TLDR:

• Existing DAO design rewards freeloaders/social media personalities/whales

• KPI Option Auction DAOs (KOA DAOs) are a type of Decentralised Autonomous Organisation (DAO), where voters vote on proposals by purchasing options in an auction

• Purchased options pay out for the proposal achieving KPIs

• Reward savvy token-holders long-term for suggesting proposals

• There are many configurations, including voting power decay, a securities market and alternative compensation structures

DAOs suffer from a feedback loop problem. When an investor submits a proposal for a DAO, the sole validation for their submission, post acceptance, is tied to a project’s token float.

This feedback loop for proposals is a highly inefficient and impossibly noisy way of measuring value created. It rewards lazy tokenholders at the expense of the community, personalities and leaves everyone at the behest of powerful whales.

A solution?

This article proposes a solution to the feedback loop problem: a DAO with voting power awarded for predicting proposal impact on DAO KPI metrics.

Participants in the DAO must regularly leverage their creative and predictive expertise, and purchase tranches of options representing the KPI payoff of proposals fed into the DAO.

Successes in voting translate into “credit” tokens soulbound to successful bidders: these represent either a static increase in voting power generated by tokens. These credits can be used to distribute treasury yield, or to control the right to certain features.

Long-term, this means that only voters that understand ways to create value for the DAO are able to vote.

For example, a DAO has indicated that they want to increase TVL for their protocol. A proposal comes in to create a partnership with a cross-chain bridging platform. The proposal requires $100 invested in it to pass, and the KPI metric for TVL increase is measured in a year.

The KPI options are auctioned cheapest to most expensive relative to the unlikelihood of the outcome coming to reality.

Over time, the options are purchased by members of the DAO, and as more of the options are purchased, the cost of the options increase, reducing the amount that can be owned of each. The proposal is activated if there is a sufficient amount invested in the auction of the option tranches (in this case $100).

Later, the KPI metric is measured relative to before the proposal’s introduction, and the options are exercised by the investors if they came to fruition.

Punishing exploitative freeloaders

This design punishes exploitative freeloaders (ie, a VC that prevents a protocol from going on another chain that competes with their interests, at the expense of the protocol) and provides extra revenue for savvy tokenholders not at the expense of the DAO. It aligns interests for the DAO around a singular north star – KPIs are explicitly defined and successes are measured relative.

Projects including Aragon and UMA have discussed and implemented KPI options. Their approach is the creation of options that unlock tokens upon the accomplishment of KPIs, incentivising the communities to strive with the team to hit those deliverables to receive ownership. UMA used this approach during their token raise. This article’s suggestion differentiates itself in that KPI metrics are defined in each proposal in auction format.

Rewarding sophisticated tokenholders

A DAO with voting power driven by KPI options rewards small tokenholders with a keen understanding of the market and the product.

It rewards an understanding of the execution skills and core competencies of the team and punishes needless failures of execution. A system of encouraging tokenholders to purchase options sold in an auction for the KPI outcomes encourages two-way dialogue with the project’s core team.

Simpler UX and solving creativity

This financial underpinning can be leveraged for very simple UX: members of a DAO community can simply answer a poll to indicate how strongly they feel about a proposal. Behind the scenes the position is purchased without the user interacting.

It solves the problem of creativity in a DAO: proposals for the DAO’s future are rewarded accordingly for their impact. Inventors of an idea are rewarded for the idea’s inception, incentivised to see their idea along it’s entire lifecycle and rewarded for the execution.

Frustrating takeovers and punishing poor performing teams

An added benefit is the frustration for ransackers: A would-be ransacker would be required to take a longer time horizon view, needing to gradually accumulate bets in proposals that increase their voting power. A higher amount of voting credits relative to others implies sunk cost in the understanding of the product, and a level of familiarity with it’s community and core team. Having to compete with an entrenched community that understands how to drive value adds increased cost in a takeover, and if the new tokenholders retain the DAO structure and fail to deliver value themselves, the added cost of a lack of a moat would presumably embolden other takeovers (in an arbitrage situation and presuming they don’t immediately sack the treasury).

