DAO incentive model through a limited supply governance token - rewarding profits without issuing dividends


#1

Hi community,

I want to share with you a first draft for a DAO incentive model I’ve been thinking about lately.

The challenge of building the right incentive mechanism into a DAO is not unique to our project, but rather applies to any decentralized organization being built nowadays. We feel we’re facing challenges at the DAO level, and where better than this forum to get feedback on our approach.

Once a DAO has its mission clear, three topics come up as the DAO’s objectives. These are impact (accomplish the mission), profit (fund the mission) and survival (simply not die). In order to achieve these objectives, and given the current regulatory landscape, two main tasks arise:

  1. Decentrally incentivize contributions starting with ~0 cash without doing an ICO
  2. Decentrally reward contributors without handing out dividends (security problem)

Before diving into incentives, let’s identify the types of contributions the DAO wants to support:

  • Code: the smart contract protocol, the DAO itself, the user-facing clients…
  • Community: build, engage and grow the number of people involved in the mission and products
  • Business: for the mission to self fund itself going forward, a profit stream will help create opportunities

We believe these contributions can be driven by three major factors:

  • Mission: the DAO’s ideas are aligned with your own
  • Money: you believe you can make a profit helping the DAO
  • Reputation: you want to learn, grow your skills, prove your value, impress others…

In the short term, mission and reputation are probably higher drivers, since a DAO’s tokens will be hardly liquid on its first years (bonded curve based mint-and-burn models yet to be tried at scale), so the money incentive would be more of a HODL incentive, if you believe in the token’s potential.

With these contributions in mind, the goal for this DAO incentive model is to make its token holders be contributors. That means 100% of the tokens will be contribution-based minted. We’ve named this process “Distribution by Contribution”.

We propose a model where the DAO’s token has a limited supply of 900.000. This follows Bitcoin’s supply model (BIP 0042). A third of the tokens will be minted for code contributions, a third for community contributions, and a third for business contributions. Let’s dive into deeper detail.

Code & Community

Code and Community contributions will follow the same mechanism. Each set of tokens will follow the a/(b^x) distribution curve, where “a” is the number of tokens that will be issued for that whole set of contributions (⅓ of total) and “b” is a number set so that the tokens are minted during a certain period of time. We’ve chosen 21 years (7665 days), making b=1.0008.

Screenshot_20180729_190824

Early contributions will be rewarded with a higher number of tokens. Proposals and actions for code & community contributions should be continuous, and the DAO would decide on token allocation on a monthly basis. For example, on month 14 twenty bug fixes and three new features have been merged and 10 events have been conducted/proposed. This month, the curves indicate 50.000 tokens should be minted for code contributions, and another 50.000 for community contributions. The DAO would vote on how to allocate these for each contribution made/proposed, in what could be something like 1.000 tokens per bug fixed, 10.000 tokens per feature merged, and 5.000 tokens per event. It could also be the case that a really valuable product makes a proposal to the DAO for a 35.000 token funding grant, and if the DAO approves it the bug & features contributions receive less in this period.

Business

Regarding business, the DAO wants to incentivize the generation of profits (money coming into the vault). The third of tokens assigned to business will be minted based on how much profit enters the vault, also following an a/(b^x) curve that rewards early profits higher. “a” is, again, the total number of tokens set to be minted for business milestones, but in this case we won’t adjust b to fit a temporal horizon. “b” will be adjusted by how much profit we want to reward. In the example graph, we set this quantity to 100.000 units, making b=1.08. The 1st unit of profit is more valuable (bigger token reward) than the 200th, and that one is more valuable that the 50.000th.

Screenshot_20180730_092934

The currency of the unit proposes a challenge. The most common thing for an Ethereum based DAO will be to generate income/profit in ether, but the volatility of ether and other crypto assets could interfere in the DAO’s minting interests later on. Measuring profits in its equivalent to stablecoins like Dai could also be tricky, as they depend on the dollar, a fiat currency whose long term stability could also be challenging if cryptocurrencies achieve their mission.

The tokens minted will be distributed to all token holders proportionally to their stake in the DAO. This is an incentive for any token holder to increase the DAO’s profits, but could also lead to holder inactivity. To fight this, we are thinking of implementing a model where activity in business decisions (what projects aligned with the mission the DAO invests in/mints token for or not, etc) is rewarded, and/or inactivity punished.

This DAO’s profits will likely highly come from a VC-like model where the DAO serves as a motor for its mission to be accomplished through investment in projects/startups/organizations working on aligned products. Different business models can always be tried and implemented throughout the DAO’s life.

Conclusion

Having looked at the three types of contributions considered, we can say the token represents a simple utility: governing the DAO. This means taking part in its decisions, managing its assets (protocol, vault, stake in related projects…), funding mission aligned ventures, merging code… It’s profit-based minting also serves as a means for holders to be rewarded for contributing to the DAO’s financial success without the DAO ever issuing dividends or part of the profits.

After the 21 years set for direct contribution reward in code & community, if the project has been moderately successful and the token holders reasonable with the vault’s management, the vault’s funds should constitute a further motor to build the future of the DAO, whether that’s continuing to fund mission aligned initiatives with the vault’s funds, issuing another token in order to deploy an additional incentive model, or whatever the DAO token holders decide is best for the mission.

This a first draft probably full of errors, mistakes and contradictions we have yet to discover. I’ll also name some challenges and open concepts we’re working on:

  • Detail Distribution by Contribution and how it measures merges, impact, profit…
  • Include bet creator reward in contributions
  • Manage unclaimed bounties/”empty” contribution periods and their assigned tokens
  • Detail rewarding activity/punishing inactivity of token holders
  • Study bonded curve mint-and-burn token model
  • Detail bet outcome validation as the DAO’s main service to bet creators
  • Scenario: DAO holders vote to use vault profits to issue dividends to themselves

Please share your thoughts and criticisms :slight_smile:


#2

Thanks for sharing this @jose!

At a general/high level I think the idea of rewarding tokens based on direct contributions (as opposed to purely financial contributions like an ICO or bonding curve makes sense). I also think having the supply scheduled defined up front may help provide early contributors certainty but worry that this certainty comes at the expense of flexibility. What if the DAO has not successfully been bootstrapped but the supply schedule contraction dictates that there is less incentive for further work to be done?

However, I think the crux of the issue is more about the business model then it is about how contributions are initially rewarded. What I mean by this is that, its probably okay to have a founder simply assign tokens to early contributors or even investors (though this certainly muddy the securities question) on and adhoc basis, these early contributors could be granted governance privileges over future supply inflation. The key difference is that there is no concept of fiduciary responsibility to the token holders, and instead this responsibility should be codified into the organizations governance process.


#3

Who is tasked with signing off on these? Both the initial pricing and completion? Having the entire DAO vote on bug fixes does not seem scalable (and would promote severe underprovision of votes) and having too few promotes possibilities of corruption.


#4

You’re right that it’s not a solution that would scale too well, and I would say what @lkngtn proposes in the previous comment makes much more sense: having the base of this governance process hardcoded into the DAO and let the holders be curators of proposals, maybe through a TCR, while money flows as specified in the code.