Note: Below is the first draft of a signal proposal to be approved by REP holders. I also plan to submit a signal proposal to xDai and DXD snapshot. I will wait a week for feedback before submitting the proposal. We will also discuss it on the next Governance Discussion (February 3)
The Governance 2.0 Working Group has spent the last couple of months working on finding a sustainable governance system for DXdao. There’s been an underlying tension since the summer; DXdao was launched with a purely Reputational-based governance structure, but last May DXdao launched a bonding curve and the DXD token to raise funds. DXD holders funded the treasury, but have no say in governance decisions as of now.
The goal of the Gov 2.0 WG was to structure a system that aligns the interests of REP and DXD holders, can build and grow DeFi products and protocols, and maintains the ethos from DXdao’s launch and those principles laid out in the DXdao manifesto. In the initial meetings, the working group identified the Solution Requirements for a new system.
This signal proposal is the culmination of those efforts and aims to lay out the structure for a new governance structure. Not everything has been specified and DXdao governance and technical development will be charged with building a fully-functioning system within the bounds outlined in this proposal.
There are three main components of Gov 2.0:
- A new voting power equation
- Good governance incentives
- Migration process to new system
New Voting Power Equation
This is the crux of the Gov 2.0 system as it completely changes who has ultimate power in DXdao. At the moment, proposals are passed purely based on the amount of REP for and REP against. The new system will incorporate DXD into a new calculation for voting power. In this system, both DXD and REP are required to vote or have influence in DXdao.
To calculate a DXdao member’s “Voting Power”, we must:
- Come up with a “DXD Influence” and “REP Influence” & normalize these scores
- Assign weights and add them together
Holding DXD does not require governance participation. To have influence and increase one’s voting power, the DXD must be staked in pools identified by DXdao governance. Additionally, one can increase their DXD Influence by future commitments to DXD staking.
The inputs to DXD Influence are:
- (X) DXD staked - as LPs in DXdao products or in a governance staking contract
- Multipliers can be adjusted by governance to (dis)incentivize certain LPs. Only DXD is counted (if LPing)
- Max: 1,500 DXD (adjustable by governance)
- (X0) Future months committed
- proposed equation = (X0/6)^B
- Staking is committed for X0 months; Max 36 months (adjustable by governance)
- B = some power below 1 (adjustable by governance); higher = favors longer-term investors
- 6 = ‘schelling point’ of expected commitment. 6 months of future commitment gives an output of 1.
Proposed DXD Influence equation:
- X * (X0/6)^0.75
- DXD staked * (Future months/6)^0.75
- Adjustable by governance: B (initially set at 0.75)
REP is earned for contributions to DXdao. Since it is non-transferable and can be slashed, it is more sybil resistant. At the moment, most REP is held by workers and those who participated in the original staking period, but this should be expanded widely and reward a host of positive contributions, such as liquidity provisioning.
Since REP is non-transferable, those with REP may maintain influence even after they’ve stopped contributing. Gov 2.0 introduces a decay function to address this. Moreover, since the current social consensus on a “max 4% REP” is intended to limit a single member’s influence, we can codify this in the voting power equation, which allows REP to scale and be used for non-voting purposes.
- Y = Reputation issued to address; max: 4%
- Y0 = Months since last REP issuance
- Decay function = 1-(Y0/24)^D
- D = some power > 1 will give a slower decay in the first year of inactivity, and faster in the second year.
- Minimum output: 0.05
- Proposed REP Influence equation:
- Y * (1-(Y0/24)^1.5)
- Reputation * (1-(Months since last REP issuance/24)^1.5
- Adjustable by governance: power D (initially set at 1.5), min output (initially 0.05)
The output of DXD Influence and REP Influence will then be normalized to the same scale. The precise method of normalization is left up to technical implementation, but the consensus of the working group is that the scores should be normalized after the DXD/REP Influence calculation and on those primitives that are participating in governance, perhaps periodically adjusted.
Combining REP Influence and DXD Influence
The two normalized scores must then be combined to form a single number for a DXdao’s member’s Voting Power. Assigning explicit weights to REP Influence and DXD Influence gives transparency into how the votes are calculated. Even though these normalized scores are added together, the consensus of the working group was that members participating in governance must have both DXD and REP (minimum amounts determined by governance).
To combine normalized influence scores, a % weight should be applied to each. The weights may change over time, so the Gov 2.0 WG is proposing a bounded range along with initial weights.
Proposed bounded range:
- DXD Influence: min 30%, max 60%
- REP Influence: min 40%, max 70%
Initial Voting Power Weights:
- DXD influence: 40%
- REP influence: 60%
Good Governance Incentives
Governance takes time and resources. In the current system, holographic consensus provides a financial award to those that ‘boost’ proposals by staking a token on proposals they expect to pass. A boosted proposal can pass in an expedited time without a majority vote. This is meant to focus voters’ attention on only the most important proposals.
While there is an incentive to boost proposals, there is no incentive for members to vote on “good proposals”. Currently, some REP holders are constantly monitoring proposals to make sure worker proposals, market curation and other items pass but this is done primarily by full-time contributors and mostly for altruistic reasons.
Governance takes time; it should be rewarded and incentivized. Gov 2.0 WG identified three governance incentives in a new system:
- Rewards to DXD staked in governance
- Retroactive governance ‘bonuses’ - on quarterly, half-year or annual basis, reflect on “good proposals” and reward the proposer AND those who voted in support
- Incentivized Representatives - selected DXdao members (not full-time contributors) who are rewarded for voting on proposals. These are selected by DXdao governance and their voting record will be reviewed to ensure they are not voting blindly for rewards.
The ideal form of reward is vested DXD. DXdao governance may also decide to allocate product fees in lieu of (or on top of) DXD rewards.
Migration process to a new system
DXdao governance is currently only from REP holders. They control the $25m treasury and the 100k DXD premint. DXD holders funded the treasury but currently have no say in governance. These are separate groups now, but both will be needed for governance in the future. To kickstart the migration process and the ceding of control of the treasury:
- 10,000 DXD from the pre-mint will be proportionally distributed to REP holders with 3 year vesting. This DXD can be used for governance staking.
- REP is inflated 5% and distributed to:
- Addresses that bought DXD off the curve
- DXD holders
- REP and DXD need to be pro-actively claimed
- DXD distribution will happen to all REP addresses but a portion may be distributed to those that fit some minimal governance requirements (ie voted on a proposal)
- Additional REP inflation may be airdropped to addresses that have shown governance capabilities in other projects on Ethereum.