How to improve the governance efficiency of DAO through mechanism design?

When I browsed the COMP forum at 2 am on a Saturday, the idea of ​​”government mining” came into being. In fact, this is not a new idea. As far as I know, in June 2020, James Waugh first proposed and discussed “Proposal farming” or “mining proposal”, which laid the foundation for the Fire Eyes DAO’s formal “government mining” proposal for Balancer in November 2020. . Nevertheless, many people still know very little about this concept. Governance of mining itself will change the rules of the market game, as explained below.

The idea itself is simple. For example: DAO needs to complete some things, but it is difficult for people to complete these tasks. Therefore, similar to liquid mining, DAO should “mining” on human capital to start an active governance community.

The current state of DAO

Understanding the operating mode of DAO governance helps us understand why we need “government mining”. Now the DAOs in the ecology have encountered similar situations:

Product development process is slow- From the perspective of the product itself, the development of web 3 has almost just begun. DAO is now in the first phase of the product being built, or even earlier. We know that these agreements are not yet in their final stages. They need to improve, develop and grow to stay competitive in the long term. For agreement managers, there are many things worthy of major changes, but few have been reached so far.

Lack of leadership and coordination skills- We have seen the teams at Compound and Uniswap take a step back and let the community try to self-organize. This almost resulted in the stagnation of the two agreements at the beginning. Under regulatory pressure, we are almost certain that this trend will continue. More broadly, the community is trying to coordinate resources for work. The agreement relies on community contributors who can only work in the evenings and weekends to lead the plan; few people choose to take the initiative to stand up; at the same time, governance is rarely the priority of these people.

The organizational structure cannot be effectively expanded-the  DAO should grow with the release of the product. But it turns out that it is difficult to do this in a decentralized environment. Many DAOs do not have a clear development team to service the agreement. Even if a DAO has a development team, other teams and positions that serve as assistants are difficult to fill. If DAOs are to operate at the level of conditions required by unicorns in the traditional entrepreneurial space, they cannot rely on substitutable part-time staff. They will need full-time employees: product experts, strategic business experts, security/QA engineers, customer service, etc.

Too little incentives- Considering the efficiency of the DAO and the value of unlocking, the incentive mechanism of the DAO should be the mechanism with the highest profit. But on the contrary, DAOs are relatively “stingy” and hesitate because they are worried about wasting money or paying too much, so it is difficult to recruit full-time people as the mainstay. The vast majority of DAO’s work is part-time or one-time work, usually paid retrospectively through a small token subsidy. Wages are more about the amount of work than the value of the work. Therefore, people who are best suited to solve DAO problems rarely participate. In addition, so many DAO contributors work without incentives, including community members contributing on forums, discords, regular community meetings, and so on. These people added value to the agreement, but did not get the fruits of their labor. More broadly, the vast majority of the encryption field is not actively participating in the DAO. Governance is time-consuming, and rewards are often inconsistent with what is paid.

With a huge treasury, token distribution becomes a problem-DAO treasury has a lot of money. These DAOs have a lot of money, but they don’t know how to deal with it. They very much hope that someone will help them structure these tokens to ensure that the DAO will not interrupt the plan due to the excessive concentration of tokens among the team and early investors.

So to sum up, DAO could have achieved many goals, but no one came forward to lead the team and make contributions. In the final analysis, it is precisely because the incentive mechanism is weak or non-existent. Therefore, product development is slow and the team cannot grow. Many existing DAOs are at risk of being replaced by new, faster-growing teams. At the same time, the agreement has uncountable funds that need to be spent effectively. The development dilemma of DAO is imminent.

Let us analyze the last point-the problem of token distribution under the huge treasury. The team usually holds about 20% (rarely more than 25%) of the tokens and distributes more than 50% of the tokens to the community. Widely distributed tokens are necessary for decentralized protocols. Fully decentralized network ownership endows the protocol with some basic features, which form the basis of the decentralized protocol, such as security, neutrality, and community incentive uniformity. However, this decentralization process usually lasts for many years, so we see that many protocols have a large part of the token supply when they are launched, and these token supply methods will be “TBD” for a long time. This is where the community can be creative. When considering how to decentralize network ownership, the community can use the distribution of its native token to guide or initiate the agreement.

