DAOs, Tokens, and Goodhart's Forest

Within the narrow context of a token’s home protocol, supply and demand for the token will — for a well-designed system — reflect supply and demand for the protocol’s services and functionality. But no token lives within a quiet walled garden. Rather, every token lives in the noisy Forest.

-In a permissionless market, adversarial actors can use a project’s token to threaten its success.

Unfortunately, metrics have an awfully hard time representing human goals. We humans are messy, fuzzy things, and often our goals cannot be reduced down to one or even a few quantifiable metrics.

Tokens are what you get when you combine a target metric with a built-in incentive: you get an incredibly powerful mechanism for motivating people to do things! This power is why tokenomics is such a promising field and why so many protocols are using tokens to coordinate their communities.

The power of incentives cannot be overstated. Properly devised incentive mechanisms can supercharge a group’s ability to efficiently optimize for its selected target metrics. Which sounds great — and it is, provided that those target metrics are a proper representation of the organization’s goals.

But, if you read the previous section, you know that there’s a catch: while the value of a protocol’s token is meant to reflect the success of the protocol, it’s very difficult to design a token that actually captures the full breadth and nuance of the protocol’s goals. And the price incentive built into tokens leaves them especially vulnerable to ... See more