Title
Grants program proposal
Summary
Hereby I’d like to propose a grants program for funding DFX infrastructure development. At its core is an augmented Capital-constrained Liberal Radicalism (CLR) aka Quadratic Funding mechanism. It allows to fine-tune flexibly parameters like budgets, comp size, KPIs to track, to allocate funds in tuneable batches with a decision provably optimal on the space of viewpoints of all stakeholders, while governance is run at the sweet spot between DAO vote (too bulky for frequent/complex financial decisions) and some centralised body vote (nimble, but with limited legitimacy).
Overall it’s far more versatile and nimble, DeFi-spirited and providing mathematically proven optimality for funds allocation than a vanilla grants committee.
Motivation + Specifications
DFX protocol, as any decentralized fat protocol, is open infrastructure. Hence DFX infrastructure funding is essentially a problem of optimal allocation of public goods funding.
Public goods, like national defense, urban or DeFi infrastructure, are non-excludable (if you use DFX, you can’t refrain from benefiting from efficient technical backend, for example, it’s part of what makes DFX a DeFi protocol) and non-rivalrous (your benefits do not reduce that of other DFX users).
The problem of efficient and fair distribution of funds for public goods has been a subject of extensive research.
Buterin et al. have suggested a Capital-constrained Liberal Radicalism (CLR) mechanism, aka Quadratic Funding, which offers a (nearly) optimal distribution of a designated budget (i.e. limited funds) against a given list of public goods.
Basically the idea is that voters deciding funds allocation can reflect in their decision not only their preference, but also the strength of their preference by buying influence at increasing marginal cost, thus a broader community can account for interests marginal on grand scale, but important in view of part of the community, while also preserving the overall democratic ethos and not sliding towards oligarchy, where a few powerful make decisions for everybody.
And then there’s a matching pool (a budget) provided either by the DAO, like DFX DAO, or some benevolent outsiders, which matches voting results with funds.
Here’s a primer on quadratic payments from V. Buterin.
It’s also been mathematically proven by Weyl et al. that under standard assumptions, a fixed set of communities and public goods as in our case, in large populations quadratic voting mechanism, of which CLR is an extension, leads to approximately optimal decisions on public goods.
Finally, a number of promising real world experiments around CLR has been carried out, of particular interest for us being Gitcoin protocol for Ethereum infrastructure funding, clr.fund with purposes similar to that of Gitcoin, but implementing anti-collusion infrastructure and Optimism, which augmented CLR with badge holder governance.
So drawing from all the above here’s a working scheme.
A budget is allocated by a DAO decision for a period x (e.g. 3 months). By the same DAO decision a group of badge holders is designated with a mandate to allocate these funds using quadratic voting mechanism.
Badge holder governance is a middle ground between full-scale DAO, impractical if not impossible for these purposes, and a tight group like a grants committee. Actually, the more diverse it is, the broader set of interests it represents the better.
For a pilot I suggest including into the badge holder group everybody sufficiently active within DFX, like core team + key discord participants + maybe representatives of investors like Polychain + maybe some top DeFi+Ethereum+crypto community members (LobsterDAO?) to play a balancing role akin to independent board members.
With time, the badge holder committee could and should be enlarged, for example, with discord users reaching a certain karma level as calculated by a discord bot, which in turn will bring about gradual (partial) transition of power from the DFX team to the community.
Within a designated period anyone can nominate a funds recipient, be it for continuous work like modding, marketing or a fixed-goal project, with all reasoning possible.
Badge holders, compensated or not, hold public discussions and vote with voting credits on the budget allocation approved by a DAO decision.
Decision about funds allocation is made with the quadratic voting mechanism. All badge holders are given an equal amount of credits, e.g. 100. Each badge holder can allocate their credits reflecting their respective individual assessment of nominated project’s value and strength of this opinion (that is for a given voter marginal cost of the next vote given for the same nominee is bigger, reflecting the strength of subjective value preference: 1st vote costs 1 credit, 2nd vote for the same nominee = 2 credits (total 1+2=3), 3rd vote for the same nominee = 3 credits (total 1+2+3=6) etc.) If the number n of votes goes to the infinity, then the limit of the sum is (n^2)/2 hence the term “quadratic”.
The share of the budget received by each nominee is proportional to the square of the sum of the square roots of votes received.
The result reflects the distribution not only of perceived value, but value weighed by the strength of stakeholder’s preference.
At first the mechanism could be funded from the DAO Treasury. In some future iteration this logic can be encoded into the smart contract, such that a certain % of DFX revenue is directed to this mechanism. Some floor level could also be designated and if revenue % falls below this level, the difference is subsidized from the Treasury.
The beauty of this mechanism is that almost everything here is a variable, hence it can be gradually adapted to fit DFX evolution.
There could be different (parallel) rounds with tuned parameters.
Distribution of people with certain expertise could be subject to tuning: technical, marketing, risk etc. Other principles of the committee composition are up to further discussion. Voting credits distribution could be a variable, badge holders could receive credits according to some formula or in equal proportion. Obviously, these factors will influence the eventual funds distribution.
Another class of variables could deal with the compensation structure. For a certain class of funding recipients an n-component compensation structure could be introduced as mandatory: x% retroactive + y% future-looking, or x% liquid + y% vested + z% locked. Or some floor level of payment/month. These caveats could all be integrated into the badge holder mandate by the DAO decision
Even the key reward formula can be tweaked, as was done by Optimism, they didn’t raise the sum to the power of 2, although this led to smaller variance in funding distribution as compared to Gitcoin.
Also certain anti-spam firewalls could be introduced for nominees, like pre-approval of at least one badge holder, some (not big) deposit or proof of humanity.
Obviously, both individuals and groups could be among funding seeking nominees.
Multiple variants of vanilla QV and QF aimed at mitigating certain shortcomings (particularly inefficiencies and collusion vulnerabilities) have been suggested and are being actively explored, which should become the subject of further discussion here as well.
Still in case of badge holder governance collusion considerations are slightly mitigated by reputation factors. An example of a badge holder code was introduced by Optimism in the course of their experiment.
Final notes
This mechanism will help mitigate the discrepancy in perceived subjective value of respective contributions, approaches to measuring it and hence mapping this value to compensation. This clash is already emerging within evolving DeFi communities and one can foresee that without a systematic approach this problem will only exacerbate with the protocols and respective range of contributing efforts growing more complex.