Ransackers only have an advantage in their size and coordination if the tokenholders are so paralysed that no-one has any credits from making correct bets, indicating a very poorly functioning DAO. A poorly performing DAO in this context is one where tokenholders fail to succeed at all in submitting votes and accumulating credits, and voting power reverts to the base tokens. This situation could indicate a team that is failing to deliver on submitted proposals, one that is decoupled from it’s community. A situation like this would revert to the base ransacking power seen in other DAOs.

Goals for the DAO

KPI goals for the DAO form the basis for it’s “lag indicators” – indicators that it wishes to affect through programs and goals. It’s important that these metrics are difficult to game.

For a finance protocol, these might include:

1. TVL contained in the protocol

2. Average dollar amount held by each unique address in the protocol

3. Chains supported by the protocol

These metrics provide a singular north star for the DAO. These metrics can be made available to query with smart contract execution, or queried with a oracle. The following are some suggestions on implementing these KPI metrics:

For 1) a single function called “getTVL” could be written into a factory contract that scans connected contracts for the TVLs available, using a pricing oracle, if available. This could have issues if the tokens are susceptible to a lack of liquidity given the opportunity for price discovery abuse. The implementor might instead choose stablecoins as the sole metric in another function, as this could be harder to abuse.

For 2) another function could be written that calculates the average distribution of tokens across wallets nominated by an off-chain party. An optimistic use of a fraud proof could be used to punish improper submission of available wallets, though a futarchy oracle could used instead. The specific configuration of supporting this KPI would vary.

For 3) A simple oracle could be used as a metric. The successes of this metric could be tied to another reward, including the TVL on these respective chains.

Metrics provide the DAO a goal to optimise for. They are felt in traditional organisations in the form of OKRs and KPIs. We will review how this format could be tied to the release of loans and other sources of funding in the tail end of this post as an additional line of discussion.

Features for the metrics

There are several features that could be enabled. A few are suggested and discussed below:

Vote epochs with limited carry-over of increased power from the last epoch

This is safe and simple. It rewards consistent idea creation and participation over a long time horizon.

The DAO establishes voting epochs: each month/year, weighted voting is held normally and at the end of the epoch the voting power resets to 0 for everyone, or some amount of success from the last epoch carries over. This incentivises participation without the decision-making pool becoming stale.

Natural language oracle for reviewing successes in retrospect

This is useful for understanding whether a “fuzzy KPI”, or a KPI that’s hard to measure, came to pass. It also reduces the complexity for the DAO to construct their contracts in a way that’s compatible with this system! Simply put, an oracle (ie, a UMA oracle) could be used to ask if the proposal was a success in retrospect. A distributed justice system, ie Kleros, could be used to challenge an oracle’s take with regard to technical nuance, or an alternative system could be used. Beware of abuse!

Securities market for the purchased KPI options internal to the DAO

The DAO can allow the community to trade the options on an internal securities market to the DAO. The team can optionally provide liquidity in the market with virtual amounts of liquidity, with the promise that any compensation received for a correct bet with an option is rolled over to the next epoch or bet (if it’s in use).

A comprehensive securities market empowers the token-holders to reflect all the available information in the sale of the KPI options over the life of it’s execution. It discourages a practice that may be common in the option purchasing during the auction: a fog of war where purchases are made last minute, so as to cause the proposal to reflect any available information. This securities market will provide members of the DAO with a ticker of the performance of the proposal relative to it’s KPI. This information can be leveraged effectively to improve the execution of the suggestion, as well as for an executive team of a DAO to pull the plug on any bad proposals as they’re in progress.

Market-making the sale of the option in the securities market may be needed by the DAO, with the team beforehand setting their expectation of the price of the contracts. This could be done with a heuristic or quoted using the initial values of the auction. Or a random walk could be used, hoping that injecting enough random noise into the value discovery reduces the complexity of the market.

A securities market for the KPI options insulates investors from the risks of discovery over the lifetime of the outcome. This approach requires a greater amount of participation or capital management from the less inclined, and rewards active engagement.

Minting governance tokens and emitting them to the DAO tokenholders over time

Incentivise successful idea vetting by distributing tokens to winners of the epochs, or by implementing a burn mechanic that doesn’t affect the winners. Obviously a greater amount in circulation means reduced value, though presumably the pace of growth of the product would offset this. This potential configuration rewards savvy tokenholders for their successes.

