DAOs and the free-rider problem
Last updated
Last updated
The free-rider problem arises when a good or service has private costs and non-exclusive public benefits. A typical example is a fireworks display. The fireworks can be enjoyed by anyone in a given area, whether they pay or not (if they don't have tickets, it's hard to stop people from looking up to the sky).
A lot of people may want a fireworks show, but if you only get a private benefit (the pleasure of watching the fireworks yourself) and not some in the public good (other people's enjoyment of the fireworks), then you probably don't have enough money to arrange a fireworks show .
In a DAO, all token holders benefit from good governance, whether they participate (create proposals, vote on proposals).
At the end of the day it doesn't matter as long as there is good governance but I'm not someone who relies on the goodwill of some people to work for the whole team - as anyone who has experienced team projects in school can attest this doesn't always work bring the desired result.
Also, the current state of affairs can have a centralizing effect - if your private interest is a large part of the collective interest, you are incentivized to participate, i.e. in the case of a DAO, you own a large percentage of tokens.
What if we privatized some of the benefits of governance participation?
I say we pay people to participate in governance. Those who participate should receive greater rewards in the protocol. From another perspective, we should punish those who do not participate in governance by diluting their stake in the protocol.
On-chain governance has two main activities - creating proposals and voting on proposals.
While I think it's important to incentivize the creation of good proposals, I don't think there should be a one-size-fits-all solution.
Voting, on the other hand, should take a more formal approach. In all the DAOs I've seen, there is no clear incentive for voting, so non-voters get a free ride. I think voting should bring a clear reward of more governance tokens proportional to one's voting balance.
I discuss some potential incentive-voting-reward inconsistencies below and how to address them.
My solution is to give a higher reward to the vote that eventually wins. This encourages token holders to vote for the best option and incentivizes people to try to convince others of their point of view as well.
Another type of free-rider voters can simply wait until the voting period is nearly complete, and then vote at the end after the results appear to be certain.
My solution was to have a reward decay schedule. The voting reward should be highest at the beginning of the voting period and decay to zero at the end. This encourages token holders to stay on top of upcoming voting and due diligence proposals before the voting period begins.
Another potential way to game voting rewards is to create useless proposals and vote on them.
However, many DeFi protocols, including Uniswap and Compound, have some level of spam protection built in — proposers must meet a minimum threshold for delegated voting rights. Although incomplete, one solution to this problem is to exclude proposers (and their delegated voting rights) from voting rewards.
If it becomes a problem, the voting threshold can be raised to stop this type of behavior.
Direct voting is not for everyone. In my opinion, it's hard to understand more than 2 or 3 protocols to be an active participant, assuming you have the ability to devote a lot of your time to DeFi governance (I've been told that most people, unlike me, are life outside).
For many DAO token holders, delegating to active community members makes the most sense. The beauty of voting incentives is that it makes representation not just a labor of love, but a potential career.
By default, voting rewards will accrue to voting addresses, i.e. delegates will be rewarded not only for their own voting power, but also for the voting power of everyone who delegates to them.
While this is great for delegates, it doesn't leave much momentum behind your token delegation. It is easy to imagine a delegation contract that allows the delegator to return a certain percentage of the reward to the delegator. Delegates will compete on two fronts:
1.How well they are represented (high voting participation, good reputation, good judgment, etc.)
2.The percentage of the reward they return to the delegator
DAOs (and web3 in general) provide a rich design space to create incentive programs that allow us to build better applications. However, the current DAO voting model is not inspired from an incentive perspective.
Voting rewards can better incentivize good governance and create a competitive marketplace for delegation.
Creating proposals is hard work and should be rewarded through bounties, , and one-time payments. Proposals are not created the same in terms of their difficulty and impact (parameter updates are simpler than rewriting contracts and generally have less impact).
One way to game voting incentives is to simply vote (always "yes", always "no" or randomly) on each proposal for a reward, regardless of the proposal. It's not even hypothetical at this point, as implements a lovely that only allows you to downvote each proposal.
