The Value of Debt to DAOs
Why should my DAO take out a loan?
  • Don't have to sell governance tokens or dilute existing token holders
  • More sustainable and efficient financing for growth initiatives
  • Leverage recurring revenue (a.k.a assets you don't even have yet)
  • Less upfront capital and less chance of being liquidated compared to using generalized lending pools

What were my borrowing options before Debt DAO?

In the current DAO ecosystem, debt is very rarely utilized. Mainly when there’s a protocol hack do DAOs typically begin to explore debt financing options.
Few and far between are the protocols that explore using debt outside of a hack. This is largely because their options aren’t clear. One example was when SushiSwap attempted to raise a $60M round. Instead of diluting existing token holders, the protocol could have taken a loan backed by its $56M in annualized revenue at that time.
The main options available until now all involve over-collateralized loans either from stablecoin issuers like MakerDAO/Abracadabra or via lending markets like Aave/Compound/Fuse. In addition, undercollateralized loan platforms like Maple Finance or TrueFi all require KYC which completely exclude DAOs.
For growth stage DAOs with product market fit, onchain revenue and strong communities, debt is a far superior capital efficient option to fund operations and acquisitions rather than selling tokens. The DeFi community is full of experienced participants who know this.
The scarcity of the use of debt is a clear signal that there’s a need in DeFi that's not being met.

Why use Debt DAO to Borrow or Lend?

There are now more options. Debt DAO’s revenue-based financing innovations allow protocols to scale more efficiently and fund their operations with little to no dilution.
Our initial solution is based on collateralizing on-chain revenue with the Spigot contract which automatically and trustlessly repays loans, providing Lenders with additional comfort beyond any collateral posted as security.
The Debt DAO way provides several benefits to Borrowers also.

Capital Efficiency

Overcollateralized platforms require a lot of highly liquid capital posted upfront as collateral. Debt DAO allows you to take a loan based on future cash flows. This frees up more capital for you to pay contributors, do token swaps with partner DAOs or any other activities that grow your protocol's revenue. Using liquidity mining and similar incentive programs also reduce your protocol's long-term upside in itself on top of being less efficient.

No Sudden Liquidations

Overcollateralized platforms immediately and automatically liquidate you based on the current market price of your token. The price may however just be temporarily depressed due to unexpected market conditions. Current market prices might not necessarily reflect the success of your protocol. This method means that you're more likely to lose money from liquidations and be susceptible to oracle attacks.
Debt DAO has an arbitration and restructuring process so your collateral is not liquidated unless there are no other options for you to repay or restructure the loan. As long as revenue continues to cover interest payments and collateral levels are maintained as per the loan covenants, there's much less chance of losing out through liquidation.

Lower Overheads

With Debt DAO once your loan is issued all you have to worry about is making your pre-defined repayment plan which can be automated with our Spigot contract. No monitoring of market prices and sporadically repaying loans based on price movements. You always have consistent access to capital to fund operations, even in bear markets. You're good as long as revenue remains sufficient. The token price becomes less relevant and your team can focus on growing and building instead of managing positions.