Original author: Eliza Oak, a16z
Original compilation: Karen, Foresight News
A core difficulty in democratizing online governance systems is how to motivate long-term citizen participation through rewards.
Current Web3 governance systems tend to use transferable tokens, but these tokens have some obvious limitations (e.g., skewed oligarchy, lower ability to withstand Sybil attacks, and incentives for holders to sell tokens and exit), which Can be overcome by going beyond token voting.
In this article, I compare reputation-based and token-based governance reward systems for participation, outline the considerations for each governance reward system, and discuss how these rewards are earned and what power they might translate into.
Precedent for rewarding contributions
Political influence is often based on wealth, not merit
Historically, social and political influence has been largely based on wealth rather than merit. In ancient Rome, for example, status among the senatorial class was distinguished by birth and land ownership.
During the Renaissance, wealthy families such as the Medici bankers of Florence used their wealth to influence political and religious affairs as well as cultural movements.
Even in many of todays liberal representative democracies, wealthy individuals and corporations influence political affairs through donations and lobbying. Other social institutions explicitly designed to reward merit, such as college admissions, often reward wealthy and well-connected individuals through legacy admissions or alumni donations.
If the goal of Web3 is to move toward truly democratic online systems, then the question becomes how do we prevent the re-creation of wealth-based hierarchies. How can we prioritize merit, value, and contribution over wealth and relationships?
Performance-based reputation systems are difficult to scale beyond niche environments
Reputation is one way society attempts to capture merit.
For centuries, we have tried to find ways to collect and aggregate signals to discern who is trustworthy, capable, or worthy of recognition, and thus to determine how to translate these signals into social status, access, and decision-making power.
For example, guilds in medieval Europe attested to the craftsmanship of artisans; enjoyed word-of-mouth among tight-knit tribal communities; academic accreditation at universities; and used credit ratings to assess the likelihood that someone would default on their financial obligations.
Additionally, in today’s digital environment, technology platforms have explored ways to identify reputations based on observed behavior rather than wealth. Examples include Googles PageRank algorithm, Reddits reputation scores, and Amazon and Yelps peer reviews. However, these systems are often less connected to wealth and relationships, but are often limited to specific environments and cannot be generalized to wider areas. Additionally, they are susceptible to fraud and abuse.
Of course, large-scale reward systems are not without significant social risks. The key is balancing the power of technology with the goals of decentralized design.
Web3 provides the possibility for merit-based online governance
For the first time in history, Web3 enables us to design and implement highly trustworthy reward systems that are available at scale.
For example, the immutability of blockchain ensures that rewards are not tampered with and recorded in a secure manner, while smart contracts can transparently automate the implementation of rewards, reducing the need for intermediaries.
MakerDAOs delegate compensation system is an example of exploring reward systems in Web3, and I will discuss other examples later in this article.
These reward systems, based on new mechanisms for building trust and distributing rewards, may be designed with participation from a broad user base to democratize the governance process of an entire technology platform or other online community.
Two core challenges in designing reward structures
Two important issues in designing a reward system are:
What should be rewarded?
Who gets the reward?
What should be rewarded?
Models such as college competency or skill certificates or credit scores are rough models of trustworthiness, contribution, and value of skills. The key to deciding what to reward is determining whether this is a true reflection of reputation.
For example, in online governance, users may receive reputation scores for actions such as voting, attending town halls, or submitting governance proposals. So, besides recording how often these things are done (quantity), is there a way to assess the effort and value (quality) of this behavior?
Who gets the reward?
At the heart of determining who gets a reward is aggregation, and the tricky part is creating a standardized method and explaining it in a common language.
When it comes to reputation, metrics are often context-specific: for example, credit scores reflect financial trustworthiness, driving records measure responsible driving, and restaurant cooking skills are assessed online.
These metrics are not meant to be interchangeable; for example, an excellent credit score is no guarantee of a persons cooking abilities. But in online communities using reputation-based governance, it may make sense to incorporate a more inclusive view of reputation.
So how should we weigh these different components of reputation, and how do we fit them into the broader social context? Should reputation be designed to encompass all the contents of someone’s crypto wallet, including finances, identity, and even virtual art and property?
Reputation system vs token based system
Token-based rewards are transferable, while reputation-based rewards are non-transferable. One might wonder which one should be used and why.
Early experiments in Web3 governance were often token-based, but the current trend is toward more reputation-based systems as the default because of the clear advantages if successfully implemented (summarized in the table below).
