Designing reward systems for web3 governance

Research Summary

The report discusses the design of reward systems for web3 governance, comparing the trade-offs of reputation-based and token-based reward systems. It explores how these systems can be earned and the powers they might translate into. The report also delves into the historical precedents for rewarding contributions, the challenges of scaling merit-based reputation systems, and the potential of web3 to implement rewards at scale. It further examines the core puzzles in designing reward structures, the pros and cons of reputation- versus token-based systems, and the implications of attaching different powers to rewards.

Key Takeaways

Historical Precedents and the Need for Merit-Based Systems

• Political Influence Historically Wealth-Based: The report highlights that societal and political influence has traditionally been wealth-based rather than merit-based. This has been seen from Ancient Rome to modern liberal democracies where wealth and connections often hold sway.
• Challenges of Scaling Merit-Based Systems: Reputation-based systems have been difficult to scale beyond niche contexts. These systems, while typically less directly tied to wealth and connections, have tended to be context-specific and not generalizable beyond niche settings.
• Web3’s Potential for Merit-Based Governance: Web3 has allowed for the design and implementation of highly credible, universally available reward systems at scale. Blockchain’s immutability ensures that rewards are tamper-resistant and recorded securely, while smart contracts can transparently automate the implementation of rewards.

Designing Reward Structures

• Key Questions in Designing Reward Systems: The report identifies two non-trivial questions at the root of designing reward systems: What should be rewarded? and Who gets rewarded? The challenge lies in determining whether signals represent truthful demonstrations of reputation and creating a standardized way of interpreting signals that translates across contexts.
• Reputation- Versus Token-Based Systems: The report compares reputation-based and token-based reward systems. Reputation-based governance likely makes sense for meritocratic systems prioritizing long-term community alignment, while token-based governance is probably preferable for projects prioritizing scalability and liquidity.
• Combination of Tokens and Reputation Score: The report suggests that it may make sense to incorporate some combination of both tokens and reputation score, where reputation leads to some but not all governance functionalities.

Token-Based Systems

• Definition and Examples: Token-based governance refers to a system where incentives or rewards are linked to the ownership or acquisition of fungible tokens. Examples of these types of tokens include ERC-20 tokens in Ethereum, ICS-20 tokens in Cosmos, and SPL tokens in Solana.
• One-Token, One-Vote Model: Most projects use a “one-token, one-vote” model where voting power is a direct function of token wealth. Examples include MakerDAO, Aave, and Uniswap.
• Reward Mechanisms in Token-Based Systems: The report outlines several reward mechanisms to distribute transferable tokens that have been implemented in token-based systems, including airdrops, retroactive rewards funding, liquidity mining, and vote escrow.

Reputation-Based Systems

• Definition and Examples: Reputation is earned rather than purchased. While reputation may also take the form of a token, the implementation is different from fungible tokens which can be bought or sold on the open market. Examples of current identity-based governance systems include Optimism citizen’s house badges and Polygon’s proposed reputation-based voting via Polygon ID.
• Potential Ways to Earn Reputation: The report outlines potential ways to earn reputation, including automated behavioral metrics, peer attestations, and centralized selection.
• What Powers are Attached to Rewards: A key consideration is determining what value, access, perks, or influence the reward yields. These powers could be attached to either transferable or non-transferable reputation.

Actionable Insights

• Consider the Nature of the Project: The nature and mission of a project will determine whether a token-based or reputation-based reward system is more suitable. Token-based governance may be more appropriate for economic projects, while reputation-based systems may be better for civic projects.
• Balance Scalability and Meritocracy: While reputation-based systems aim for meritocracy, they can be difficult to implement due to the complexity of measuring and validating reputation. Therefore, a balance between scalability and meritocracy should be sought when designing reward systems.
• Explore Combination of Tokens and Reputation Score: It may be beneficial to incorporate some combination of both tokens and reputation score in the reward system. This could allow for a more nuanced and flexible approach to governance.