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In-depth analysis of DAO incentive mechanism

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To fully understand DAO incentives, be deeply involved in at least one DAO operation

原文标题：《 DAO 的激励机制》

Hitchhiker, Marina, W3

In the Chinese-language crypto community, SeeDAO's growth and funding is commendable for the recent performance of DAO. The DAO closed its Series A funding round at the end of January 2022 at A $30 million valuation. Before this, the predecessor CryptoC company's main business focus is on NFT content production and community building, especially the relationship between content creators, platforms and capital parties. SeeDAO, a spin-off from the corporate structure, aims to build a creator economy for Web3, with the first phase being an incubator for DAO.

Although the CONCEPT of DAO has been around since 2013, you don't really know how a DAO works until you get deep into the middle region and get involved with a DAO, and you certainly don't know why SeeDAO did the funding at such a high valuation. However, this is not the core of this article. SeeDAO has been working well on the project of incubating DAOs, and we have reason to believe that there will be more excellent DAOs in China in the future.

As more and more people are "forced" to work from home due to the COVID-19 pandemic, DAOs are beginning to attract more talented contributors, whether they are actively or passively involved. This is an interesting trend, but it does get us thinking about the fundamental differences between how daOs operate and how companies operate.

A simplified comparison between traditional companies and DAOs

Simplified comparison between traditional companies and DAOs In the traditional Web2 market, most of the value created by users has been captured by large centralized platforms; Under the DAO framework, members get a share of the value created;

The most direct result of this change in the form of value acquisition is that members can be motivated to make better contributions based on the governance rights in each DAO, thus making the entire organization more productive.

The company serves customers, while DAO serves community members.

One thing is clear: A DAO is a group of people coming together for a common goal, whether it's a VentureDAO, a media DAO, etc. The result presented by this final goal is generally a service or product. There seems to be no difference between the two when comparing the goal of the establishment of the company. It is just because the "main body" is different, but both of them are engaged in some kind of business.

Corporate governance is mature, but DAO still has a lot to go.

The biggest difference between participating in DAO and joining a company lies in how to design incentive mechanism and how to distribute compensation. In the framework of the company, most people know each other, and they can quickly establish trust between each other, and the efficiency of communication and coordination is good. Members of DAO come from all over the country, and their backgrounds and cognition are also uneven, which makes it difficult to cooperate in the early stage.

The entry of companies needs to be screened, and the entry and exit of DAOs in the public domain need no threshold.

Under normal circumstances, enter a company need to send resume, interview screening and other mechanisms to determine whether you meet the company's job conditions, if your resume is bright, the interview performance is bright enough, then to a large extent you can enter a company for its service; However, there is a basic part of DAO, that is, anyone can enter DAO without permission, feel the atmosphere of DAO community, and then you can confirm whether you want to deeply participate in the contribution and governance. This gives you an early entrance into how the "company" works, and you can always quit when you're not interested.

In general, DAO shows more community inclusiveness, but the real operation cannot be achieved without the promotion of core members. Need periodic election for instance, appoint or hire for formal management personnel. The core of this paper is to discuss what incentive mechanisms exist in decentralized autonomous organizations like DAO to enable participants to make continuous contributions and new members to take up tasks in an orderly manner after the core members quit.

The core of DAO incentive mechanism design

Over time, in order to attract more talent to the DAO, they can choose to work full-time or part-time, and they can choose how much time they want to spend on the DAO each week. However, in order for them to actively participate in the construction of the community for a goal, it is necessary for DAOs to establish stakeholder incentives. If Nash equilibrium theory is used as a reference for DAO organizational motivation, we can consider the following two points:

1. As an individual, what are the benefits of joining this DAO for me? Will the current incentives attract me and will I be motivated to continue working for DAO in the future?

2. For the DAO community, what good "impact" can new members bring to the community; As a member of the community, what benefits the development of the community can bring back to the individual members, which also needs to consider the future development potential.

In general, there is no absolute "leader" in the DAO community, so members need to actively participate in the formulation and acceptance of phase tasks. The most basic "interest" correlation is the design of incentive mechanism, which is also where many DAOs need to be continuously improved and perfected. The power to govern, rewards for contributions, and distribution of profits can motivate members to actively participate in governance, which in turn encourages communities to flourish.

The incentive model of DAO

Before talking about DAO's incentive model, let's review the compensation system of traditional Web2 listed companies. The common system is: basic salary + year-end bonus + equity, which will be adjusted periodically according to the performance and ability of employees. In order to improve employees' expectations for the future of the company and improve the retention rate of excellent talents, a large proportion of compensation will be allocated to equity, and the vesting period will be set well. Companies that motivate employees to achieve short-term goals can allocate the largest percentage of their compensation to the year-end bonus.