As you can imagine, we may want to incentivize many different areas in the agreement, but currently liquidity is actually the only area that is prioritized. As we have seen, liquid mining may be a very powerful mechanism, but it is clearly not a panacea for the success of the agreement. The current liquidity mining plan should allocate tokens to the “users” of the agreement, but in fact it is only arbitrage by funds and projects, which make profits by developing and selling tokens. The liquidity of funds itself can be formed spontaneously, but the community needs to be managed.

Compound allocates nearly $ 1 million to liquidity providers in COMP every day , but it is still very difficult to make simple and necessary improvements to the agreement. Liquid mining may achieve the successful establishment of DAO in the short term, but it is not necessarily effective for the long-term development of DAO. Are some elements overlooked?

Solution: governance mining 

Protocol governance is systematically underestimated. If you ask experienced builders and investors what is the biggest determinant of the long-term success of early projects, more than 90% of people will say the quality of the team. In the encryption protocol, the team is the person who actually conducts community governance. So if we want to achieve long-term success, we should give priority to the construction of decentralized teams. Factors such as “too slow progress”, “slow progress”, and “surpassed by other encryption protocols” will become the main reasons for the death of encryption protocols in the next few years, all of which are synonymous with poor governance.

For the DAO, which was running a progressive decentralization strategy in the early stage, the incentive community contributors accounted for almost the highest share of expenditures. Not only liquidity needs mining support, DAO should also mine on contributors, human resources, and broader governance activities.

Abstractly speaking, governance mining works like this: the agreement promises to distribute part of the tokens to governance contributors within a period of time. The distribution of tokens is relative to how much each group/individual contributes, and is weighted by the value of their contributions. The more valuable the contribution, the more rewards the contributor will get. The value of a contribution will be updated over time to reflect changes in its impact, so a contribution may have some value in advance, and rewards will be traced back based on the results, so that contributors can capture the long-term value of their work.

I subjectively believe that contributions can include any behavior that adds value to governance: point out key issues, suggest or implement protocol improvements, theorize or design new products and protocol versions, recommend candidates for vacant positions, provide thoughtful comments on the forum, Conduct technical research on proposals, host or participate in community conference calls, etc.

The potential impact of governing mining can be huge. You can imagine this picture:

It is 2023, and governance mining is prevalent. A hot new agreement was released, and everyone began to copy and copy. But this time, they are aiming for the idea of ​​governance rather than liquidity. After the product was launched, all the best crypto funds, governing mining organizations, and independent contributors have contributed in their respective fields of expertise and in different ways to obtain tokens. The governance function of the agreement has grown at an astonishing speed. Within a month or two, the agreement has multiple full-time contributors focusing on different needs. Almost all existing agreement pain points and technical problems have been discovered and resolved (or solved on the way Solution) Realize the development of multiple new products, etc.

If governance mining is carried out effectively, there will be many great achievements:

Speeding up decentralized governance- Decentralization usually slows down the progress, but governance mining can actually speed up the process. Imagine if governance contributors get a considerable airdrop every time they help solve a problem (assuming more than 5 digits), this will help people be willing to make efforts in the early stage to speed up the governance of the agreement to reach their can The extent to which a meaningful contribution is made. When people realize that working for the DAO can get rich, the governance of the DAO will become a priority. Applying free market economics to the human capital of DAO, people will use FOMO to obtain value, solve problems, and improve agreements in this process.

Accelerate the formation of governance teams-The vast majority of full-time DAO contributors are part-time contributors at the beginning, so by creating meaningful incentives for people to participate, DAO can create a deep talent pool from which to recruit full-time employees. Governance incentives will attract the attention of developers, product designers, protocol strategists, etc., and help people with skills and expertise to connect to specific roles in the DAO, so that teams and pods will be in the network life cycle Early formation.

