Governance 2.0 - Signal Proposal

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

DXD Influence

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 Influence

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.

REP Influence:

  • 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.
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Some additional materials on Gov 2.0 Working Group if you’d like to dive in further:

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Huge applause here for Chris for moving this forward and to everyone helping out and giving feedback during the last couple of weeks!

I like Chris’ proposal a lot, there are just two things I would like to have changed:

1. REP is hard to get, DXD is not

This approach naturally favors REP holders, as it is easier for them to obtain DXD (especially at these prices) than it would be for DXD holders to obtain REP.
A suggested solution to this problem would be to airdrop REP to DXD holders and to be more aggressive with REP distribution. This could very well work, but it will mean quite a bit of extra, ongoing, custom work.

2. DXD is still second class citizen

One big and constant complaint from DXD holders is that REP holders don’t care about them or that they feel constantly belittled by them, despite them providing all the capital REP holders are getting paid by.
Governance 2.0 should be a chance to fix this misalignment, but giving DXD holders comparatively less influence to make decisions right out of the box just feels like the whole purpose of Governance 2.0 is to just throw DXD holders a stick so they shut up.
We have a huge misalignment of incentives right now - Governance 2.0 would certainly reduce that, but with these proposed numbers DXD holders will still feel like second-class citizens and the problem will not be solved.
(On top of that, I haven’t heard any justification for why REP holders should have more weight)

Ah and one more thing:

Why not 10% or 20%? :grin:

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I affirm the suggestions for the improvement of this great proposal and the attitude that belie the suggestions. I have not independently confirmed your math and would not trust my math to confirm it anyway. However, the math expressions and equations themselves seem logical to me. I am not clear about the bonding curve. Overall, I would like to support this Governance 2.0 Proposal.

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Excellent proposal, @Powers ! The Governance 2.0 process has been a bit of a grind, but it’s very exciting to see all of the discussions and ideas regarding voter engagement and DXD holder voting rights come to fruition. Thank you for all of your work on this. The equation and many other points are extremely well done.

I do, however, support @HeyChristopher 's concern that the initial voting power distribution seems inadequate to address the lack of managerial rights DXD holders have in this decentralized organization. The initial voting power weight should be 50% for both DXD and REP. DXD holders should be allowed to have equal rights to that of REP holders. Under our current formula, you still need to hold both REP and DXD in order to vote. So, interests should still remain aligned for many of those participating in voting.

I think a further discussion needs to be had of what exactly it is that DXdao is concerned with in not giving DXD equally weighted voting power to that of REP. I understand security concerns where bad actors attempt to drain DXdao’s treasury by quickly buying DXD to vote. But we are requiring some REP ownership in order to vote, which is not so easily obtained, and DXD must be staked in a governance contract or liquidity pools to vote. Let’s play out these concerns regarding security to address them with solutions other than limiting DXD voting power.

Also, to confirm, we are – it seems – airdropping some REP to current DXD holders? That is what I understood from this part of the post:

REP is inflated 5% and distributed to:

  • Addresses that bought DXD off the curve
  • DXD holders
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Hi @Powers,

I am just after some clarification here:

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.

Will this 10,000 DXD be distributed only to existing REP holders prior to the 5% REP inflation? Or will those that fall under the criteria of curve buyers and DXD holders be able to receive from this 10,000 DXD distribution as well?

The way it is ordered in the bullet points makes it seem to me like the 10,000 DXD is for only existing REP holders.

In addition to this, It seems like an enormous amount to be given out proportionally given some REP holders have >5% of the distribution. This would mean a minimum 500 DXD airdrop to these wallets. At ATH USD price, this is $250,000. At ATH ETH price, this is more like a $650,000 USD airdrop. Does this sound reasonable? Personally, I don’t think so. Unless I am misunderstanding something fundamental about the proposal here…

I’d like to see some more clarification around why this 10,000 DXD distribution is necessary in the first place if possible.

Cheers

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Hi @kobello,

From what I took during the last Governance 2.0 call, the DXD airdrop would be to pre-existing REP addresses, not DXD holders that will be receiving REP as a part of the Governance 2.0 transition.

To your point regarding the 10,000 DXD airdrop – we need to likely adjust this. As you pointed out, the distribution in DXD is very uneven. Currently, 6 ETH addresses hold over 50% REP. Under this DXD airdrop plan, that means 6 of 452 addresses will receive more than half of the DXD distribution, approximately $825,000 at current market rate.

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Increasing the circulating supply by 20% and giving the tokens to yourselves is an outrageously greedy plan.

