This article discusses how the key to democratizing online governance systems is to incentivize long-term civic engagement through rewards, and contrasts reputation-based and token-based systems of rewarding governance participation, exploring how these rewards are obtained and what kind of power they might translate into.The article points out that, historically, social and political influence has tended to be based on wealth rather than on individual talent, and that achieving truly democratic online systems requires preventing the re-establishment of wealth-based hierarchies.In addition, the article cites the difficulty of scaling up a reputation system based on performance beyond the niche environment.
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The key to democratizing online governance systems is how to incentivize long-term civic engagement through rewards. current Web3 governance systems primarily use tradable tokens, but there are obvious limitations to this approach, such as a tendency toward oligarchy, lower resistance to Sybil attacks, and incentives to sell tokens to exit. to overcome these limitations, we need to go beyond token voting. in this paper, i will contrast reputation-based and token-based systems of rewarding engagement in governance, outlining the various factors that need to be taken into account by these systems of rewards for governance, and exploring how to gain access to these rewards and what kind of power they may translate to.
Historical precedents for rewarding contributors
Political influence is usually based on wealth rather than on competence
Throughout history, social and political influence has often been based on wealth rather than individual talent; in ancient Rome, for example, the class of senators was largely based on family background and land ownership; in the Renaissance, wealthy families such as the Medicis of Florence used their wealth to influence politics, religious affairs, and cultural movements; and even in many of today’s liberal, representative democracies, wealthy individuals and corporations influence political affairs through donations and lobbying; and other social institutions designed to reward individual talent, such as college admissions, tend to reward wealthy and well-connected individuals through legacy admissions and alumni donations.
If the goal of Web3 is to achieve a truly democratic online system, the challenge is to prevent the re-establishment of wealth-based hierarchies; how do we prioritize individual talent, value and contribution over wealth and relationships?
Performance-based reputation systems are difficult to extend beyond niche environments
Reputation has always been a way for societies to measure the value of individuals.For centuries, we have looked for ways to collect and aggregate signals in order to identify who is trustworthy, competent or deserving of recognition and, in turn, to determine how to translate these signals into social status, access to resources and decision-making power.These systems include, for example, the guilds of medieval Europe, which attested to the skill of artisans; word-of-mouth reputations in tightly-knit tribal communities; academic accreditation at universities; and credit ratings, which assessed the likelihood of a person’s defaulting on a contract.
In today’s digital environment, tech platforms have explored ways to represent reputation based on observed behavior rather than wealth. for example, Google’s PageRank algorithm, Reddit’s karma ratings, and Amazon and Yelp’s user reviews. however, these systems, while often less tied to wealth and relationships, tend to be applicable only in specific scenarios and cannot be replicated in a broader context; moreover, they are often vulnerable to fraud and abuse. of course, large-scale reward systems are not without significant social risks: for example, China’s social credit scoring system, or saudi arabia’s blacklisting of individuals via spyware, are cautionary tales of the potential for centralized design to lead to anticutopian outcomes. the key, then, is balancing the power of technology with the goals of decentralized design.
web3 allows us to design and implement rewards across environments and at scale, opening up the possibility of performance-based online governance
For the first time in history, Web3 provides us with the ability to design and implement highly trusted, universally usable reward systems on a large scale. for example, the immutability of the blockchain ensures that rewards are tamper-proof and securely documented, and smart contracts can transparently automate the implementation of rewards, reducing the need for intermediaries. makerDAO’s rep compensation system is an example of a reward system being explored in Web3, and I’ll discuss others later in this paper. these reward systems are based on new mechanisms for building trust and distributing rewards, and have the potential to be designed with the participation of a wide range of users to democratize the process of governance over an entire technology platform or other online community.
Two central challenges in designing reward systems
There are two very important questions at the root of designing a reward system; what should be rewarded and who gets rewarded?
What should be rewarded?
