I’ve recently spent some time with Banyan DAO, thinking about how best to reward contributors and optimize value over time. These thoughts below represent some initial thinking on the matter; I reserve the right to change my mind when presented with new arguments or data!

Intro

Banyan DAO is being formed as a way to promote flourishing, invest in people (through training and networking), and invest in new companies (through funding, direct work contributions, and expertise). In designing a compensation and ownership model we have several primary goals which are partially at odds with one another:

1. Build a community-driven organization where strategic decisions and compensation is driven by a network mindset, rather than a top-down hierarchical mindset.
2. Create a model which rewards individual contribution.
3. Create a model which can grow over time, allowing early contributors to realize outsized value and recognize investment during the high-risk “founding” phase.

The conflict arises when we compare inherently inflationary structures (issuing new DAO stake to onboard new members and recognize contributions) against inherently deflationary goals (resale of stake on a secondary market, necessitating a stake pool which is static or growing slower than overall DAO value). In determining the appropriate inflation rate we must consider the total DAO value rather than treasury value alone.

The following is a concrete proposal for issuing stake in a new DAO. For a deeper discussion of the economic assumptions underlying this proposal, please see the further discussion at the end of this document.

Proposal

We begin by assuming that every member of the DAO possesses 1 non-transferrable unit of governance, plus a variable amount of loot stake earned through contributions or created in exchange for tribute DAI.

Compensating Contributors

1. New loot stake is generated (an inflationary minting process) at the end of each season. The amount of new loot stake is based on the length of the season and the total outstanding stake pool. A 1-month cycle would incur a 1% dilution per season, while a quarterly cycle incurs a 3% dilution.
2. The broader DAO votes, in successive rounds if necessary, on the percentage distribution of new loot stake to each active project. This issuance could take place proactively (to incentivize contribution to certain new strategic projects), or retroactively (to recognize impact for completed projects).
3. Once the newly-issued loot stake has been broken down into small pieces, it is distributed to individuals by percentage contribution as determined by a community allocation. (For this discussion I’ll be assuming use of Coordinape GIVE tokens.) Each Coordinape circle must be limited in size to no more than ~25 individuals to maintain community accountability.
4. Optionally, some fixed percentage of the current dilution (1%?) can be auto-allocated to “overhead”, which represents a Coordinape circle compensating broader DAO managers, organizers, etc.

Onboarding New Members

1. New members to the DAO tribute a fixed amount of DAI to the treasury and receive 1 non-transferrable governance token (no monetary value), plus some amount of loot as determined by overall DAO value.
2. The DAI::loot ratio is determined by MAX(current treasury value per loot, 7-day average Loot token price) +10%. Because new members tribute a fixed amount of DAI but receive a variable amount of loot, we would expect that a DAO growing in value would issue progressively smaller slices of loot to later-stage members.

Bootstrapping the DAO

For the special case of pre-season contributors, we begin by seeding the DAO with an arbitrary, fixed amount of loot stake. 10% of all stake is distributed equally among all existing pre-season members. 90% of all stake is distributed to contributing pre-season members in proportion to their work investment.

Effectively, this means that (1) everyone present gets something, and (2) early contributors get most. These loot shares are effectively valueless (empty treasury!), but are expected to grow commensurately as the DAO undertakes economic activities based on the work of the early contributors.

 If all you wanted was the plan/proposal you can stop here. But if you want to know the reasons why then continue reading…

Appendix: All The Detail

Operating Objectives

Before we can begin to value our DAO and determine a compensation scheme, we should consider the basic operating structure of the DAO and its goals. A few common models:

1. Startup / Traditional – In this model, all treasury tokens are re-invested into the business. We optimize for growth. The treasury is always near zero so that value accrues to the business. Eventually as the organization matures excess revenue may be paid out as dividends but the explicit primary objective is growth first.
2. Private Fund  – Here, the business exists for the purpose of growing its treasury. Value may be re-invested into the business for growth, but like Buffett our intended holding period is “forever”. The treasury grows over time and individuals realize value through rage quits and rare dividend-like distributions.
3. Partnership – This entity exists for the purpose of gathering income, but all treasury value is quickly paid out to the stakeholders. Actual treasury size is minimal outside of a small amount of necessary operating income. Traditional analogs include Doctors’ offices and REITs (Real Estate Investment Trusts)

The chosen Operating Objective is extremely important when considering compensation outcomes!

Moloch, Mo Problems

A traditional Moloch DAO issues tokens in exchange for tribute, and members can rage-quit at any time and receive their portion of the treasury. This model maps most closely to a Partnership with shades of the Private Fund. New DAO stake is issued to incoming members (an inflationary action), but is immediately backed by tribute. This keeps the value of the staking tokens stable over time and effectively precludes traditional “liquidity events” for early founders (trading tokens for houses). All value accrued comes exclusively from the value-generating economic activity of the DAO.

If we want to design a more equitable compensation mechanism that truly scales, we must consider the 3 primary owner/investor classes:

1. Financial investors (membership tributes, venture-purchased loot stake, etc)
2. Member contributors (time, expertise, engagement)
3. Early contributors of time or value (there’s a risk premium early that decreases over time, assuming overall success of the venture)

In a Moloch DAO with stable loot stake value and a treasury that increases only through economic activity (running paid events, etc), early contributors are compensated based on cumulative time and tokens invested. Rewards accrue to active participants, but not necessarily early participants who took on additional risk.

Terrible Situations

Consider the case of the early member who takes on high risk and contributes to the founding of the DAO. For this example, let’s assume that the DAO treasury is roughly constant: there’s a small amount of operating income, but most value is re-invested into the business.