At least distribute the 10,000 DXdao after this next round of REP has been allotted. Let everyone get in on that unnecessary dilution.

Sorry, I meant to say inflation. Increasing the circulating supply is inflation. Thinking that the original REP holders deserve 10,000 more DXdao tokens for free is delusional.

I think this is a good proposal addressing the issue of lack DXD holder voting rights.
I would also favor a 50-50% split.

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I have to agree with @kobello and @SlimDelgado here that I’d like to see some clarification around why the 10,000 DXD airdrop is necessary as part of a governance proposal? In fact it could be argued that REP holders having to earn or acquire more DXD to maintain their voting power in the future, while DXD holders having to participate to gain more REP to increase theirs, would align incentives perfectly with the new 50/50 governance structure proposed. Workers receive DXD each month, so they should hold or be able to obtain DXD for voting naturally? Existing REP holders that aren’t participating and/or voting deserve free DXD airdropped even less and may well just claim it and dump it on the market as it vests.

Simply handing out $17m worth (at bond curve price) of DXD from the treasury is a very big deal, especially if the purpose of this work was to finally provide DXD holders with a real say. On top only a handful of wallets hold more DXD than the big existing REP holders would receive under this proposal, meaning that DXD holders potential influence are simply undermined again immediately when it comes to practical voting power.

Just think of the narrative here… I have bought app. 200 DXD over time for ETH via the curve and Uniswap. I am presently -70% or whatever down on that and I’ve been waiting patiently for a say in governance. And now that governance 2.0 finally comes, someone who’s had a big say all along receive 2.5x that amount of DXD voting power (and a ton of free cash) in an airdrop, while I get 1/4 of the relative REP. To simply maintain my expected “voting share” I’d now have to also buy 40 DXD more in market while others would be dropped 10-13x that simply for “voting” purposes?

As minimum we should clarify;

  • Also, what’s the reasoning for inflating REP by 5%, but inflating DXD in circulation by 20%
  • Will the 10k DXD be distributed to REP holders prior / after the planned 5% REP inflation?
  • How would the distribution look (like, how many addresses and the expected distribution).
  • What is this planned airdrop hoping to achieve that can’t be achieved any other way?

Not a fan of any governance proposal that can even remotely be interpreted as making a small number of individuals wealthy on the treasury’s direct expense, while they are the only ones who can vote for it in order to benefit themselves. That would smell very bad to me.

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The intent as I understand it is to empower DXD holders and dispel any notion of their being two “camps” in DXdao. We’re all members of DXdao and our interests should be fully aligned. I agree with changing the weights to be 50/50.

When you look at the impact of the specified changes, there is a shift in control from REP to DXD. In control terms, DXD is gaining 50% influence at the cost of 20% inflation to circulating supply (no change in total supply). From that perspective, Governance 2.0 favors DXD, as I believe it should, since the point is to move from the current set up where DXD has no voting power to it being fully incorporated.

Another way to look at the 10,000 DXD being allotted to REP holders is as a reward for their early involvement, and more importantly, as an incentive for their continued involvement. “Airdrop” is definitely the wrong term here. While DXdao is not really comparable to corporate entities we are familiar with, I think a useful analogy here is to compare this reward/incentive program to option pools at startups. Even if we look just at circulating supply, 20% going to contributors is very much in line with what a typical option pool would be, and that’s without considering how much startups usually set aside for founders. In other words, this reward/incentive program is far from greedy and almost by any comparison, the curve buyers, who can be thought of as seed or early investors, having greater than 80% of the pie is amazing for the DXD holder.

In terms of a potentially uneven distribution of voting power, I believe the maximums set are intended to keep things well distributed. I think perhaps we should consider a combined maximum as part of this proposal as well.

I agree that the breakdown of the distribution should be further analyzed. And also agree that non-participating REP holders should not receive a significant amount.

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All up for discussing incentives etc. but I think the thing to be very sensitive too here is that this can not just be conflated with an option pool;

Options pools are normally;

