DXdao agrees to governance upgrade

New system, dubbed “Governance 2.0”, combines token and reputation-based governance, unifies DXD and REP in a new voting power equation.

• DXdao aims to align the interests of DXD and REP holders by combining their influence into a single voting power equation. Longer DXD governance lockups will result in heavier weighting. Inactive REP addresses are subject to a decay function.
• New Governance compensation rewards those who participate in “Good Governance”.
• REP to be distributed to DXD holders; additional to bonding curve purchasers. Vested DXD to be distributed to active REP addresses.

DXdao governance passed a signal proposal on mainnet and xDai, approving plans to migrate to a new system and give governance rights to DXD holders. Since its 2019 inception, DXdao has been governed by Reputation (REP) holders; REP is non-transferable and is earned through contributions to DXdao. Last spring REP holders launched the DXD token on a bonding curve to fund product development and direct profits from DXdao products to DXD holders.

Up until now, REP and DXD holders have had informal governance connections, but the Gov 2.0 system introduces a new voting power equation to represent both REP and DXD. Addresses participating in DXdao Governance 2.0 must have both REP and DXD, in order to ensure those that vote have skin in the game and have contributed to DXdao.

The migration will transfer the DXdao’s $35m treasury over to the new REP and DXD controlled system. The system design includes all stakeholders, from investors to workers, and ensures that DXdao can stay maximally decentralized.

The Governance 2.0 plan also outlines good governance incentives and a migration plan that features a REP inflation to DXD holders and a distribution of vested DXD to active REP holders. The new system is the result of months of discussion and research led by a working group made up of full-time contributors, community representatives and folks from DAOstack, Delphi Digital and 1kx.

Unified Governance

Proponents of a reputation-based governance system argue that it puts governance in the hands of those contributing to the DAO and values decentralization, while detractors claim that it lacks the feedback loop of token-based governance. Meanwhile, token-based governance systems can become plutocratic and face short-term price pressure from liquid token voting.

DXdao’s Governance 2.0 system aims to achieve the best of both token and reputation-based governance systems by using a new voting power equation that requires both DXD and REP to pass proposals. To achieve this, each DXdao governance participant will have a “DXD Influence” and “REP Influence” score that is calculated separately, normalized, and then added together at a 50/50 weight to determine overall influence on DXdao governance.

DXD Influence

DXD is the liquid financial value of DXdao. DXdao’s goal, as outlined in the manifesto, is to push decentralization forward and drive value to DXD. Token-based governance does present some challenges, namely centralization risks from large holders, susceptibility to flash loans, and short-termism bias.

DXdao Governance 2.0 addresses these through the “DXD Influence” score, which requires token holders to stake their DXD and increase their influence by committing to a longer lockup. The “DXD Influence” equation is:

DXD staked * (Future months staked/6)^0.75

• DXD staked = as LPs in DXdao products or in a governance staking contract; max: 1,500 DXD (both adjustable by governance)
• Future months = max 36 months; 0.75 or some power below 1 ( both adjustable by governance)

REP Influence

Addresses that have earned REP have demonstrated their commitment to DXdao and can take a long-term, more holistic approach to governance. REP also serves as a decentralization multiplier, because it is easier to inflate than a token with a liquid value. However, REP-based governance is biased towards existing REP holders.

DXdao Gov 2.0 proposes a decay function for the “REP Influence” to decrease the influence of REP holders the further away from a new REP award, ensuring that active contributors have the most influence. The “REP Influence” equation is:

REP * (1-(Months since last REP issuance/24)^1.5

• Max 4% of overall REP
• Adjustable by governance: Minimum decay multiplier: 0.05; 1.5 or some power > 1 will give a slower decay in the first year of inactivity, and faster in the second year.

Since REP and DXD have different overall amounts, to combine them we need to normalize the scores and then simply add them together to get a member’s overall Voting Power influence.

Good governance

Governance is often a thankless task. Projects and communities benefit from those practicing governance but it’s hard to distinguish between “good governance” and “governance theatre”. Too much of current governance is altruistic, which is fine for the short-term, but does not create a sustainable ecosystem. DXdao Gov 2.0 plans to compensate those who practice good governance through three ways:

• Rewards to DXD staked in governance
• Retroactive governance ‘bonuses’ — on quarterly, half-year, or annual basis, reflect on “good proposals” and reward the proposer AND those who voted in support
• Incentivized Representatives — selected DXdao members (not full-time contributors) who are rewarded for voting on proposals. These are selected by DXdao governance and their voting record will be reviewed to ensure they are not voting blindly for rewards.

Vested DXD is the preferred form of compensation, but product fees and revenue may also be considered.

Migration process

The new system requires a fair distribution of DXD and REP and that all governance participants have both. The last component of Gov 2.0 is a plan to more closely align REP and DXD holders, by inflating REP and awarding it to DXD holders and allocating vested DXD for active REP holders. Details are as follows:

• REP is inflated 5%; 4% distributed to DXD holders at time of signal proposal passage and 1% to addresses that bought DXD off the bonding curve.
• 10,000 DXD from the pre-mint will be proportionally distributed to REP holders, with a 3-year vesting cliff. Any REP holder (or new addresses) that participate in DXdao governance in the next 6 months are due 3 DXD (base distribution). Active addresses (voted at least 3 times) are entitled to a proportional share minus DXD from base distribution.

For full details of qualifications, please see the proposal in Alchemy.

Looking ahead

DXdao has a long history of on-chain governance. Gov 2.0 is meant to be a system that sustains DXdao for the foreseeable future, but it will take a lot of technical work (and governance) to fully implement.

In the mean-time, DXdao governance is focused on a couple of other “1.x” features. First, DXdao is expanding to multiple chains and establishing bases to govern its products. There is already a DXdao base on xDai and soon to be one on Arbitrum. Second, DXdao is experimenting with DXD governance rights through the existing REP-based system through a “DXD Guild”, which will allow DXD holders to lock their tokens and vote on proposals.

About DXdao: DXdao is a decentralized collective that builds and governs DeFi products. DXdao was spawned in May 2019 through a collaboration between Gnosis and DAOstack. Reputation (REP) is voting power in DXdao, and DXD is the financial token with a claim on profit from DXdao products.

DXdao products include Omen (prediction markets), Mesa (batch auction DEX), Swapr (governance-enabled AMM), and Rails (L2 payment app).
DXdao believes in governance and decentralization.

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