Overall, reputation-based governance may be reasonable for meritocracy that prioritizes long-term community consistency, while token-based governance may be more suitable for projects that prioritize scalability and liquidity. On the access/participation dimension trade-off, reputation-based systems may favor early community members who can start building reputation earlier, although token-based systems are more suitable for wealthy individuals. In terms of defending against Sybil attacks, reputation-based systems aim to overcome the Sybil vulnerabilities inherent in token-based systems (such as the Beanstalk hack) by associating reputation with identity. However, this may raise privacy-related concerns depending on the method used to verify identity, although these concerns can be overcome with zk-SNARKS or other types of zero-knowledge proofs.
In practice, it may be reasonable to incorporate some combination of tokens and reputation scores. Optimisms bicameral system, that is, the reputation-based Citizen House and the token-based Token House, will be one of the implementation methods, but there is a lot of room for design. Past research has argued that reputation systems should rely on a pair of tokens, one to represent reputation and the other to provide liquidity. Other projects are exploring dual governance models where staking token holders have veto power over governance token holders. In the case of Lido, both LDO and stETH tokens are transferable, although it is conceivable to build non-transferable reputation-based governance tokens into a similar dual-token model.
Token based system
“Token-based governance” refers to a system in which incentives or rewards are tied to the ownership or acquisition of fungible tokens. For example, Uniswaps UNI token can be used to vote in Uniswap governance.
The transferability of these tokens makes it easier for new participants to participate in protocol governance compared to reputation-based systems, although these systems could potentially lead to oligarchy, where those with more capital have greater influence . Token holders have a direct financial stake in the success of the project, which incentivizes them to vote with the purpose of promoting their own long-term financial value.
Unfortunately, the financial interests of token holders do not always align with long-term non-financial community interests. Examples of these types of tokens include Ethereum ERC-20 tokens, Cosmos ICS-20 tokens, and Solana SPL tokens.
Currently, most projects use the one coin, one vote model to vote on decisions about the project. For example, in MakerDAO, MKR token holders can vote on protocol changes to support the risk parameters of the collateral of the DAI stablecoin, etc. In the decentralized lending protocol Aave, AAVE token holders can vote to decide which projects should receive funds from the Aave ecosystem reserves. On decentralized exchange Uniswap, UNI token holders voted on fee structure changes for the UNI token, which affects how transaction fees are distributed between liquidity providers and token holders.
In token-based systems, some examples of reward mechanisms that have been implemented for distributing transferable tokens include:
Airdrop: Tokens are distributed to wallets at discrete points in time based on specific eligibility criteria. Airdrops are often used to incentivize certain actions, promote new projects, or distribute ownership more broadly within the community. DeFi protocols (such as Uniswap), Layer 2 solutions (such as Optimism), blockchain identity solutions (such as ENS), and even NFT projects (such as Yuga Labs’ Bored Ape Yacht Club) have all experimented with airdrop rewards.
Retroactive rewards: Optimism has implemented multiple rounds of retroactive rewards to distribute tokens, sending OP tokens to users’ wallets. The contributions of these users support the development and adoption of Optimism public products to enable a wider OP Stack ecosystem. Examples of public goods include adding code to the developer ecosystem, contributing to user experience and adoption, or actively participating in Optimisms governance. Winners are selected through community nominations and Optimism Citizens House voting.
Liquidity mining: Users receive token rewards by providing liquidity to decentralized exchanges or liquidity pools. Decentralized lending protocol Compound Finance and derivatives liquidity protocol Synthetix are examples of protocols that issue token rewards through liquidity mining. Compared to airdrops that are implemented at discrete times or multiple times, liquidity mining sends users a continuous stream of tokens to lend and borrow. This is similar to anonymous mining in Tornado Cash, where users are rewarded with tokens by depositing them into an anonymous pool.
Voting Escrow: To participate in governance, users must lock their tokens in voting escrow. Users can increase their voting power by locking their tokens for a longer period of time. For example, DeFi exchange Curve Finance uses veCRV (voting custody CRV token) to implement voting custody. In Curve, locking veCRV for a longer period of time can lead to greater improvements in addition to increasing voting power. This can also serve as a defense mechanism against flash loan-based governance attacks.
reputation based system
Reputation is earned, not bought. While reputation can also take the form of a token, it is not implemented in the same way as a fungible token that can be bought or sold on the open market. In practice, reputation most often utilizes non-fungible tokens (NFTs), such as the ERC-5114 (Soul-Bound Badge) tokens in Ethereum. The Optimism Citizens House badge and Polygons proposal for reputation-based voting via Polygon ID are both examples of current identity-based governance systems. Reputation-based governance might work in practice in a variety of ways, including peer attestation, automated scoring based on observable behavior, or centralized curation (later in this article, I outline the trade-offs between different reward mechanisms).