Historically, e.g., university accreditation or credit scores are indeed models that roughly represent the value of trust, contribution, and skill. the key issue in deciding what should be rewarded is determining whether the signals represent true reputational performance. for example, in online governance, a user may receive a reputation score for behaviors such as voting, attending a town hall meeting, or submitting a proposal for governance. what is the means of assessing the effort and value of such behaviors (quality), in addition to documenting how often (in terms of quantity) a person engages in these activities?
Who gets the reward?
In Web3 governance, the central problem in determining who should be rewarded is aggregation. the tricky part is creating a standardized way of interpreting the signals, translating them across contexts in a common language. in the case of reputation, metrics are often context-specific: for example, credit scores reflect financial creditworthiness, driving records measure driving responsibility, and online restaurant reviews assess culinary skills. these metrics are not interchangeable, and an excellent credit score is no proof of a person’s culinary prowess. in the case of online communities that use reputation-based governance, though, it can make sense to adopt a more holistic conception of reputation.
So how should we measure these different reputation components and how do they fit into a broader social context (e.g., social graph-based verification)?Should reputation design encompass all of the elements of someone’s crypto-wallet, including finances, identity and even virtual art and property?
Overview of reputation and token-based systems
Token-based rewards are transferable, while reputation-based rewards are non-transferable. the choice of which to use depends on the particular scenario and goals. early experiments with Web3 governance were typically token-based, but there is a growing trend to default to reputation-based systems because of the clear advantages they offer if successfully implemented (as shown in the table below).
In summary, the choice between reputation-based or token-based governance depends on the goals and needs of the project. for elitist systems that value long-term community coherence, reputation-based governance may make more sense, while for projects that value scalability and liquidity, token-based governance may be more appropriate.
On the access/entry dimension, reputation-based systems may be more favorable to early community members as they can start accumulating reputation earlier. however, token-based systems may be more attractive to wealthy individuals. on the dimension of resistance to Sybil attacks, reputation-based systems aim to overcome Sybil vulnerabilities such as Beanstalk hacking that are inherent to token-based systems by associating reputation with identity. however, this may raise privacy concerns, although these may be addressed through the use of zk-SNARKS or other types of zero-knowledge proofs.
In practice, it may make sense to combine tokens and reputation scores. for example, reputation can lead to some, but not all, of the governance functions. an example of how to accomplish this is Optimism’s bicameral system, which consists of a reputation-based civic house and a token-based token house, but there is a lot of room for design. past research has argued that a reputation system should rely on a pair of tokens, one to denote reputation and another to provide liquidity. other projects are exploring a dual governance model in which the collateral token holder has a veto power over the governance token holder. in Lido’s case, the LDO and the stETH tokens are both transferrable, although it is conceivable to incorporate a nontransferable, reputationbased governance token into a similar dual-token model.
“Token-based governance” refers to a system of incentives or rewards associated with the ownership or acquisition of fungible tokens that can be traded on the open market. for example, Uniswap’s UNI tokens can be used to vote in Uniswap’s governance. the transferability of these tokens is more likely to attract new participants to the governance of the agreement than reputation-based systems. however, these systems can lead to the phenomenon of the rule of the rich, whereby the more capitalized have more influence. token holders have an immediate financial stake in the success of the project, and thus are incentivized to vote to promote long term financial value. unfortunately, the financial interests of the token holders do not always coincide with long term, nonfinancial community benefits. examples of such tokens include the ERC-20 tokens from ethereum, the ICS-20 tokens from Cosmos, and the SPL tokens from Solana.
Currently, most projects use a ‘one generation, one vote’ model, where voting rights are proportional to token wealth, for voting on project decisions. for example, in MakerDAO, MKR token holders have voted on protocol changes such as risk parameters to support collateral for the DAI Stablecoin. in Aave, a decentralized lending protocol, AAVE token holders have voted on which projects should be funded from the Aave Ecosystem Reserve. in Uniswap, a decentralized trading platform, UNI token holders have voted on a fee structure for the UNI tokens, which will affect the way that transaction fees will be allocated between the liquidity provider and the token holders.
