Should DAOs pay delegates?
By Fig Gowen and Raphael Spannocchi
Paid delegation you say? The absurdity.
Delegates, once a luxury for DAOs, are now becoming critical stakeholders within these organizations. Pioneered by MakerDAO, compensation is growing and expanding, with murmurs of Aave adopting a similar construct.
Well, why pay them you ask? What’s the point?
Why Pay Delegates?
Reason 1: Paying delegates leads to high-quality participants, encouraging greater competition and competence. As the decision-makers within DAOs, delegate work has become a full-time job.
Long readings, new proposals arriving daily, and lots of meetings — compensation is an attempt to compete for and attract delegates’ attention. As Web3 grows in terms of products and opportunities, the true governance organizations (including ourselves) now require greater discretion.
Where should I play? For how long?
DAOs like Maker are not only competing with other Ethereum-based communities, but cross-chain as well — Osmosis, protocols on Solana, and Alogrand are all introducing significant work loads.
Reason 2: Another reason to pay delegates is to attract talent from traditional Web2 companies. Money is persuasive — to stay competitive with large finance and tech firms, web3 must be willing to offer similar compensation. The relevant subjects for delegates and their decisions are legal, financial, or organizational development; Experts in these fields command some of the highest salaries. We are just missing doctors!
Reason 3: Paying delegates protects risk and downside. Delegation has become a full-time job, it’s true. Especially for multi-billion dollar treasuries and 2+-year-old products. There is important history, a robust schedule, and precarious politics which all must be learned and understood. Some folks are leaning into this time commitment — and opportunity — leaving the comfort and stability of a normal job.
Delegates can lose all of their compensation in a moment. Decisions by delegators are often opaque and unpredictable, with little feedback. If a loss of income was a risk, so is the lack of important benefits; there’s no proof of stable income (for leases or mortgages), no health insurance, no 401k match, and no snacks in the HQ either.
Necessities that we often take for granted are immediately forfeited when becoming a career delegate or “protocol politician.” To incentivize people to take this risk, DAOs must pay proportionally. Few older, experienced individuals are going to give up the security of health insurance (for themselves and their family) for the chance to have hard-capped earnings, and exposure to daily drama.
I thought this crypto stuff was about asymmetrical upside?
What if delegates don’t get paid…
But if delegates do not get paid, DAOs are at the mercy of delegates donating time. Depending on their financial situation, delegates have to prioritize paid work, even during emergencies.
Enthusiasts, true fans, and wealthy idealists are the only ones who’ll stick to an unpaid role. Or malicious actors who fake it, until they can execute a governance attack.
Open source software development shows that even the most widely used libraries fall into disrepair if their authors do not get compensated for their work. It’s just too frustrating. At some point in time authors say: “Screw that, I don’t feel valued for what I do.”
Increasing delegate compensation is a scary conversation, but it’s important to think about the role of decision-making and what distributed ownership means to a DAO.
A healthy pay is a vote of confidence.
Ideally DAOs pay in native tokens to align incentives between the DAO and delegates themselves. Treating a token as a form of equity, delegates will aim to increase the value of the token, rewarding users, investors, founders, and core team members, especially if some of the pay is on a longer vesting schedule.
Paying delegates — a series of games
How do you attract talent? Meaningful, challenging work and great pay, in a nutshell. The rationale is simple: Attract top talent and make sure they dedicate enough time to YourDAO™ so governance is the best it can be.
Paying delegates presents an interesting game theoretical challenge. Delegates should not feel compensation is money raining down from the sky that they’re entitled to, but compensation for grit, smarts and work. Let’s look at paying delegates as a series of games. Well, not actual games, like Dungeons & Dragons, but the game theoretical kind, where we look at the downstream effects.
Game 1: Introducing delegate compensation
YourDAO™ decides to pay delegates for their work, so they can prioritize governance over other projects, even if they arepaid ones. How much should the DAO pay? Pay too little and governance work will feel cheap, some faithful supporters might even feel insulted. Pay too much and it’ll rip a hole in the budget.
From a game theory perspective compensation introduces the potential for rent seeking and value extraction. Delegates can earn money, so the rational thing to do is to earn it with as little work as possible.
Those who delegate their tokens should — in theory — check the performance of their delegate and remove delegation if they are not happy with their performance or their choices, for that matter.