  • Agreed in size and terms when investors sign the shareholder agreement. The terms are known and can be negotiated by investors before they agree to them.
  • Employee options are normally subject to 4 year vesting and 1 year cliff conditioned on continued employment (and often certain other conditions and goals too). So if an employee doesn’t continue work for 4 years they don’t receive the full amount (which is very different from just time vesting in a contract with no recourse on the options). No company would ever do that and claim it incentivises people going forward. Any employee could leave and still reap the benefit of all the others’ hard work.
  • In incentive terms we as investors are basically handing over a 20% option pool upfront while none of our goals have yet been achieved, and with no guarantees whatsoever on the future involvement of those people we decide to reward? Except we’re not handing it over, it is decided by the beneficiaries themselves without the investors say. This fact alone makes it a sensitive discussion.
  • Normally the allocated option pool of app. 20% (similar to what we had after seed) is designed to last all the way until the company is liquidated and cover all employees to that point, or at least to later stages of the company’s growth (series C/D with 100+ people). What do we do with all the next employees that didn’t get any of this “option pool” but whose coworkers got potentially millions worth? Only viable solution is then to hand out more of the DXD treasury in options. So how much more will we have to dilute the treasury and when? Is there an actual strategic plan or schedule for this that take scaling into consideration? As curve buyers we ultimately have less than 33% of the pie… not 80%.
  • The founder concept is also flawed here as founders are rewarded more shares because investors invest at a stage where certain proof points have been reached and funded by the founders themselves. Founders in a traditional startup also have added responsibility and exceptional risk; years of no salary, personal liability over losses, legal liability etc. etc.

Without the above differences properly addressed, I’d reserve the right to call it an airdrop…

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I think the most doubtful point here is what a big chunk of treasury DXD goes directly to REP holders instead of serving interests of DXD holders (as in whitepaper/manifest). I suggest that while DXD holders stake their DXD the reward goes to REP holders instead of “airdropping” treasury DXD

Retaining employees is vital to the success of this organization. Increasing salaries is a good way to keep people happy, and of course giving out bonuses is another way. Are bonuses included in the formula that determines how much an employee earns? I don’t think so.

Typically 3-10%?of the payroll goes to bonuses. Here in the crypto sphere the % could be higher, I’m not sure.

What I find most problematic about the 10,000 dxd situation is the precedent that it would set. Basically letting current and future investors know that the uncirculated coins are for the founders to give to themselves. While simultaneously paying themselves with the other funds, the ones that we all invested in to the project.

From the outside looking in I see an amazing organization operating with an unparalleled transparency, filled with smart, hard working people, it’s truly impressive. But, now as the time has come to distribute REP to investors, thereby diminishing your own voting power. You have in the name of “governance” attempted to slip in this pork barrel gift to the founders. Meanwhile all the investors that bought dxd from the curve are down right now on the dxd:Eth ratio. Everyone that is except for the original REP holders. You all were here during the early bird sale when there was a flat price of .05 Eth per dxd. So the folks that benefited from the dirt cheep dxd sail are now each entitled to hundreds of dxd tokens as a gift… it’s a terrible look.

How would this 10,000 dxd bonus to the founders add value to DXdao? And at what cost? One clear issue or cost would be the further erosion of investor confidence.

One last thing, I would like to apologize for accusing people of being delusional in my post from the other day. Very rude of me, I’m sorry.

Great discussion in the thread above and on the Governance call. I will respond to the DXD distribution comments separately, but some things there are some things I plan to update in the signal proposal text.

  • [Voting Power] Combining REP/DXD Influence: 50% DXD Influence and 50% REP Influence, both with min/max parameters of 65%/35%
  • [Voting Power] Overall Max: The new voting power equation has a REP max and a DXD max, but there is not a consideration for the overall max influence for an address. This is challenging to map out now, because DXD Influence is dependent on the amount of DXD staked in governance. In implementing this proposal, additional research into a mechanism to create an overall maximum for influence in the voting power equation may be needed to maintain the goal of decentralization.
  • [Migration Process] REP inflation to DXD holders:
    • The snapshot of DXD should occur at the time of signal proposal submission
    • In addition to the proposed 5% inflation to DXD holders, some REP may be distributed to DXD holders that participated in the DXD Guild
  • [Migration Process] Future DXD distribution to REP holders
    • The snapshot of REP holders should occur at least 6 months from the signal proposal passage
    • Only REP holders that have participated in DXdao governance are eligible. This should be focused on active participants to DXdao governance but also as a way to reengage dormant REP holders.
    • DXD will be vested for 3 years from when the Gov 2.0 system is implemented . The vesting contract should retain the ability to revoke DXD distribution to addresses that don’t act in accordance with DXdao’s best interests.

I’d also like to add this language to the bottom of the signal proposal:

“This signal proposal encapsulates the overall structure and design of a new Governance system for DXdao that sustainably intertwines REP and DXD. Implementation of this proposal will require additional technical details that are unknown and outside the purview of this proposal. This flexibility will allow the new system to account for unforeseen developments, but the implementation process should abide by the text and spirit of this proposal to the extent possible”

I will add these updates into the text of the signal proposal.