Some examples of reward mechanisms for distributing transferable tokens implemented in token-based systems include:
Airdrops: Tokens are distributed to wallets at a discrete point in time based on specific eligibility criteria.Airdrops are often used to incentivize certain behaviors, promote new projects, or distribute ownership more broadly within a community.DeFi protocols (e.g., Uniswap), Layer 2 solutions (e.g., Optimism), Blockchain Identity Solutions (e.g., ENS), and even NFT projects (e.g., Yuga Labs’ Bored Ape Yacht Club) have experimented with airdrop rewards.
Retrospective Reward Funding: Optimism has implemented multiple rounds of this token distribution methodology, sending OP tokens to the wallets of users who have supported the development and adoption of Optimism’s “Public Goods,” thereby supporting the broader OP Stack ecosystem.Examples of Public Goods include adding code to the developer ecosystem, contributing to the user experience and adoption, or actively participating in Optimism’s governance.Recipients are selected through community nominations and voting in the Optimism Citizens’ Academy.
Liquidity Mining: Users are rewarded with tokens for providing liquidity to decentralized trading platforms or liquidity pools.The decentralized lending protocol Compound Finance and the derivatives liquidity protocol Synthetix are examples of protocols where token rewards are issued through liquidity mining.Unlike airdrops, which are implemented at one or more discrete points in time, liquidity mining provides users with a continuous issuance of tokens for lending and borrowing.This is analogous to anonymity mining in Tornado Cash, in which users receive token rewards for depositing coins into an anonymity pool.
Voting Pledge: In order to participate in governance, users must lock tokens into a voting pledge.Users can increase their voting power by locking tokens for a longer period of time.For example, Curve Finance, a DeFi trading platform, implements voting pledges through veCRV (voting pledge CRV tokens).In Curve, locking veCRV for a longer period of time provides a greater enhancement in addition to an increase in voting power.This can also be used as a mechanism for defending against governance-based attacks on Lightning Lending.
Reputations are earned rather than purchased.While reputations may take the form of tokens, they are implemented differently from fungible tokens that can be bought and sold on the open market.In practice, reputations are often implemented using non-fungible tokens (NFTs), such as the ERC-5114 (“Soul Binding” badge) token in Ether.The Optimism Citizen’s House Badge and Polygon’s proposed reputation voting based on Polygon IDs are typical examples of current identity-based governance systems.Reputation governance may be implemented in practice using a variety of approaches, including peer attestation, automated scoring based on observable behaviors, or centralized selection (I’ll outline trade-offs between the different incentives in a later part of this paper).
Theoretically, reputation tokens could take the form of non-transferable fungible tokens (e.g., disabling the transfer feature in the ERC-20 contract.) One could use non-transferable fungible tokens to evaluate the contributions of community members at a more granular level, e.g., the number of reputation tokens could be easily split and used to assign ratings to community members on a continuous scale rather than a discrete scale created by a few reputation badges denoted by the NFT. these reputation-based governance systems could distribute influence more equitably, and potentially provide better Sybil resistance. however, reputation-based systems do have inherent challenges, such as scalability and subjective measurement of contributions.
Reputation-based governance rewards are still in the early stages of implementation. some of the potential ways to earn reputation include:
Automated Behavioral Metrics: Reputation is automatically calculated based on a user’s observable behavior within the system.For example, if an individual attends a town hall meeting, they may earn one point for their reputation score, while a vote may provide five points.Such behavioral metrics might be hard-coded into a smart contract.To overcome manipulatability, one could envision town hall attendance being recorded at random 30-second intervals during the meeting, rather than just at the beginning.Of course, the challenge of identifying the nuances behind the participation would still be present.For example, regular attendance might demonstrate a person’s genuine civic commitment, but it might also reflect that someone simply has a lot of free time on his hands.
