Governance Series: Reputation Systems in Governance

A low barrier of entry along with a native token compensation model is a driving factor for attaining and retaining contributors in DAOs.

Holding the tokens of a DAO is an easy way to allow contributors to participate in governance while ensuring they have some skin in the game. The values that align us with those of a DAO’s are a major incentive to keep us within the DAO.

However, a pragmatic problem arises for committed contributors. How can contributors liquidate their tokens in order to pay for their bills while still holding on to the governance rights of the DAO they truly care about?

Most DAOs use coin-voting mechanisms for governance. The problems of coin-voting have been widely discussed, but iterating upon it through quadratic voting, token-vested mechanism, or liquid democracy enables DAOs to thwart plutocratic capture and resist Sybil attacks. These iterations are good for the short-term, while capturing and distributing reputation will enable protocols to build upon sustainable and robust governance systems.

Reputation is an important aspect of web3 governance, as it helps to ensure that decisions are made fairly and democratically, while also incentivizing participants to contribute to the growth and development of the network or ecosystem. Capturing reputation from off-chain and on-chain activities will set the foundation for Sybil-resistant and contribution-based governance.

Building composable reputation systems in web3 will enable protocols to be governed based on contribution, enthusiasm, and participation. Reputation systems present an opportunity for web3 protocols to incentivize high-quality contributions, which is crucial to the growth and sustainability of any project. Decentralized IDs, Soulbound Tokens (SBTs), and web3 native badges & levels set the tone for reputation-based governance that cannot be purchased, but only earned through contribution.

The innovations in on-ramp facilities to bring off-chain reputation to the blockchain and collate it with on-chain reputation will form a foundation to build a social graph that will aid resilient governance systems.

Two-pair Token Systems

Rewarding contributors with native tokens has been common practice in most DAOs.

These tokens, apart from being used to compensate for contributions, also signal reputation and serve as a stake for governance rights. Using the same token for reputation and compensation brings contributors into a situation where they have to liquidate the tokens to pay for their bills at the expense of losing out on governance rights. This presents a paradox of reputation tokens; if a token can be transferred easily, then those without a reputation can simply purchase it, which reduces the token’s ability to serve as a reputational signal.

“A Novel Framework for Reputation-based Systems” proposes a two-token reputation system, whereby one token serves as a non-transferable reputational signal, and the other token is a transferable asset that can be easily liquidated. By promoting a feedback loop, this system effectively addresses the paradox of reputation tokens. Users receive non-transferable tokens for their high-quality contributions, and when aggregated to a certain limit, those tokens can be used to derive transferable tokens that are easily tradable.

As a practical example, dxDAO utilizes a two token governance system.

Mapping Reputation Systems

The data points associated with capturing reputation scores are scattered across the ecosystem, while the inability to on-ramp verifiable reputation from off-chain sources remains a strong challenge. Mapping these reputation scores and making them composable enough can help us draw a reputation graph that can be used across the ecosystem.

Being able to assign a score based on the data collected could serve as a basis for building reputation-based governance. Orange Protocol uses data from multiple points to generate a score that can be used to mint an NFT based on the scores received, which in turn could be used for voting activities. Cliqueis an example of querying off-chain data and bringing it on-chain.

While data is available from multiple sources, the question not only arises on the quality of these sources but also on the way scores are calculated. Andrew Hong, in the article “The Landscape of web3 algorithms”, has mapped web3 scoring systems based on context, generalization, level, and ELO-score. Generalized scores for reputation are good for comparisons, while contextual scores are better for analyzing health over time granularly. ELO-scores mean your score is more dependent/ranked against the actions of other parties, while levels are more like going up and down.

Mapping reputation will help contributors, creators, and protocols to synthesize the right and relevant reputation systems. Being able to map reputation on these axis’ will enable DAOs to filter the contributor funnel, and subsequently work out a governance model that works best. Suppose new contributors can be funneled to general and level scores, while matured contributors can be funneled through contextual and ELO-based scores.

Delegate Visibility

A delegate is an individual or a group/protocol, such as a DAO team, that serves as a representative for token holders who choose not to participate in governance directly.

The reputation held by delegates is the most important capital they possess. Governance contributions of delegates range from voting (on-chain and off-chain), Discord/forum discussions, new proposal creation to giving feedback on proposals, and could even be as simple as sharing relevant materials. Reputation systems can make these contributions more visible while also holding delegates accountable.

Karma has created a delegate dashboard that captures data from delegation stats, snapshot voting stats, on-chain voting stats, forum and Discord activity. This data is translated to display voting participation, voting history, delegate commitment message, voting reason, and a display of scores assigned through a weighing process from all of these activities. They’re also combined with badges that complement the delegate dashboard in capturing multiple reputations.

A visibility layer for delegates based on reputation improves transparency and accountability.

Soft Skill-based Reputation

Most systems that capture reputation are thoroughly based on on-chain and off-chain data.

This is because a negligible amount of consideration is given to reputation deriving from soft skills and specific contexts. LinkedIn’s endorsements are a close real-world analogy to that sort of system. Certain contributions such as reliability, filling up a team member’s role in absence, and being persistent about a goal even without results are some of the contextual contributions that lack acknowledgment or are difficult to translate to web3 governance.

Praise used by Giveth and Token Engineering Commons is a novel reputation system that gives praise to individuals from peers on a contextual level while aggregating to receive tokens that can be used for governance and liquidity. Recognizing and rewarding contributions fosters a culture based on giving.

As organizations scale, it becomes difficult to acknowledge these kinds of soft contributions. Developing a peer-peer reputational scoring system along with granting SBTs for continuous performance would incentivize soft-skill contributions while also helping in taking the score on-chain and making it composable with other reputational systems.

Attestation Services

Attestations and badges have become an important primitive in making reputation more portable.

Representation of a person’s identity, accomplishments, attendance, and works — an on-chain resume of sorts — is possible through attestations with the use of NFTs and SBTs. The transferable NFT is a poor choice for a reputation token, largely due to its limitation to being transferable and irrevocable, along with the lack of standards narrowing their composability.

While SBTs that are bound to a wallet largely reduce the limitation of transferable NFT through features such as non-transferability and the right to dissociate, adding social recovery and enabling privacy layers on top of SBTs could further drive the adoption of SBTs. Attestations are a further upgrade from NFTs and SBTs.

Attestations are statements or evidence about anything issued by anyone to an individual or a protocol. Use cases of attestation such as identity verification, reputation building, voting systems, and content authenticity can sharpen governance and carry reputation across the ecosystem. Attestation in a governance context can be used for reputational building by vouching for one’s trustworthiness, reliability, and behaviors. Attestation as a verified credential can be used to authenticate access to DAOs with an NFT.

Ethereum Attestation Service lets you make attestations and build your own schemes using a no-code solution. Attestation Station on Optimism is a smart contract for attestations that provides an open and easily accessible platform for developers creating applications based on reputations.

Closing Thoughts

As DAOs are innovating to accommodate reputational capital, the systems discussed above should ideally work as complementary to each other rather than being competitive solutions.

Reputation-based governance will put governance in the hands of those contributing to the DAOs while valuing decentralization. Furthermore, adopting reputational systems based on context and funneling contributors can help DAOs create a custom-made reputational layer.