How to Attract & Retain Delegates: Delegate Compensation
To be paid or to not be paid? A simple but unanswered question for delegates. The camaraderie of being in crypto sometimes precedes one’s financial needs. Is it sustainable?
Sacrificing time, energy, and money was a common theme for the early contributors to crypto. In some cases, it was an important catalyst that brought crypto to where it is, but we are at a stage where contributors can and should be getting fair compensation for their contributions. Delegate compensation currently lies in the grey area, with one-half believing that they shouldn’t be paid and another half seeing it as a necessity.
As we explored in an earlier article, Delegates and Streamlined Governance, delegates enact changes to a protocol on behalf of the token holders. Only a few protocols, such as MakerDAO, Illuvium, and a couple of others, pay their delegates to actively participate.
Failures of the Current Delegation System
Delegation as a practice within the web3 space varies so much on the spectrum, with only very few protocols, such as MakerDAO, displaying a somewhat functional delegation system. The lack of standardization for delegates means that each protocol has different standards for how delegates function within their respective governance system.
With so many protocols considering not worth paying for the delegation role, the honeymoon phase of delegation kicks in. Contributors do it for fun for the first few weeks, but then voting and keeping up to date with the ongoing affairs of a DAO become an un-incentivized chore. Without good perks or rewards, it’s common for delegates to gradually stop interacting with the protocol’s governance systems. The time commitment and funds required to vote become a liability that is not long-term sustainable.
In this case, delegates are the only ones without a slice of “the pie,” while everyone else gets theirs: working groups, contributors, or token holders. Without a “slice”, what else will motivate them to participate in governance?
On top of the (mostly missing) incentive mechanisms, delegates should also have a clearly defined role within the ecosystem. Currently, they are classed as “delegates” but with no specialization or domain focus. It’s similar to a chef, without a specialization.
Chefs focus on a specific cuisine, such as French, but can still cook up other cuisines such as British or Indian, albeit not at the same quality as their French cuisine. Delegates share a similar role. Some delegates might be focused on risk management, growth, or vision. MakerDAO implemented these forms of tags informally, allowing delegates to signify the topics they care deeply.
Though this situation is different from the chef analogy used earlier, displaying the primary focus as a delegate is a step in the right direction. At MakerDAO, though not perfect, this form of display of long-term goals considerably simplifies the decision-making process for delegators.
The Current State of Delegation Compensation
As previously mentioned, very few delegates are compensated for their work. Interestingly, the protocols that choose to pay delegates employ very distinct compensation models.
MakerDAO
MakerDAO utilizes a combination of active factors to determine a delegates’ compensation rate:
- Amount of MKR delegated (Time-weighted average in the past 30 days)
- Performance modifier
- % of voted proposals in the past 30 days
- Participation rate in the past 30 days
In doing so, MakerDAO determines the delegates’ compensation based on their commitment to the protocol rather than paying a flat rate. This motivates delegates to actively participate in the protocol, creating a win-win situation for both the protocol and the delegate.
Their performance modifier, as seen above, also maintains a somewhat fair but disciplined structure to encourage delegates to participate in the forum; otherwise, their compensation will be reduced related to the performance metric. In extreme cases, a delegate can become eligible for zero compensation when their performance metric falls below 75%.
Below we can see the practical implementation of the performance modifier in the top 5 delegates of MakerDAO. A majority of the delegates reach their minimum required performance rate for compensation except for Hasu, who becomes ineligible for compensation due to such a low-performance rate.
Through our delegation work at MakerDAO, StableNode has first-hand experience with decentralized governance. We have combined our practical experience alongside our research to understand what makes a successful delegate system and how we can support other protocols in creating a similar one for themselves.
Illuvium
The compensation mechanism employed by Illuvium differs vastly from our previous example for multiple reasons. Illuvium has constructed a council that has been elected through the token holders utilizing a form of quadratic voting to reduce the impact of plutocracy. The type of quadratic weighting used here differs from the examples we previously explored in various voting mechanisms. In doing so, five members were elected to the Illuvium council for an epoch of six months.
Initially, epochs only lasted three months, and Illuvium council members were compensated with ILV. Through the Illuvium Improvement Proposal 21 (IIP 21), epochs were increased to six months, and compensation was switched from ILV to USDT to provide a more stable income to the council members.
Interestingly, each council member is paid a flat rate of $5,000 per month for six months until their term ends. Regardless of a council member’s contribution, each member is paid the same amount, which differs greatly from the MakerDAO model. Not only that but there can only be a capped amount of members on the Illuvium council, whereas it is possible for anyone to become a recognized delegate at MakerDAO.
Illuvium is still early on its journey to decentralization, with only 23 proposals (as of July 28, 2022) since its inception on July 21, 2021, meaning an increase in council members and compensation is unnecessary. However, their council is an intriguing model since five elected representatives will determine the future of the Illuvium, combining a form of decentralization and centralization.
Future of Delegate Compensation
It has become common knowledge that many token holders are spread across various DAOs and are unlikely to participate in all of them. Still, delegation provides a simple solution for token holders to set and forget their tokens to delegates who can act on their behalf in the best interest of DAO.
Voter apathy continues to be a prominent issue within decentralized governance, and a combination of delegation and delegate compensation will help tackle this problem. To make a delegate’s job more attractive, it is essential that some form of compensation is in place. Otherwise, they will undergo delegate churn. Several months with little to no pay is bearable but only for the privileged, and they are few. Implementing a form of compensation for delegates will open the door to those interested in the role itself and the income that comes with it.
In our opinion, compensation for delegates is somewhat inevitable for DeFi protocols. Sure, that might sound biased. However, we do not see governance voting becoming decentralized and practical if there are no incentives for people to take up a delegate role.
Nouncil: Informal compensation
Nouns are Non-Fungible Tokens (NFTs) that are auctioned daily instead of being sold like the common 10,000 NFT projects. Through this auction mechanism, nouns accumulated a large treasury which currently sits at around 26,250 ETH.
An informal version of delegate compensation spawned out of NounsDAO through the community, Nouncil, which aims to elevate Nouns (NFT) to further heights. These noun builders and subDAO representatives formed the council to participate in Noun governance together.
Although they are an informal group, they received 22.2 Eth from the DAO to retroactively distribute amongst the nouncil members for Q1 and Q2 2022. Using co-ordinape, they identified which members of the nouncil deserved compensation, with 6 out of 14 nouncillors being compensated for their work.
The nouncil model is much more informal than our previous two examples, but they have demonstrated a need for delegates to be compensated for their work. Especially with the number of proposals and forum discussions within NounsDAO, it can become cumbersome to participate.
Closing thoughts
Delegates will play a key role in ensuring the decentralization of a protocol, and the sooner we compensate their work, whether that be retroactive or a salary, the more likely we are to see improvements in the governance space.
The camaraderie of being associated with a protocol through governance can be appealing to delegates, but we need to compensate delegates. Otherwise, their governance activities will dwindle to nothing but “nice proposal” and “great summary” rather than informative, value-adding contributions.
At StableNode, we act as delegates at various protocols, not for compensation but to set a standard of how delegates should perform. We believe that by setting a professional standard for delegates, with a high standard of work, over time, we will attract more delegates to the space. This will make delegation a career for professionals since compensation will also be attached to the role.
Learn more — StableNode Governance Series