Smart distribution of governance tokens-  tokens are distributed to those who contribute the most value to the protocol, not those who have the most capital. Therefore, large fund pools have no substantial advantages over independent funders. The active contributor community can be said to be the best group holding governance tokens, and this group is most likely to be active long-term token holders.

Obtain the long-term value of the agreement from mining- Although liquidity contributors are usually neither long-lasting nor loyal, governance contributions have a lasting impact, because the permanent improvements it brings to the agreement help promote sustainable long-term growth . In addition, human capital may be more sticky than liquidity, allowing the agreement to lock in some of the resources attracted by governance mining. 

Challenges faced by mining governance in practice:

In the existing ecosystem, we have seen some forms of governance mining introduced into the protocol, such as Balancer, Index Coop, MakerDAO, Friends with Benefits, and other protocols. However, so far, the success of these proposals seems to be quite limited. There are several reasons for this:

Too little reward-rewards of only a few thousand dollars will not change the behavior of contributors. We should invest millions of dollars in governance contributors.

Weak advantages- The governance mining allocation we see seems to prioritize scalability and decentralization rather than accuracy. This makes them perform well in rewarding long-tail contributions, but poorly in appropriately compensating the most influential contributors. A more centralized distribution mechanism is needed in the early days.

Iterations and experiments are not enough yet- this should be a core concern for community leaders and the feedback loop needs to be strengthened. There are many prospects for governing mining, but it takes time and effort to improve it.

On the basis of the existing problems discussed above, coupled with the expansion of new problems that may arise, the following are some of the key challenges in the design of governance mining mechanisms:

It is difficult to create a good method that meets both accuracy and scalability for governance participation evaluation. It will be very difficult to sift through hundreds of forum posts, hours of community calls, etc., to determine who contributed, how much, and what impact it had. In the short term, it is unlikely that there will be sufficiently good algorithms for automated evaluation.

Assessing the value of contributions is inherently subjective- one of the key components is the ability to accumulate value over time (for example: making suggestions for improvements, if the agreement grows significantly from it, contributors can get dividends from the value created). Although some economics can be strictly defined (such as the desire incentive method), many other economics may require human input to achieve the definition in practice, and this will inevitably cause confusion.

Mining contributions may dilute the quality of governance activities- if we start to invest large sums of money in governance mining, activities may increase 10 times, but not all activities are productive. For example, people may initiate a large number of low-quality governance proposals and behaviors to obtain some tokens.

Money may only be part of the answer-for a long time, the agreement has claimed that they will pay corresponding fees for valuable contributions, and even tried some things, such as soliciting product ideas from the community at a price higher than the market, etc., but in reality Few contributors participated in it. Governance mining mainly focuses on governance incentives, but there are other structural and social issues that may need to be addressed. 

Design and governance mining mechanism 

The following is a simple structure to govern mining V1. It is true that this model is initially centralized and will not be very malleable, but this may be the safest way to ensure good results early. Of course the model can be continuously improved over time. 

Governance mining V1  

1. Organize a group of 3-5 people from the community to manage mining (may also require a larger advisory committee). This team needs to clearly indicate the priority and heuristics of token distribution.

2. Set aside a small part of the token supply for mining within a period of time (for example, 6 months). It needs to be large enough to attract groups with high opportunity costs and set the right tone for the governance value of this network. Create an upper and lower limit for the number of tokens to be distributed based on how many tasks are completed during this time. If their actions have a significant impact, this will provide potential contributors with some baseline guarantees and sufficient upside space.

3. Review governance contributions within a fixed period of time (for example, 1 month), and distribute tokens according to the value of the contribution (there may be a waiting period). Encourage long-term participation by increasing rewards for regular contributors. Keep a good record of historical governance contributions to be able to trace back and update the value.

4. At the end of the period, evaluate the results and adjust the priority and allocation logic, restart the project, and repeat the process.

