Historically, on-chain governance has predominantly operated under a plutocratic model.
While certain projects have experimented with democratic models through KYC enforcement and the principle of one person, one vote (a system with its own fundamental flaws), the overarching trend has been a shift towards plutocracy, where purchasing more tokens equates to gaining more voting power.
This situation is further compounded in the cryptocurrency domain, characterized by its extreme volatility, often experiencing 100x fluctuations within a single year. Early investors, especially those with insider access such as friends of founders or seed investors, often gain disproportionately high influence post-launch, as soaring token prices render similar levels of voting power virtually unattainable for the majority.
In response, some DAOs have introduced a delegation system, allowing average participants to assign their voting rights to representatives. However, this approach also often falls short in fostering true competitiveness, especially when weighed against the disproportionate influence of early investors or ‘whales’.
Without delving deeply into these historical approaches, let’s explore a novel concept that diverges significantly from past attempts and holds promise: decaying categorial meritocracy.
Sounds like a loaded term, no? What exactly is merit? How can we both quantify and qualify it? The concept of merit often appears intrinsically human, perhaps even subjective.
Indeed, in many environments, this is the case. Even in situations where a record of individual contributions exists, the majority of today’s DAOs tend to conduct what amounts to glorified polling, where core developers still retain the ultimate veto power.
Regrettably, the larger DAOs, where voting and execution processes are both on-chain and autonomous (thus inescapable), predominantly lean towards a plutocratic structure.
So how do we get to categorial merit? How do we define it, and then how do we quantify it?
A categorial meritocracy hinges on three critical components:
- Categories (duh!)
- On chain record of activity and effect
- Somewhere to track merit
Let’s go through them one by one.
It is important categories be clearly defined and activities within them doable on-chain. While it is always possible to hardcode various function calls into a smart contract based DAO, right now, there is only one actual DAO framework which has this built-in: Substrate, or as it is more recently known as: Polkadot SDK.
Chains developed using this framework feature:
- on chain voting in governance, like voting for runtime upgrades, small spends, tips, medium spends, staking administration, runtime constant changes, and more.
- delegation to your representatives, so you can have others vote for you.
- validating and for those who cannot run validators, nominating. Even nomination pools which allows small holders to create pools through which to nominate their stash on validators.
- proposing tips for good content, tutorials, on-chain and off-chain actions and more.
- submitting proposal on which others can then vote.
This makes any Polkadot-SDK based chain by default one of the biggest DAOs in the web3 space. What’s more, the execution of voted-in proposals is enshrined on chain and automatic. It executes on the predefined block without human intervention, meaning there is no one to say “No, we won’t do that”. (Well, technically there is, but through ANOTHER proposal :))
This detailed array of possible on-chain actions paves the way for specialization based on merit.
Obviously then, recording these actions is automatic since can be done on-chain.
In cases like with Snapshot, voting is fun, quick, and free, but it is also off chain and therefore non trackable. It could be oraclized, sure, but this introduces just another SPOF (single point of failure).
If Snapshot were to move voting on chain, it still isn’t enough as votes are disjointed and serve as just a record of different votes by different addresses. The collective merit of an address is missing (more on that below).
But we can consider the “record” to be available to us - it’s the blockchain itself in systems of on-chain executable actions. Now let’s put it to use with the third piece of this puzzle.
Enter modular NFTs. With modular NFTs, all users of a blockchain can get an “avatar” - a non-transferable (soulbound) avatar NFT into which all merit score goes.
This does not have to be a human-looking thing, or even an anthromorphized animal. It can be anything from a stained glass window to a trophy shelf, it doesn’t matter. But it’s important that it’s visual - we’ll get to why in a second.
Once a user executes any on-chain action, their merit level in that category goes up a point. He now has experience in that category.
After some number of on-chain actions related to a category, the user is also given an equippable for their avatar, representing their contribution, a visual indication of their merit. This is now merit gamified.
The equippables themselves are transferable (not soulbound), but merit is not - therefore, rarer items will be harder to get and will encourage people to pariticpate more and get them and potentially sell them. We now have a global item economy on top of a governance model. Other projects and protocols can hook into this low level merit system and offer their own collectibles and equippables as a result of certain in-protocol actions by the users, further expanding the userbase and growing this economy of mutual compatibility.
