Dual-Token Paradigm for Enhanced Reputation

Exploring the Dual-Token design in decentralized governance.

Author

Marathonmind
October 13, 2023

In this edition of the Premia Governance Series, we explore the Dual-Token paradigm that can be utilized for reputation within DAOs.

The article delves into the transformative potential of integrating a reputation-based, non-transferable token alongside traditional liquid governance tokens.

But first, a digest of impactful DAO governance headlines.

Arbitrum STIP Initiative

Arbitrum-native protocols had a chance to gain their share of $40 million in ARB tokens as part of a short-term incentives program (STIP).

Premia was among the grantees with 161M “For” votes, successfully passing the threshold and becoming eligible for a grant of 900k ARB tokens. One of the biggest winners of the proposal was GMX with a whopping 12M ARB tokens.

The STIP is a one-time grant meant to foster and accelerate further growth of the Arbitrum ecosystem in the near-term.

Nouns DAO Fork

NounsDAO executed its first fork, featuring a "last minority protection mechanism."

This allows subsets of Nouns holders to form a new protocol version, balancing ecosystem dynamics.

While forking offers the right to exit and possibly financial benefits, critics fear it could erode Nouns' treasury over time. Notably, the fork is the first instance of DAO forking.

This will test the resilience of Nouns DAO and, by extension, the entire DAO landscape, given Nouns' prominence in DAO governance.

Blockchain Privacy & Regulatory Compliance

Ameen, Vitalik, and others have unveiled a paper exploring blockchain privacy and its alignment with regulatory norms.

The paper delves into "Privacy Pools," allowing users to present zero-knowledge proofs confirming their withdrawals didn't stem from recognized illicit sources.

This potentially enables users to ensure regulatory adherence while maintaining privacy on public blockchains.

With the crypto sector moving towards a world with optional financial intermediaries, it underscores the imperative to collaborate with regulators and introduce compliance tools tailored for self-custody.

RetroPGF 3: Round Design

RetroPGF 3, by the Optimism Foundation, reflects lessons from the previous round.

Improvements include a refined sign-up process for quality data collection, collaborative lists for badge holder evaluations, clearer impact assessment guidelines, and an enhanced voting experience.

This iteration underscores the commitment to iterative learning and community involvement in public goods funding.

The Dual-Token Paradigm for Enhanced Reputation

This article is inspired by "A Novel Framework for Reputation-Based Systems."

We will delve into the transformative potential of integrating a reputation-based, non-transferable token alongside traditional liquid tokens, offering a fresh perspective on enhancing DAO governance, contributor incentives, and decentralized decision-making.

Liquidity vs. Governance Rights

A sustainable crypto token is one that possesses the capability to capture enough utility, enabling token holders to use it for purposes like providing liquidity, governance rights, and easy onboarding and off-ramping.

DAOs typically distribute tokens as compensation to contributors or teams, either in stablecoins or native tokens of the protocol. Contributors are also given a choice in this regard. An inherent problem arises when a token holder opts to liquidate this token for their personal needs instead of holding onto it to exercise voting rights that shape the protocol's future. Moreover, token holders can purchase tokens from the secondary market to exercise voting rights and vote on proposals benefiting either the protocol or the individual stakeholder.

As we delve deeper into the realm of DAOs, it's evident that many DAOs have become inward-looking. Core teams are taking on the bulk of work, receiving compensation in tokens. However, they might forgo governance rights if they need to liquidate these tokens for personal expenses.

Airdrops and Progressive Decentralization

Airdrops are more than just a distribution mechanism; they represent a conscious step towards progressive decentralization.

By dispersing tokens across a wide array of community members, airdrops not only reward early adopters and supporters but also aim to ensure that control isn't concentrated in a few hands, thus mitigating the risks of a 51% attack. This broad distribution is aimed at participation from diversified communities that will propel the DAO forward.

However, achieving this ideal distribution is a challenging endeavor. Even the most meticulously planned airdrops can face threats. Arbitrum, for example, employed Nansen’s Query to enhance its distribution process. Yet, it couldn't completely thwart Sybil attackers who try to exploit the system for undue gains. The constant tug-of-war between achieving genuine decentralization and warding off malicious entities underscores the complexities DAOs face in their journey towards decentralization.

Complexity of Tokenomics

The intricate design of DAO tokenomics aims to maximize utility and safeguard against undue external influences. However, time and again, token voting mechanisms have been exploited due to its liquid nature, lower participation, and lack of quality in decision-making.

Introducing a non-transferable token might offer a layer of protection, governance stability, and enable capturing reputation. This token should ideally have features like expiry, consent to receive, revocability, composability with a voting platform, and also work seamlessly with applications that facilitate roles and access.

Power of Contribution

Creating a second token, apart from the liquid token being received, can efficiently decentralize DAOs if designed diligently. This token can potentially be a Soulbound Token/nNFT, which can be gained only through phased contribution. Reputation can be signaled by this token, which can also be endowed with governance rights.

SBTs/Badges seem to be the most ideal option due to features like the right to consent, non-transferability, operational efficiency, and its compatibility to be used with off-chain voting tools like Snapshot.

Utility and Demand

The utility and demand for the token are two major factors that decide the sustenance of a token. Let’s discuss how these tokens can capture value.

Governance Rights

These badges can be assigned governance value by delegating voting tokens from the treasury to these badges. This is an ideal way to distribute voting rights to active contributors, as they can enjoy voting rights and also use the liquid tokens they received as compensation. The inflation and deflation parameters can be set based on contribution, contribution lifetime cycle, and proof of work.

Access Rights

With decentralized roles and access gaining popularity, the access and roles assigned to this token could make governance more interactive and gamified. It will be fun to give on-chain and off-chain roles such as creating and voting on proposals in Snapshot, Coordinape circle, and other Discord-based roles.

Reputation

Layering the SBTs in levels, such as receiving them in levels, is an opportunity for contributors to build reputation and possibly make it portable as well. Praise has a similar mechanism, where the general public can access a dashboard to see top contributors in a particular DAO.

Digital Identity

Sybil actors in the blockchain ecosystem are a persistent problem, and a token such as this, if composable with other mechanisms, can be a significant deterrent for such actors.

Closing Thoughts

The evolution of DAOs is a testament to the versatility and resilience of the blockchain space.

As these entities become more complex and multifaceted, novel solutions such as the dual-token paradigm can offer a strategic path for enhancing governance, ensuring token utility, and fostering genuine decentralization.

While challenges abound, the promise and potential of such mechanisms underscore the vibrant future of DAOs.

Premia Blue is Live on Arbitrum!

Premia Blue is a DeFi Token Options Exchange (DTOX) featuring a non-custodial options settlement layer with fully customizable options parameters and risk exposure.

Maximize capital efficiency, define your own risk, and optimize fees earned with the leading options protocol on Arbitrum!

Reply

or to participate.