Understanding DAO Incentives & Rewards Better
As we move deeper into a digital economy, DAOs (decentralized autonomous organizations) start to become the playground in which we coordinate, contribute and earn. For most crypto enthusiasts their first experience of a DAO was either through a DeFi procol or being in a collective of NFT holders.
DAOs are definitely the next evolution of organizations because people want more flexibility in how they contribute and transparency in how their contributions are valued. Aside from the fact that the nature of work itself is changing, people also want to own what they’re contributing to. They want to have a voice in the direction of a project or protocol.
Challenges DAOs face
Although DAOs promise a lot of upside, they still bring a whole host of challenges that include:
Contributor burnout which leads to lower long-term retention
Apathy in governance participation where the turnout for voting on governance is often low
Free rider problem where most of the work in crafting and putting forward proposals is carried out by a minority of participants
Unequal influence due to bias in economic voting where participants with more tokens can wield more influence over a project
Range of incentive systems
This makes incentives, rewards and compensation a foundational aspect of DAOs especially when it comes to retaining the core team and contributors over the long-term. The typical schemes DAOs utilize currently include:
Retroactive funding proposals
This is a form of compensation which rewards contributors after they’ve made their contributions. After a certain period, contributors are encouraged to submit funding requests outlining the value they’ve created or delivered for the DAO coupled with the amount of funding they’re requesting.
Pros
Provides a lot of flexibility to the DAO and contributor without having to engage in a prolonged commitment
Allows DAOs to better evaluate the contributions prior to providing the reward
Cons
Creates more uncertainty for the contributor if they’re looking for a long term engagement
Streams
Streams are programmable forms of rewards like salaries that can be disbursed to contributors in a periodic manner.
Pros
Provides more certainty for the contributor and the DAO for longer term engagement
Contributors get reward in real time
Cons
Not practical for rewarding smaller or on-off tasks
Collective rewards
Collective rewards are like bonuses that are allocated to contributors based on how other contributors value their contributions.
Pros
Allows for participants to collectively evaluate and reward the contributions of other contributors
Decentralizes the rewards system
Cons
Contributors face uncertainty in the amount of rewards they receive
Governance power
As part of the compensation package provided to contributors, DAOs can opt to also provide compensation in the form of governance tokens. overnance tokens are a form of rewards to help contributors earn in the form of governance power, which is offered on top the usual compensation based on a major crypto asset or a stablecoin.
Pros
Contributors feel empowered because they get to engage in governance issues
Cons
Contributors face some level of uncertainty because governance tokens might be more volatile than other, more mature assets
Tips
Tips are a very straightforward and immediate way to encourage incentives or rewards for contributors.
Pros
Allows for instant or real time rewards to recognize contributions without the need for a lengthy evaluation process
Cons
Centralized approach that could lead to biases towards specific contributors
Contributors face uncertainty in the amount of rewards they receive
Bounties
Bounties are a form of compensation for well-defined tasks with clear completion criteria. The reputation of the contributor is less of a priority for evaluation as opposed to the evaluation of the final contribution.
Pros
Great for specific, clearly-defined tasks that don’t require evaluation of a contributor’s reputation
Cons
Slightly more oversight from the DAO is required to ensure tasks are completed properly
Grants
Grants are a form of incentive that are largely used for more complex initiatives that require deeper research and unique implementation, most of the time requiring external expertise.
Pros
Useful for more complex tasks or projects that usually require attracting new talent to the DAO
Cons
Significant amount of oversight from the DAO is required to monitor the progress and evaluate the results
NFTs
NFTs can be a form of non-financial reward provided to contributors. NFTs as rewards can be in the form of Proof-of-Attendance Protocols (POAP) where it is used to indicate the contributors’ participation in DAO activities. Or, the NFTs can be used to provide holder access to gated channels or services.
Pros
Enables access or restrictions
Allows contributors to build reputation on-chain
Cons
A form of illiquid reward that comes with some level of uncertainty for contributors
Factors influencing incentive systems
DAOs have the flexibility of integrating a multitude of incentive systems in comparison to traditional corporations which is one of the main upsides to DAO participation. However just because these incentive systems exist doesn’t necessarily mean they’ll guarantee success.
Clearly defined values
One of the most important and underestimated parts of the DAO is having a clear outline of its values so that all participants are aware of what they’re getting into. This is especially important because when an incident occurs, the DAO can fall back on their values and evaluate if the parties involved went against any of its core values. Therefore, clearer decisions can be made based on more concrete core values as opposed to subjective assessments.
Take for example, if some contributors are rewarded more than others based on the skills they bring to the DAO. If the DAO’s values clearly outline that rewards will differ based on the skills of the contributors, then all participants are aware of what they’re getting into before setting themselves up with different expectations.
Decentralization spectrum
DAOs have to understand that decentralization is a spectrum and the newer the DAO the less decentralized it is compared to a more mature one. Over time DAOs can take steps towards being more decentralized but it’s not something that can be achieved overnight.
Collective rewarding is a form of decentralized rewards for contributors but may not be feasible when the DAO is new and still has a few contributors because much of the efforts are still being driven in a centralized manner.
Incentive management
Sometimes the factor causing inertia is just as simple as the resources available to a DAO. Some of the incentive schemes like Bounties or Grants sound elegant at first but take time to define clearly and monitor results, which consumes management resources from the DAO. This could mean contributions from Bounties or Grants might yield underwhelming results compared to the resources invested into managing these types of incentives.
Final Thoughts
The flexibility of incentive and reward schemes are clearly what helps give DAOs more upside for contributors than traditional organizations. However DAOs have to be careful in choosing which schemes are best for them while weighing the delicate balance between its own maturity, goals and what it can offer contributors. Furthermore, having a high level of transparency on its values and the incentive schemes will be critical to help retain contributors over the long-term.