1. For this example, new loot is issued over time in recognition of work by DAO members. As membership and work increase over time (increasing the income potential of the DAO, but not its treasury), the value of the early member falls to zero.
2. In contrast, consider an early member who works constantly, earning GIVE tokens and new loot issuance. In this case the member may be successful in avoiding dilution but their total economic value remains constant despite the membership growth and de-risking of the venture. Contribution is truly a zero-sum game.

(Aside: yes, I’m aware that a growing, de-risked venture could ultimately lead to a larger treasury and become valuable, so even a smaller stake of this business could become meaningful. But I still maintain that this situation does not accurately compensate for early risk premium, and is emotionally demotivating to early competitors who must “run as fast as they can to stay in the same place".)

So what’s the solution?

Back to the Bad Old Days

Let’s take a brief excursion into the traditional startup world to provide some context. The problem of company founding, scaling, and payout is a well-trodden road charted and paved through decades of trial and error.

In a traditional company, founders take money from Venture-Capital investors and use it to build an organization with a recurring revenue stream. The company’s Market Value is ultimately valued according to its Book Value + Business Value.

1. Book Value – Assets minus Liabilities. For many new companies this may be zero, or negative!
2. Business value – The forward net revenue stream of the business, times some arbitrary multiple.

This is super important! When determining the value of the business, cash in the bank matters a little bit but it’s the Multiple which has the largest effect.

Example: As of early 2022, a predictable boring business like Citigroup trades at 2.63x earnings while fast-growing and exciting Tesla trades at 175x. Back in 2013 Amazon was reinvesting all of its profits into business growth so it was actually trading at 1000x earnings! That eye-watering multiple was a reflection not of their bank account or profitability, but of their growth and future prospects. It seems to have worked out for them!

The valuation, and thus the payout compensation for early employees, is affected by the multiple more than the current revenue! If founding DAO members ever hope to trade loot stake for houses and retirement funds in the real world we need to consider increasing not only the DAO Book Value (treasury), but also the value of the business.

Implications

This implies that the Private Firm and Partnership models are wrong. We must consider an operating objective closer to a Startup / Traditional company, where the treasury may grow, but primary value is derived from growth of the business. Thus the loot stake must be deflationary relative to Market Value, growing at a lesser rate than the overall growth of the business. This makes loot tokens attractive to contributors as well as outside investors. The presence of outside investment additionally encourages the possibility of future liquidity events even in the absence of explicit treasury distributions.

Just Enough Dilution

If we want to grow, but we want loot shares to behave as deflationary assets, what is the right amount of dilution to incur in each successive season? Here again we have an opportunity to borrow from the world of traditional Venture Capital.

In typical Startup funding model, a VC firm will invest money into a venture, seeking to acquire approximately 20% of the company. These funds are expected to last 18 months before a new funding round is needed, at which point a further 20% dilution will be contemplated. This level of dilution maps to approximately 1% per month. The company must grow by > 1% per month if it hopes to reach escape velocity and become a self-sustaining venture.

Following this growth model, a new Growth DAO should be able to safely issue new unbacked loot stake, for the purpose of compensating contributors, in the amount of 1% total outstanding loot tokens every month. If done on a quarterly basis, this implies a 3% dilution per round.

I’m explicitly assuming that this ~12% annualized growth rate is reasonable and sustainable for many years into the future. Hopefully, growth significantly exceeds 12% so that contributors see a compounding return on their efforts. If growth eventually stabilizes, later contributors will slowly but surely take ownership of the DAO. This is also appropriate and reasonable: In a world of zero growth and monthly 1% dilutions, it would take a cohort of new contributors ~6 years to capture over 50% of the total DAO value (0.99 ^ 72, if you’re curious).

 Distributing Allocations

Inflationary allocations of loot stake must be constant and predictable, regardless of the work performed. This may seem counterintuitive, but consider:

• In a season where very little work takes place, issued stake accrues to the few who do anything. These outsized rewards serve to encourage participation during times when members might be otherwise unlikely to contribute.
• In a season where a lot of work takes place, the rewards for each contributor are small. However, if we assume that this work is done in service of generating economic value, the large amount of work should generate a large amount of market value. Even though the individual amount of loot stake issued will be small on a per-contributor basis, the value represented by that stake should still map to appropriate compensation in the long run.

Coordinape is a great way for recording contributions, but humans are imperfect. Research into human dynamics shows that we are generally unable to maintain deep working relationships with large groups of people. The specific limit is the subject of some debate, and some research indicates that 50 may be the right number. Regardless of the specific numerical limit, value in large groups will naturally flow to the most visible members rather than the most valuable members. Therefore we must take the loot shares and break them up into smaller, more manageable pieces that can be distributed with appropriate local accountability.

Slicing the Pie

So, how do we do that? Especially with 10,000+ members?

In a traditional organization, investment budget is determined top-down: a CEO or Board of Directors allocates funds to different departments, who in turn fund projects and individual hires. In our new decentralized world, the broader DAO membership community takes charge of funding strategies, project areas, and projects. At each successive level, votes are restricted: only members of that sub-groups are eligible to vote on and allocate reward stake to individual contribution circles.

Done properly, we push down ownership and responsibility; we allow each part of the organization to grow and thrive as an independent organism, operating without direct control but coordinated through the collective intelligence of the whole.

Why the +10% Loot Premium?

If new inflationary loot shares can be issued by our DAO in exchange for tribute, and these shares are valued at or below the current market or treasury value of the DAO, we’ve inadvertently created an arbitrage situation where newly issued stake can be immediately flipped for a profit. We’ve diluted existing ownership for no purpose, and the bots will find us. With a 10% premium on new stake we’ll limit issuance to new contributing members or particularly motivated large-scale investors.