We have seen delegation to be very sticky in practice. Redelegation often incurs transaction fees and can involve a lot of tedious work, depending on the applied opsec of delegators. We’ve also seen custodians like Fireblocks or Anchorage have a rather lukewarm attitude towards governance. Without guessing their intentions, they represent very concrete obstacles to both voter participation and redelegation for their users, which include many funds and institutional clients.
In practice certain kinds of rent-seeking behavior are more widespread than they need to be, because the checks and balances are not as effective as they could be. These are simply market forces at work.
Another potential issue is self-delegation. If delegate compensation is sufficient, actors could in theory simply delegate to themselves and then do just enough to hit participation metrics and get paid. We have not seen proposals for adequate compensation to make this attack feasible in any DAO, but it’s certainly something to be aware of. MakerDAO is probably the DAO with the best delegate pay at the time of this writing, but even here delegates could hardly make more than 1% APY if self-delegating. This is certainly not worth the effort.
Setting incentives to mitigate these game theoretical challenges is more of an art than a science, and certainly takes a couple of iterations to get right. The most obvious and probably effective strategy is to only pay delegates that have been vetted by the community. This reduces the Anon account problem, and creates a meaningful barrier to entry. But even then the DAO is well advised to make sure these delegates actually perform. Some sort of metric or performance tracking is the best way to solve that issue. Metrics make performance visible and are hard to argue with. Of course now YourDAO™ has to decide which metrics to pick and how to tie performance to pay. Which is exactly what our next game is about.
Game 2: Tying compensation to the amount of tokens delegated
YourDAO™ now decides to pay delegates who represent more voting power more than delegates who don’t represent a lot of voters. The rationale here is that top delegates have already put in more work for the community or are more renowned and the DAO wants to attract these delegates.
Should there be an upper limit to compensation? If not, the only way not to make compensation crazy expensive is to have small delegates receive very little. Which could mean compensation doesn’t work for them. They’d still have to work other jobs to make a living.
If an upper limit is introduced, game theory tells us that the rational choice is to just get about as much delegation as is necessary to reach the cap, and not more. Delegates who have reached the maximum aren’t incentivized to do their best work, because they don’t need to attract any more tokens.
The golden route here is to have an upper limit to delegation compensation that is hard to reach, even for the most motivated delegates, while still scaling compensation quickly enough that even smaller delegates feel valued and can put in the necessary time.
However, this metric is not enough, because delegates get paid regardless of their output. Of course YourDAO™ only wants to pay active and diligent candidates.
Game 3: Tying delegate compensation to activity
Let’s introduce performance metrics. The two most obvious parameters are voting activity and communications. Voting activity can be measured on the voting portals and on-chain, while communication strength can at least crudely be measured by forum activity.
Paying delegates to vote only is too crude. The rational choice for a delegate would be to simply vote Abstain on all polls and already qualify for compensation. So YourDAO™ measures forum activity to see if delegates are active members of a community.
Remember that delegates need to be recognized by the community before they can qualify for compensation. Community recognition is a good filter to weed out any delegate who games the activity metric by spam posting to game his metric. Such delegates would be quickly identified and the community could rescind their status.
The overarching problem of Goodhart’s law still remains: “when a measure becomes a target, it is subsequently no longer a good measure”. If metrics determine payment, they can and will be gamed.
Or to keep it simple: designing a good delegate payment system is as much art as science.
Delegate compensation metrics will need to be iterated upon until a DAO finds a sweet spot. Since most of this will be governance regulated, it introduces yet another interesting game: Should delegates be able to vote on their pay? And if not, who can vote, if most tokens that actively vote are already delegated?
Conclusion
Not paying delegates means forfeiting access to top talent and specialized organizations, who’ll move to greener pastures. Paying delegates presents a decent set of game theoretical challenges to set the incentives right.
At the same time that pay is introduced, expectations for delegates should be declared, and the bar should be high.
Quality delegates bring value to DAOs by delivering thought leadership, strategic experience, analytics and business insights as well as excellent responsiveness during emergencies or fire drills. In one sentence: DAOs should pay for quality delegates only.
Despite all the challenges that paying delegates brings, we believe it is worth it and hope this blog post equips DAO governance with the right questions to ask to arrive at the ideal compensation structure for delegates.
By the way, if your DAO is in need of top quality delegates, you know where to find us.
Blog post authored by Fig Gowen and Raphael Spannocchi
