Idea: Yield Governance

Hi DeFi friends,

one thing that I always disliked about MakerDAO and other DEFI protocols is the lack of incentives for (non-whale) users to engage in governance, contribute to discussions and engage in the community.

I therefore want to share an idea with you: what if we introduced yield governance. Processes that distribute rewards to those who vote (and, hopefully, inform themselves on the vote beforehand, thus contributing to the community).

I haven’t fully thought this through, but an idea could be a mechanism that distributes a fixed token amount to those who vote (maybe, but not necessarily proportional to the weight of a vote). If it were proportional, the token distribution wouldn’t be affected if all token holders voted (I’m saying “token” on purpose, as we decided the YFI supply to be fixed, so this token likely wouldn’t be YFI).

Such processes would be similar to yield farming. Only difference: you don’t generate yield for providing liquidity, but for taking a stance and helping to make decisions that have the whole community behind them. We would actually, incidentally, solve the problem of low voter turnout that most democracies suffer from, but well, we’re used to doing stuff that can improve the real world :slight_smile:

I could work out a more detailed proposal, but please contribute if you like this idea. Or let me know why it’s flawed and should be burried in the depths of this forum.

Cheers, Max

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The topic of using monetary incentives to increase governance participation is always an interesting discussion.

I think direct governance yield based on participation could introduce a host of unintended results that may actually be detrimental to the decision making process. The most obvious to highlight would be completely passive or uninformed voting, I know you allude to this.

It would be interesting to explore nonmonetary incentives through gamification (ie changes in status, reputation), results-based rewards (ie only rewarded if you end up in the majority, although this would prob require blind votes), etc… and maybe waay down the road, some flavour of futarchy.

I think, for now, I’m most excited about delegation of governance power to proxies/protocol politicians that are well versed in niche or complex decisions and proposals, SO LONG AS there’s a strong and secure accountability mechanism that delegators can trigger frictionlessly (I guess today that would just be the action of redelegation).

The following is a really interesting study that actually looks at the effects of compulsory voting, nonmonetary incentives and/or effects from say, social or peer pressure to participate, and the effect of fines and penalties instead of rewards :eyes:

https://www.google.com/url?sa=t&source=web&rct=j&url=https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_2019101.pdf&ved=2ahUKEwjlzNSvkuzqAhWEHzQIHfyRAVQQFjABegQICBAB&usg=AOvVaw3lNFfEhTWvSVgL1lpPDL6W

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Governance incentives (if designed properly) can be a huge benefit.

I’m definitely for exploring this further and envision there being allocations to the most active participants in a controlled fashion.

Last thing we want is people voting solely to vote (and earn YFI). With that said though, a healthy allocation to governance contributors could go a long ways!

Thanks, Kevin, I see you’re more informed than I (I haven’t even heard of futarchy to this date and the 1-sentence-entry on wikipedia isn’t too enlightening, but I’ll do some research on it). I’ll also have a look at the paper, thanks for sharing!

Not sure if uninformed voting would be a problem as decisions will affect your wealth (you’ll only get to vote if you hold the governance token).

Gamification sounds awesome (except for the reward-the-majority-part). But I’m no fan of delegation of governance. This will lead to centralization once again. People with the means to market themselves will win over majorities and economies of scale will prevent competitors from amassing votes. Once majorities are establish, hardly anything will change as long as the delegates don’t mess up the protocol (or would you regularly check who else you could delegate your votes to?). In democracies, we have terms for a reason (be it 4 or 5 years). If we introduced such terms after which stakes would be redelegated, centralization in governance could be limited to some degree.

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At Nexus Mutual we use incentives as part of our governance. They aren’t huge, but are designed to more than cover gas costs, without doing a heap of analysis I would guess they have been approx $5-$20 on average per vote.

I’ts hard to know exactly what impact this has had on voting participation but anecdotally I’m confident it has increased participation, especially from a wider group of community members.

We also have a delegation option and if you delegate you still earn voting rewards.

Participation rates for votes have averaged around 20% and generally range from 15% - 35%.

One benefit we have is that because we do KYC we have a 1 member per address set-up, this allows us to reward per individual, rather than token weighted basis. Which is perhaps minor but encourages smaller holders to vote. I’m unsure how much this has impacted outcomes/participation but it feels beneficial. It’s not really possible to do in this situation though, which is one of the downfalls of voter rewards in a totally open protocol, they only reward the whales.

So there is a key question here, if you can only allocate voting rewards on token weighted basis does it really help the smaller voters?

My current thoughts are that delegation is more efficient at encouraging participation from smaller holders in this scenario.

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I reasonate with this statement of how betting markets would engender ‘skin in the game’; we seen how fines/penalties can have an effect on voters turnout.

…elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare

Intially proposed by: Robin Hanson
https://mason.gmu.edu/~rhanson/futarchy.html

Also prediction markets might approximate this expectancy:

When a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.

Vitalik wrote a short post, along with arguments for/against the futarchy goverance model:

As an example on that two-folds:
First, voting on values: individuals / elected representatives via delegation; would instead vote on the appropriate success metric TVL, APY etc. only, along with an appropriate maturity date.

Then, betting on beliefs: prediction markets pick policies that best optimize the success metric within the betting window.
The wrong side gets trades reverted, while correct trades gets rewarded on maturity.

Also worth mentioning liquid democracy and holacracy

See Absolutes and differentials on the main blog post by Vitalik, who surmised that futarchy is likely to work well for large-scale decisions, but less so for finer-grained tasks

…a hybrid system may work better, where a futarchy decides on a political party every few months and that political party makes decisions.

Referencing this post on YIP 14: yEarn Rewards Reserve

Yeah, I think that in most cases, incentives will increase governance participation rates. The issues will obv be that the quality or trustworthiness of those votes dramatically decreases; voters have an incentive to vote passively- minimize research time and still receive the reward.

I completely agree with this. To @BYB’s point there is absolutely centralization risk which is why accountability mechanisms are so important. I really do think however, that the decisions being made in these protocols are too complex and frequent for 90%+ of token holder to justify participation in the long run, and the point of the last post was to highlight that even if you reward participation, the optimal option for voter will always be to not research, vote passively, and receive the same reward.

I like the idea of setting up term limits and placing other restrictions on delegates (ie on chain activities that prove their knowledge, reputation, etc…), caps on % ownership, etc…

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Some research has been done on incentivized voting: https://ethresear.ch/t/incentivized-voting-a-theory-on-greater-network-engagement/6457

If voting is going to be financially driven I suggest the receivable not be minted but rather to come from an allocation of profit share.

I understand 5% of profits may be allocated to future growth opportunities. I don’t know if this is high or low but it is an amount.

In earlier conversations I’ve proposed this profit share mechanism be used to purchase YFI on the open market, but only to do so once the pot has exceeded a determined size. In Maker, that is a lot size of 500k DAI.

In the designs I’m also proposing a YFI holding fee when creating proposals. Terms of which are yet to be discussed in the community. Assuming the idea is favoured.

My point being. Incentives should NOT imo be sourced from minting tokens but from success driven by good implementation and leadership decisions.

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