treasury gets more funds
This strong deflationary tokenomics design creates an expectation that platform value will be concentrated in fewer and fewer tokens. However, is this mechanism unbreakable?
Value of $CULT
The value of $CULT lies in the control rights of Cult DAO and its investment activities. The strong deflation mechanism of $CULT is only a method of internal value flowing. It may increase the price of a single token in the short term, but it cannot determine the long-term value of the platform, namely Fully Diluted Valuation. The picture below shows how the whole ecosystem works.
This tokenomics design can be simplified as a combination of a tax system applicable to traders and welfare for holders, which means collecting the tax from transactions and using the proceeds for burning and investment.
Imagine a company collecting 0.4% of its stock price per transaction, these collected fees could be distributed directly to the company's shareholders. In this case, the company decides to use an indirect way to distribute back to shareholders. They use the fees to buy back shares and invest in other companies and then distribute dividends from investment profits to shareholders.
This idea is difficult to implement in the stock market, but it becomes viable through smart contract programming on the blockchain.
The mechanism of $CULT takes away the benefits of traders and then redistributes them between holders through burning tokens and getting a return on the investment.
However, burning tokens only creates scarcity, not value. On one hand, buying back tokens from the market pushes up the price of tokens. On the other hand, fewer tokens to earn investment returns push up the APR and proportion of governance rights and thus increase the attractiveness of the token.
The core business of Cult DAO is investment, which involves both the primary market and the secondary market. These investment activities not only build the reputation of Cult DAO but are also the source of value of $CULT as an asset.
A common misconception is that $CULT will fail if the treasury’s investments are loss-bearing. Continuing losses do reduce the APR of stakers, the invested funds don’t come from $CULT holders, but from the tax on $CULT transactions.
High or low APR will cause an increase in trading volume, as well as collected tax/ funds for some time because of the conversion between traders and holders. But the funds also largely depend on speculative trading demand on the market.
While for APR, the expansion of transaction volume will allow the Treasury to collect more funds to invest. It means even if the average rate of return of a single project remains the same, APR will still increase due to the rising number of projects that achieve commercialization. In addition, APR is also affected by the whole crypto market and the quality of investment targets.
Only after suffering long-term shrinkage of new funds and low ROI (return on investment), $CULT can fall into a negative feedback loop. In the meantime, more and more members might leave the community and further reduce the value of $CULT. Actually, they have already been stuck in this negative feedback since August 2022.
The current transaction volume of $CULT has shrunk to less than 1/20 of its peak, which makes the tax collection and token buyback slower. Gradually, some non-prime tokens became the backing assets for $CULT APR. (Proposal 34, 35, 40, 49, 60, 62, 75, 90, 123)
The diminishing returns due to underperforming investments have caused its token price to drop to be consistent with the risky market return (8.43%), which will further weaken the market's valuation of the control rights of Cult DAO.
A recently published announcement might bring some changes to Cult DAO. Mr. O, the founder of Cult DAO, claimed that they are building a zk-EVM chain to explore Cult DAO's ecosystem and give the transaction max privacy. This will undoubtedly greatly boost Cult DAO by attracting more funds and builders in the crypto world if they can successfully launch their Cult Chain. Let’s wait and see what will happen.
Cult DAO subverts the previous model of Venture DAO. Most Investment DAOs either have high barriers of entry (e.g. The LAO, MetaCartel Ventures) or have centralized operation and decision-making mechanisms (e.g. BitDAO). Cult DAO successfully avoids these two shortcomings.
Cult DAO is not a traditional investment DAO because the investment funds are not accumulated from new fund partners but taxed from traders and also because its investment activities cannot be analyzed separately without the tax. It's an open, self-reinforcing system that combines transfer payments and investments.
The innovation of Cult DAO greatly improves the efficiency of an authentically decentralized DAO. Not only due to the token distribution designed for the community and renouncing of all contract ownership by the team, but also because of the governance model that separates proposing right and voting rights which has the potential to be widely adopted by DAOs.facwe
Thanks for awesome article on Cult Dao 🤝
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Great job, once again!