This model does not seem to be very different from the existing donor funding schemes. Similar to a gamified grant program, generous reward management contribution participation. The key difference here is that governance mining promises to distribute a large number of tokens to contributors at the initial stage, thereby generating clear incentives that cannot be ignored.

As mentioned earlier, the hardest part seems to be assessing the value of the contribution. In the short term, this is inevitably quite subjective and requires a qualitative assessment to a large extent. However, in the development process, we will be able to design a quantitatively-driven governance mining distribution mechanism to create greater efficiency and reduce subjectivity on the simple V1 model discussed above. There is already a team committed to this-the SourceCred team has been improving the pagerank-like contributor reward algorithm since 2018, and Coordinape, which was born from YearnDAO earlier this year, uses a decentralized voting mechanism to anchor the core contribution of the community By. These tools are designed to automate the reward distribution process, allowing the DAO to flexibly pay compensation to all types of contributors. No model is perfect in practice, and different methods are suitable for rewarding different types of contributors. Therefore, layering different distribution mechanisms can better avoid excessive reliance on any single method. For example, a centralized council is activated at the same time, plus Coordinape and SourceCred, and different weights are set for these mechanisms.

Another important consideration: timing. The earlier governance mining occurs, the greater its potential impact. The most influential contributors will be those who gradually become governance leaders and make the project fruitful. Such contributors will need a significant advantage to justify their participation. Early projects (lack of market traction, early token formation, low market value) will provide contributors with less present value, but from a positive perspective, they will also bring more future value, attracting a small number of people who have long-term confidence in a specific project investor. For late-stage projects (high market traction, high market value), most of the value has already been realized and more present value can be allocated, but it also means less future value. It can attract many contributors, but there are fewer long-term participants, but the variability of later governance mining results is also small. If a project invests a lot of money, then human factors will inevitably intervene in the work, but if a project focuses on future advantages (network ownership with uncertain value), then potential contributors will also need greater Persuasion will participate.

In addition, just as liquid mining is most effective when building a foundation, governance mining will become the most powerful catalyst for community governance that is naturally formed rather than purely profit-oriented. If an autonomous community has no governance organization or contributors, such as no leaders or contributors with no work to do, then even if mining will attract temporary attention, without the right leadership and structure, talents are unlikely to be retained Come down.

in conclusion  

The core idea of ​​”Governance Mining” is based on the fact that the agreement does not pay enough attention to governance. The community is happy to spend 6-7 figures every day on liquidity incentives, but it is not happy to pay salaries to contributors. If we really value those who are working hard to advance the token agreement to improve performance, then it’s time to start spending money on the blade.

The principle of governing mining is to spend enough money in the short term to attract and retain the best employees. From an economic point of view, governance mining schemes (and general contributor compensation schemes) have a high possibility of value-added.

Suppose you have a $1 billion capital network and you contribute 2.5% of the token supply to governance mining in the first year. This means that a huge reward of $25 million is easy. This might mean that if there are 25 contributors then each earns $1 million, or 100 contributors each earn $250,000. If the total amount of all donations for the $25 million governance mining project only increases the value of the network by 2.5%, then the project’s revenue will pay for the project itself. In practice this may mean that even if a strong governance plan comes from it, planning will become valuable. With so many contributors and such large incentives, we are more likely to see governance mining projects double the value of the network in the long run.

DeFi found a product-market fit at the beginning of 2020 and showed a parabolic growth after the introduction of liquidity mining. DAO will find a product-market fit that suits itself in 2021 , so now is the right time to start to understand and actively participate in DAO , and jointly make DAO development to a higher level. Compound and Uniswap are two examples that can benefit from the governance of mining activities. All new agreements that are about to launch tokens should explore governance mining to guide community governance. No one can foresee the future, and perhaps community self-driven projects centered on governance mining will bring a new wave. No matter what happens, this is an experiment in itself-and we should do more experiments.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-to-improve-the-governance-efficiency-of-dao-through-mechanism-design/
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