The more projects join, the more the pie grows for everyone.
This is where we run into a technical barrier, however. Substrate as a framework does not allow for such primitives out of the box, and instead defaults to plutocracy or dictatorship. But an incredible positive of this framework is that is allows anyone with some Rust skills to develop a new module, adding new primitives at the chain level, the lowest of the low most optimized part of the stack.
To pull off this avatar system on a Substrate chain, one would need to put in a lot of work and either modify an existing chain by upgrading it with this module (not possible due to whales having to relinquish power when this is voted in, which they would not do), or launch a new one. More on that in a followup post - the technical barrier is out of scope here.
A crucial aspect of merit accumulation is its maintenance, which requires ongoing activity in the relevant category.
For instance, if a user has accumulated 100 Treasury merit points, they will lose a percentage of this total for every Treasury proposal on which they do not vote. Inactivity thus diminishes one’s voting influence compared to those who remain active.
This is called Decay and serves a dual purpose:
- To keep people active in matters of governance because their “reputation” is fleeting.
- To make sure newcomers can always catch up to OGs who, over time, lose interest.
The decoupling of financial investment from voting power, or at the very least, diminishing their direct correlation, necessitates these balancing mechanisms. They facilitate shifts in influence and leadership evolution, countering the prevalent issue of centralization in many protocols, DAOs, and teams. Typically, such centralization is anchored either by a singular authoritative figure or a handful of early investors (whales), creating an indefinite hierarchy unless their holdings are sold, this again often to the detriment of the wider community (ZOMG founder is selling ruuug!! ☠️).
With the implementation of a decaying categorial merit system, this issue of entrenched centralization is effectively addressed.
But… what happens if I accumulate all this merit and then lose access to my account? Even this is easily fixable in this new system.
In the case of account access loss, how do we reclaim it? Is it even possible? It is indeed!
Anyone can at any time request a one-time transfer of a non-transferable NFT to a new address, with a deposit of $TOKEN. We thus call these NFTs “semibound”, because they are soulbound only as long as everyone else does not think they are transferable. Much like bitcoin’s value - which exists only because we all think it exists but not in actuality - this aspect of transferability is a mass delusion only valid until the effective majority disagrees with it.
So, as a governance example, Alice requests the transfer of account 0xAlice to 0xAliceNew from an unknown and uninitialized 0xAliceNew account. She puts down a deposit of 100 $TOKEN.
Bob has been using the platform for 2 months and in that time has accumulated 20 Treasury Merit, 10 Runtime Merit, and 0 Staking Merit. Bob has 10000 $TOKENs.
Charlie has been using the platform for 2 years and has 2000 Treasury Merit, 5893 Runtime Merit, and 3 Staking Merit. Charlie has 348 $TOKENs.
Suppose we generalize the formula to
Here w1, w2, w3, w4 are weights that correspond to each type of Merit / $TOKEN Balance.
Charlie and Bob vote on Alice’s proposal.
Charlie thinks Alice’s proposal is suspicious and votes NO. Bob thinks it all looks good, and votes YES.
Because Charlie has much more merit, his merit amplifies his voting power far beyond that of the speculating Bob, who only recently bought in. Purchasing power should not easily let someone “take over” an account, and that is what is happening in this scenario. Charlie, an ecosystem veteran, protects it.
The same formula can then apply to all other activity on chain in matters of governance. Whatever needs voting on, the Merit score of certain categories can be calculated per category that is being voted on, and if someone has more Treasury Merit while voting on a Treasury proposal, their vote simply matters more.
While a merit-based system in a DAO has the potential to drive engagement, reward contributions, and build a strong community, it’s important to design and implement it with careful consideration of its psychological and sociological impacts.
It might need careful consideration and a slow rollout, possibly with some periodic “resets” to allow for tweaking, balancing motivation and reward with fairness, inclusivity, and the general mental well-being of members, all as crucial elements to the system’s success and the long term health of the DAO.
The Decay aspect also needs careful consideration. If users do not use their Merit in a long time, it decays, and someone else who does have passion and interest can take over and trailblaze into a dynamic future. This can lead to an incredibly dynamic ecosystem which is a pendulum that can indeed swing both ways, very violently.
Stay tuned - we will look into the psychology of this in a followup post.