Introducing the SAFG – An Emerging Governance Framework in DeFi

First came the SAFE. Then came the SAFTE. Now comes the SAFG.

1/ Meet the SAFG: #DeFi’s Emergent Framework for Participatory Investing and Protocol Development

https://t.co/9SBTBkha7A

Recent @futureswapx and @compoundfinance events point to a tectonic shift in the nature of crypto investing characterized by a new framework.

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— gavin (@GavinMcDermott) April 30, 2020

It goes without saying that there’s been a constant evolution in token distribution frameworks. Last week, IDEO CoLab Ventures took the next step in the evolution of token launches by introducing the Simple Agreement for Future Governance (SAFG) – a framework that distributes tokens based on participation in a network or protocol.

Unlike traditional token frameworks where investors and issuers sign off on an agreement, the SAFG contract is embedded directly into the protocol and requires no lawyers. There are no legal bindings. It a simple, permissionless token distribution mechanism where participation in X and earns Y tokens.

This rather simple yet elegant design enables decentralized protocols to more effectively launch, grow, and govern their communities in a legally compliant manner.  With a SAFG framework, users can participate in a series of value-added ways to earn future voting rights on important protocol decisions. The structure for this distribution framework:

• Can only be earned through the participation of the protocol
• Is likely non-transferable and cannot be acquired on the open market at launch
• Guarantees no additional benefits (i.e. economic rights)
• Is used as the primary mechanism for voting on protocol changes

While on the surface these tokens seem marginal given their non-transferrable and non-economic attributes, the design provides a simple mechanism for getting the tokens into the hands of the people that matter – the community.

SAFG In the Wild

In the past month, we’ve seen the launch of Futureswap’s FST token. The native token behind the decentralized futures exchange is distributed to the users of the protocol and will primarily be used for governance. As it stands today, FST tokens are non-transferable and cannot be acquired on the open market. That said, the only way to acquire FST is by active participation in the exchange as a trader, referrer, or liquidity provider. Moreover, while the tokens don’t represent direct economic rights, users are given the option to hold the token for discounted trading fees.

We’ve also seen a similar framework with the leading money markets protocol, Compound. The protocol’s governance token, COMP, allows the holders and its delegates to vote on protocol changes. Like FST, COMP tokens are currently non-transferable and only guarantee the holder the right to participate in the governance process (i.e. no economic rights).

The Big Picture

The SAFG seems like a rather meaningless way to distribute tokens until focusing on one key factor. All of the limitations surrounding the token (i.e. non-transferable, non-economic) are all malleable.

The important part is that this framework, where tokens are non-transferable and have no economic rights at the start, allows token teams to quickly launch their project in almost any regulatory environment.

Upon a successful distribution and active governance, there’s nothing stopping stakeholders from voting away these limitations. Once the community is meaningfully decentralized, token holders could simply vote to make the token transferable or having some degree of economic rights.

With the SAFG, there’s no reason to force economic models into the protocol off the bat that may siphon away from the growth. Instead, the protocol can focus on garnering traction by distributing tokens to its active community and then fine-tune the long term incentives from there.

With Compound and Futureswap seemingly adopting this framework, we can expect more to come in the future. At the same time, we’ve also seen UMA take on this model to some capacity. While there were a group of investors and the Foundation launched a sale in the form of an Initial Uniswap Offering, roughly 35% of the token supply will be distributed to the community under a similar framework as the SAFG.

In the coming year, we can expect more and more DeFi projects adopt the SAFG model, especially seeing as it provides a legally compliant and fair distribution where active community members earn the right to govern the protocol in the future.

If that’s true, we’ll be here to report it.

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Lucas Campbell

Research Analyst at Fitzner Blockchain Consulting. Lucas has years of experience working with multiple blockchain-based startups as head of community, blockchain strategist and project manager where he focused on token economics, writing, marketing, and growth.