For Wednesday’s governance discussion, I think we should discuss these changes and the DXD distribution to REP holders plan.

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To get my bias out of the way, my company Caney Fork holds 1.72% REP, but I was a DXD holder first and then started contributing over the summer to DXdao and have earned a salary in ETH & vested DXD and monthly REP awards (0.1667%) since September.

Some broad points:

  • In the current system, REP holders control all of the 100k pre-mint and all of the treasury. The Gov 2.0 system is a compromise to bring in DXD holders into the governance system, which was not part of the bonding curve (only a claim on revenue/profits from products). I believe including DXD holders in governance and control of the treasury will improve its governance capabilities in the longterm. Buying DXD from the curve was an investment in future revenue claims from DXdao products. In the Gov 2.0 system, DXD holders will also get 50% ownership of the treasury and the DXD pre-mint. Anyway you look at it, this is a concession by REP holders (a very necessary one).
  • Before there was a well-funded treasury, lots of compensation was in REP. DXdao existed a year before DXD existed. The launch of DXD took a lot of work and several workers were compensated in REP and some ETH, but the ETH payments were listed as ‘DAO debt’ until DXdao could raise the funds. The contributions before the Worker Compensation Guidlelines v2.4 were ratified were very REP heavy and were explained because “REP controls the treasury”.
  • I think this creates good incentives over the short-term and long-term.
    • In the short-term, it encourages more participation in DXdao governance, because the REP snapshot would occur 6 months from now. This would encourage dormant REP holders to become more active and also incentivize newcomers to earn REP. Of course, DXdao has already established precedents and norms around REP distribution (workers, REP boosts, etc).
    • In the long-term, any distribution should follow very restrictive vesting (3 year vesting from new system implementation or 4 years from signal proposal passage?) and I also think it could be slashable in some way (like REP is). This means that all REP holders will be very incentivized to see the price of DXD go up in the long-term. And the current crop of REP holders is a very good distribution imo. YFI has one of the best distributions in DeFi, because during the fair launch, all of the biggest DeFi investors farmed YFI. DXdao’s REP distribution in 2019 and the curated distribution since are some of the best and brightest in Ethereum (of course, I’m biased). We want them to be financially incentivized to help DXdao.

These thoughts are from myself and Caney Fork as a REP holder (and voter). I see it as an important way to incentivize long-term alignment from a strong community & team to DXdao. However, I don’t know what other REP holders think, and in my role facilitating the Governance 2.0 working group, I want to find a solution that passes and is implemented, which means getting approval from REP holders as a whole.

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I think the REP snapshot 6 months from now is a great way to engage dormant REP holders. It’s also a better way to incentivise those that actually participate in governance, than those who will just claim the DXD and run. We obviously need to do our part in putting the community on notice about the DXD distribution.

Regardless, I imagine that the number of REP holders that will have voted by the time the snapshot takes place will be significantly lower than the total 452 REP holders. According to Deepdao.world, 25.3% (114) REP addresses have ever voted on a DXdao proposal. Even if say 50% (226) of all REP addresses have voted by the time the Snapshot occurs – which is highly unlikely – we should consider reducing the DXD distribution to 5,000 DXD or 10% of circulating supply.

As a side note, I don’t consider this DXD distribution to function like an option pool. This distribution is essentially rewarding REP holders for doing “the right thing” in giving DXD holders equal voting rights. REP holders could choose to vote down this proposal, which would have negative consequences for DXdao.

If DXdao would like to implement an option pool, I believe it should be metric driven – as option pools predominantly are – to incentivize paid contributors to meet certain goals. This would be a part of a new budget going forward and could encompass somewhere between 15-25% of DXD supply.

1 Like

This all sounds more sensible. I think it is okay that there is some incentive for current REP holders to do the right thing. We can discuss how much that should be. Also like the idea that those people will have to be active for a while (say 6 months) to get it - or become active again to get it.

There is also still the question of whether the 10,000 DXD will be distributed only to existing REP holders prior to the planned 5% REP inflation? If all DXD holders had a share it would maybe also feel more equitable, even if the majority still went to existing REP holders.

Also creates a reason to hold both DXD and be an active REP holder the next 6-12 critical months.

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As already mentioned on DXdao.eth
“DXD is the DXdao native ERC20 token, DXD token holders have an economic claim to the DXdao´s revenue
What is the most important revenue that DXDAO has ever earned? The obvious answer is its treasury, So:
DXD token holders have an economic claim to the treasury