Assuming that reputation tokens can take the form of non-transferable fungible tokens (e.g. if transfer functionality is disabled in ERC-20 contracts), one might be able to use non-transferable fungible tokens to leverage community members in a more fine-grained way. Contributions are rated.
These reputation-based governance systems distribute influence more equitably and potentially provide greater witch resistance. However, reputation-based systems do have inherent challenges, such as scalability and subjective measurement of contribution.
Reputation-based governance rewards are still in the early stages of implementation. Some examples of potential ways to earn reputation include:
Automated Behavioral Metrics: Reputation is automatically calculated based on users’ observable actions within the system. For example, if a person attends a citizens meeting, their reputation score may be awarded one point, while voting may be awarded 5 points. Such behavioral indicators may be hardcoded into smart contracts.
Peer attestations: Reputation is established through recognition or evaluation by other participants. This approach uses peer ratings to go beyond observable behavior, which may provide a better assessment of participation quality but requires incentives for people to spend time rating their peers. A key challenge here is to deter bribery or other forms of reputation buying. An example of peer attestation in practice is the Boys Club DAO partnership with Govrn to allow members to record DAO contributions that can be attested by other community members and ultimately converted into retroactive rewards. Another example is contribution-based proofs to increase the accessibility of governance, as proposed by the Optimism Governance Forum, possibly using something like the Ethereum Attestation Service (EAS) to create, verify and revoke proofs.
Centralized Selection: In the early stages of a project, a dedicated team manually selects individuals and assigns them high reputation scores based on set criteria. As the system develops, decentralization can gradually be achieved, allowing the wider community to play a greater role in improving reputation standards. This approach aims to balance the initial stages of quality assurance with the ultimate goal of fully decentralized governance. Vitalik Buterin mentioned this model in an August 2021 blog post, stating that “the simplest solution may be to launch the system by manually selecting 10-100 early contributors, and then participate as the Nth round is selected The participants will determine the participation criteria for the N+1 round and gradually achieve decentralization.”
Since reputation systems are not simply purchased on the open market, there is a lot of room to design how reputation rewards are earned. The following table summarizes the pros and cons of different ways for ecosystem participants to gain reputation:
What powers do rewards have?
In addition to deciding how to distribute rewards, a key issue is determining the value, access, privilege, or influence that the rewards bring. Currently, most Web3 governance systems use transferable tokens that can be converted into voting rights, where one token equals one vote.
Different types of value can be combined with rewards. Whether rewards are transferable (token-based systems) or non-transferable (reputation-based systems) also affects the implications of these decisions, but at a higher level these powers can be combined with transferable or non-transferable reputations .
What form does the reward take?
Governing power. Rewards translate directly into the ability to vote, delegate, serve as a delegate, issue proposals, or other governance functions.
Non-governance utility: Rewards are directly converted into non-governance utility within the online system. For example, this might include special access to community groups and events, priority access to staking, special avatars or community status symbols, etc.
IRL Rewards: Rewards translate directly into IRL (real life) benefits, such as participation in official events (e.g. meetups, workshops, webinars) with community members, physical giveaways, or other non-digital consumables.
Successful reward structures are likely to involve a mix and match of the nature and objectives of the project, while governance rewards may correspond to different combinations of governance power, non-governance utility, or real-life benefits.
Tradeoffs when designing an online governance reward system
To review, there are various factors to weigh when designing an online governance reward system. A projects answers to these questions will impact whether its reward system should be adjusted based on reputation or tokens.
How is information collected and aggregated into rewards?
How do rewards translate, with the goal of enabling interoperability of rewards (e.g., reputation scores) between different ecosystems (e.g., cross-chain interactions)?
Does the plan have an intermediary designing the rewards or is it primarily based on decentralized interaction?
Want rewards tied to a real-world identity or anonymous account?
Is Witch Resistance critical to the project and reward system?
Are there plans to combine reputation tokens with transferable tokens?
For a project, whether to use token-based governance depends on whether the project is civic or economic. As I outlined before, there are trade-offs along specific dimensions (e.g. scalability, access, privacy, anti-Byzantium, etc.). While there are defenses for token voting (e.g. participation stakes), a common concern with token-based governance systems is the potential problem of oligarchy, where wealthy actors have disproportionate influence, which clearly goes against Web3 concept.
Reputation systems are designed to work by linking governance or other powers to the reputation an individual acquires within a community. However, non-transferable reputation systems are difficult to implement due to the complexity of measuring and verifying reputation.
Therefore, exploring reputation-based governance and other ways beyond transferable token voting is an open and potentially fruitful area for decentralized governance.
Ive outlined some considerations about implementing reputation systems, but this is an evolving area and I look forward to further discussion and experimentation in ways to design effective online democratic governance systems.