*** Peer Proof:*** Reputation is built through peer assessment or evaluation.This approach uses peer assessment to go beyond observable behavior and may provide a better assessment of the quality of participation, but requires incentives to take the time to rate peers.The key challenge here is to devise a scheme that prevents bribery or other forms of reputation buying.One example of peer proof in practice is the Boys Club DAO’s partnership with Govrn, which allows members to record DAO contributions, which can be verified by other community members and ultimately transformed into rewards for backtracking.Another example is contribution-based proofs to improve governance accessibility, such as that proposed in the Optimism Governance Forum, which could potentially use something like the Ethernet Attestation Service (EAS) for creating, verifying, and revoking 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.Here, a central team identifies individuals with high reputation status.As the system evolves, it may be progressively decentralized to allow the broader community to play a greater role in refining the reputation criteria.This approach seeks to balance the initial stages of quality assurance with the ultimate goal of full decentralized governance.Vitalik Buterin pointed to this model in an August 2021 blog post, noting that, “The simplest solution would probably involve bootstrapping the system using a hand-selected set of 10-100 early contributors, and then progressively decentralizing the system over time, as the participants selected in the Nth round set the criteria for participation in the N+1st round.”
Since reputation systems cannot be simply purchased on the open market, there is a lot of scope for designing how reputation rewards are earned.The table below summarizes the advantages and disadvantages of the different ways in which ecosystem participants can earn reputation:
What powers do rewards have?
In addition to deciding how to distribute rewards, another key consideration is determining the value, access, privilege, or influence that comes with the rewards. currently, most Web3 governance systems use transferable tokens, which can be converted into votes, i.e., one token equals one vote. however, rewards can have different types of value attached to them. whether the rewards are transferable (in a token-based system) or non-transferable (in a reputation-based system) also affects the significance of these decisions. however, from a macro standpoint, these powers can be attached to either transferable or non-transferable reputations.
Possible forms of these reward functions
Governance Powers: awards can be directly converted into the ability to vote, delegate, act as a proxy, make proposals, or other governance functions.
Non-governance utility: rewards can be directly converted into non-governance utility features in the online system. for example, this may include access to special community groups and events, priority participation in pledges, special avatars or community identifiers, or other direct platform features. in addition, this may include some type of social reward, such as an ‘I voted’ NFT (non-homogeneous token) for those with high levels of participation and a good track record.
Real-life rewards: Rewards can be directly converted into real-life benefits, such as gaining access to official events (e.g., parties, seminars, social workshops) with community members, physical peripherals, or other non-digital consumer goods.
Successful reward structures may need to be mixed and matched depending on the nature and goals of the program. governance rewards may correspond to different combinations of governance power, non-governance utility, or real-life benefits.
Weighing the trade-offs and when these reward functions will be useful
Issues to keep in mind when designing an online governance rewards system
To summarize, when designing an online governance reward system, we need to weigh multiple factors.In developing these systems, the following specific questions may be asked, and a project’s answers to these questions will influence whether its reward system relies on reputation or tokens.
How will the information be collected and summarized for use as an incentive?
How do rewards translate in different scenarios and is the goal to achieve interoperability of rewards (e.g., reputation scores) between different ecosystems (e.g., cross-chain interactions)?
Is the plan to have rewards designed by a central authority or based primarily on decentralized interactions?
Do you want the rewards to be tied to a real-world identity or an anonymous account?
Is Sybil attack resistance critical to the program and the incentives?
Are there plans to use reputation tokens in conjunction with transferable tokens?
Recent research suggests that the suitability of a project for token-based governance depends on whether it is civic or economic in nature. as noted earlier, there are tradeoffs on specific dimensions (e.g., scalability, access, privacy, Sybil attack resistance, etc.). while there are arguments in favor of token voting (e.g., put-in-put gaming), a common concern with token-based governance systems is the potential for tycoon domination, whereby wealthy participants exert a disproportionate amount of influence, which is clearly contrary to the spirit of Web3. another concern about transferable token governance is the potential risk of market exit (i.e., participants selling tokens when the price goes up).
Comparatively, reputation-based systems enable elite governance by linking governance or other power within a community to earned reputation. however, non-transferable reputation systems can be difficult to implement due to the complexity of measuring and verifying reputation. therefore, exploring reputation-based governance and other ways to move beyond transferable token voting is an open and potentially fruitful area for decentralized governance. while some considerations have been outlined with regard to the implementation of reputation-based systems, this is an evolving area, and look forward to further discussion and experimentation on how to design effective online democratic governance systems.