If the compensation system of listed companies is mapped to DAO, the most effective way is the application of "equity", which is presented as holding the original DAO Token. Here are the incentives that most DAOs use today:

The acquisition of governing power

Most DAOs are free to enter, and you can choose which DAOs you are interested in. When you want to participate in the core governance of the DAO, it generally takes time and effort to contribute, and when the "experience points" reach a certain level, you can apply to participate in governance.

Just like companies, DAOs are also referred to as "management." Their main role is to coordinate and manage THE OPERATION of DAOs more effectively. Gaining the governance power means that decisions can be made on the daily affairs of the DAO. In this way, members can truly feel that the development direction of the community is decided by everyone. Through the rational use of voting tools, community members are no longer bystanders, and the sense of belonging and "power" can provide them with spiritual satisfaction, so that they are willing to contribute to the development of DAO.

治理权力的获得因 DAO 而异，通过 Token 投票参与直接管理的 DAO 可以通过支付 DAO 的原生 Token 来获得回报；非 Token 治理机制的 DAO（比如 Moloch DAO）将在如何分配治理权方面给社区成员更多的选择。

Based on Stablecoin salary

While Token offers are common in the Web3 world, stablecoin-based salary offers may be more reassuring, especially when the market is going up and down.

That makes sense. In an organization, each person receives a monthly or other regular payment, usually in fiat money, according to his or her abilities and performance. In the DAO community, this depends on how each DAO is paid. Of course, this part is also related to the contribution and active degree of each member.

协议原生 Token 奖励（类似于股票期权）

每个 DAO 在成立时可以选择是否发放原生 Token ，不过在短期内 Token 奖励相对于基于 Stablecoin 的薪资来说要逊色一些。特别是 Token 的价格不太理想时，难以保证人才的参与度和责任感，社区的吸引力也会大大降低。

因此，从长远来看，探索驱动 Token 价格上涨的因素，激励参与者提高 Token 价格非常重要。

The bounty

In order to improve the efficiency of collaboration, DAO often establishes a clear division of roles. In general, the ROLES of the DAO are divided among developer (engineer), administrator, content creator, designer, funding manager, and enabler. Specific role can refer to the following web page: https://coinyuppie.com/understand-the-roles-required-by-daos-and-the-many-ways-to-get-paid-for-them/

Rewards work well when tasks are relatively simple and judged by clear criteria. Badger DAO, for example, makes it easy to get an "internship program" going by taking full advantage of the "bounty" mechanism.

The advantage is that one-off tasks can be well performed in this way, and members are not required to have good past experience, as long as they can meet the final requirements. The downside is that there is an "overhead" cost, which is the time and effort required by the coordinator (which later translates into bonuses, etc.) to organize the project. In addition, some work results are less well defined, and rewards often fail to produce the desired results.

POAPs & NFTs

Proof of Attendance Protocol-Poaps are NFTS that prove your participation in an activity or contribution. It has the benefit of building a reputation in the Web3 world, such as on-chain contributions that enrich the resume of community contributors, in a low-cost way; The downside is that these POAPs can only make their "contribution" in a specific place, but it doesn't make financial sense to sell one POAP to someone else.

The other type of NFT serves as a credential and ticket to the core governance identity. In general, these credentials need to be minted for free through POW (Proof of Work), but they can also be sold for profit on secondary markets (such as Opensea) depending on the development of the community.

A temporary "tip"

This works well for events or projects where there is no specific plan or incentive, offering a "tip" is a temporary way to encourage active participation. The advantage is that the work can be carried out immediately, which is conducive to rapid processing; The downside is that these types of incentives tend to be targeted when you want to focus on something, but it's hard to scale them up.

Other (income from donations, investments, etc)

Here are two examples.

Take, for example, the ConsititutionDAO, as it was widely known, organized to take a crowdfunded copy of the United States constitution. This approach is often applied to complex tasks that require external funding, most importantly the compelling NARRATIVE of the DAO community.

The investment DAO is another TYPE of DAO that is worth singling out. Not limited to VC investment path, investment DAO can collect wisdom from global talents, the biggest advantage is that it can find early quality projects. Their goal is to invest in good objects, the biggest source of income is the income after the success of investment, and this income is very huge.

conclusion

The rapid development of DAO seems to have taken place in the last year or two, giving more Web2 people the opportunity to enter the crypto world. However, how to allocate compensation and what incentive mechanism can fully mobilize the enthusiasm of members, this has been a difficult problem. To fully understand the incentive mechanism of DAO and at least deeply participate in the operation of a DAO, more good ideas and solutions may be generated in practice, which in turn can promote the smooth development of DAO.