Reward good proposal creation with protocol revenue

Reward successful predictors/submitters with proposals with a share of protocol revenue.

This configuration is fantastic in that it incentivises cash-seeking outsiders and underwrites research work held externally. This type of participant is seeking revenue without complexity, with a high quality of decision-making and predictive skills. Cash-seeking outsiders of this kind could be an institution that pools their funds to de-risk the potential of missing out on token revenue. Paying out cash like this incentivises other financial structures without the pains of liquidity or pricing future cashflows.

The struggle of this configuration includes the chicken and egg problem of the cashflow and a potential slant towards unsustainable protocol revenue generation (ie, arbitrage with the treasury versus the token price). The cash compensation could be bootstrapped with an initial amount from the team.

Lend out the tokens people stake and pay the yield for doing so

This approach is complex and exposes the DAO to systemic risk. Lending the tokens provided implies the tradeoffs of including reward suppression and token oracle price manipulation. It does not misalign incentives around potentially short-term revenue generation, and it does involve solving the chicken and the egg problem of yield, however. This could make it attractive to do if the complexity is worth it.

Bell curve of purchasing power

A curve could be observed for token power in the life of the auction of the contract, with token power increasing then diminishing to reflect information discovery and communication. This explicitly prices into the purchase of the contract a specific timeline of consideration.

Quadratic purchasing of options for individuals

This feature could reduce the power of individual investors, and incentivise them to spread their beliefs. It could mitigate against the risk of an individual monopolising a single contract the moment it becomes available. The risk is that tokenholders will replicate their votes across various addresses that are unaffected by this restriction, so this could be considered ineffective?

Quadratic purchasing of options for everyone in a time quorum

Punish and dissuade group-think, with an added cost of complexity, with the benefits of less coherent voting at the outset.

For a small amount of time (once a day?), votes could be applied in a quadratic style, in that more votes in a time block will gradually peter off in their strength. This could incentivise the creation and sharing of information throughout the life of the proposal. This could be similar to the bell curve of purchasing power, though unlike the bell curve it does not punish parties that race the most likely contract available. Later stage investors would be forced to reach consensus earlier, encouraging the quicker release of information.

Gradually rewarding the options for the results

Options could be paid out incrementally, with an optional dispute mechanism that could be applied with a separate quadrant of the DAO to incentivise longterm participation.

Treasury premium

Scale the voting requirement based on the treasury ask. This would present a roadblock to treasury compensation to the effect of the DAO growing it’s treasury until the right idea comes along. This could make sense in a down market where revenue growth isn’t fantastic.

The inverse could be considered, by lowering the requirement for proposals, for example, in a period of a lack of activity:

Opportunity cost schedule/trouble meter

An opportunity cost schedule (optionally controllable by the core team in situations of information asymmetry, ie a personnel challenge) could control the flow of incoming proposals.

The team could configure proposals in a time quorum to increase in expense towards the tail end of the time period, or optionally tweak it themselves at their leisure. A opportunity cost schedule could disencentivise proposals during periods that are not favourable to the team or community. It could control the flow of incoming proposals to happen at the same time, allowing the proposals to be batched together for consideration relative to each other.

This tool could function as a “trouble meter”, to act as a gauge to control the flow of incoming proposals without exsplicitly turning the feature off. This could be cranked up to indicate internal drama, for instance, or, as a show of strength to the community, turned way down.

Conclusion

KPI Auction DAOs are a unique construction that could make it easier for projects to proactively engage their community for value creation. It’s the author’s hope that we can build this technology and popularise it, and even gamify it, to make engaging in a DAO more exciting!

It’s my hope that this is an avenue for preventing abuse, and that we can someday leverage this technology to eliminate some of the bad smells of tradfi from creeping into our ecosystem.

---

Please reach out at @baygeeth (recently set up) if you have any feedback, or via Discord at bayge .

S*houtout to Erik from Fluidity Money for suggesting decaying voting power and Erik from Matos Club (please consider checking it out - great community!) for his suggestions re the flywheel, and the overall presentation of the doc. Thank you *Shahmeer for your encouragement to write something and your feedback!

---

Please check out Fluidity Money - we’re building the incentive layer Fluidity using some novel raffle design! Keep an eye out for Superposition - an Arbitrum Orbit appchain sequencing DEX that rewards you for using it!