Why DAO Incentive Models Are Creating Paper Citizens

Delegates and voters are financially rewarded for participation, not for making correct, long-term decisions. This creates a class of paper citizens who farm governance tokens to sell, not to govern.

• Sybil-resistant airdrops (e.g., Uniswap, Optimism) still attract mercenary capital.
• Vote delegation markets (e.g., Tally, Boardroom) commoditize influence without accountability.
• Result: >60% of circulating token supply can be held by short-term speculators.

Token-weighted voting ensures capital, not competence, controls the protocol. Large holders (VCs, funds) become de facto rulers, while engaged but smaller contributors are marginalized.

• A single entity with >5% supply can veto or pass proposals unilaterally.
• Creates voter apathy among the community, as individual votes are statistically irrelevant.
• Compound's "Whale Wars" and Curve's veToken model are canonical examples of this flaw.

Delegation systems assume token holders can identify competent delegates. In reality, delegate discovery is broken, leading to popularity contests over meritocracy.

• Top delegates are often the loudest or earliest, not the most knowledgeable.
• No performance metrics exist to evaluate delegate decisions post-vote.
• This gap is exploited by "delegate cartels" who vote in blocs for their own benefit.

Align incentives by requiring voters to have something to lose. Conviction voting, bonded voting, and futarchy force participants to back their beliefs with capital.

• Kleros uses staked tokens for dispute resolution.
• Ocean Protocol experiments with futarchy (prediction markets for decisions).
• Shifts focus from voter turnout to decision quality.

Decouple governance power from purely financial assets. Use Soulbound Tokens (SBTs), proof-of-personhood, and contribution-based reputation to identify legitimate, engaged citizens.

• Gitcoin Passport aggregates non-financial identity credentials.
• Optimism's Citizen House allocates funds based on non-token voting.
• Creates a sybil-resistant layer of "proof-of-participation".

Decompose monolithic governance into expert-led SubDAOs (e.g., treasury, security, grants) with tailored incentive models. Pair this with a clear Exit-to-Community timeline from founding teams.

• MakerDAO has pioneered SubDAOs (Spark, Scope) for specific functions.
• Lido uses a staking-focused DAO structure.
• Forces professionalization of governance and a path to true decentralization.

Protocols like EigenLayer and LayerZero distribute tokens based on past behavior, attracting users who optimize for the snapshot, not the future. This creates a base of passive, disengaged token holders.

• Low voter turnout is the norm, with most proposals decided by <5% of token supply.
• Post-airdrop, TVL and active addresses often plummet as mercenaries exit.
• Governance becomes vulnerable to low-cost attacks from concentrated, apathetic holders.

Moving from one-time airdrops to ongoing Retroactive Public Goods Funding (RPGF) rewards sustained contribution. This aligns long-term token distribution with actual protocol value creation.

• Incentivizes builders and delegates, not just capital.
• Distributes power to those actively improving the ecosystem.
• Creates a positive feedback loop where governance quality attracts better contributors.

Using a single token for both speculation and voting creates inherent misalignment. Voters with purely financial stakes lack the context or incentive to make optimal protocol decisions, leading to stagnation or harmful proposals.

• Delegation is broken—most delegates have no skin-in-the-game beyond holding the token.
• Vote buying and bribery (e.g., on Frax Finance, Curve) become economically rational.
• Complex technical upgrades are decided by a majority with no expertise.

Protocols are experimenting with separating rights. MakerDAO uses MKR for executive votes and Spark subDAO tokens for specific product governance. Vitalik's Soulbound Tokens (SBTs) propose non-transferable reputation for voting power.

• Aligns voting power with proven expertise and commitment.
• Reduces governance attack surface from financial speculation.
• Enables granular, committee-based decision-making for complex domains.

DAOs hold billions in native tokens and stablecoins but lack professional, accountable treasury management. Proposals are often opaque, leading to wasteful spending or inefficient capital allocation that hurts long-term token holders.

• Liquidity mining programs often pay >$1M for negligible permanent TVL.
• No standardized reporting on ROI for grant or investment proposals.
• Creates a tragedy of the commons where no one is accountable for capital preservation.

Structuring DAOs as a hub of specialized subDAOs (like Aave's GHO Facilitators or Compound's Treasury Working Group) with clear mandates and measurable KPIs. Using on-chain analytics and attestations to track fund usage.

• Professionalizes capital allocation with expert stewards.
• Enables transparent, real-time auditability of treasury performance.
• Shifts culture from spending proposals to investment proposals with expected returns.

Protocols like Optimism and Arbitrum have distributed billions in tokens, but voter participation rarely exceeds 5-10%. Incentives attract mercenary capital, not long-term stewards.

• Key Problem: Sybil-resistant airdrops are impossible; farmers game the system.
• Key Insight: Retroactive rewards (like Uniswap's) are better but still create passive holders.
• Builder Action: Design for progressive decentralization; gate governance rights behind verifiable contributions.

Delegated systems in Compound, Uniswap, and MakerDAO consolidate power with a few large entities. This creates centralization and enables vote-buying via platforms like Tally.

• Key Problem: Passive token holders delegate to 'professional' delegates, creating governance cartels.
• Key Insight: Liquid delegation (e.g., Element Finance's Council) is more flexible but doesn't solve apathy.
• Investor Signal: Scrutinize Gini coefficients of voting power; high concentration is a red flag.

Move from token-weighted voting to contribution-weighted influence. Coordinape circles and SourceCred track work. Exit rights (like MolochDAO's ragequit) align incentives by allowing members to withdraw treasury funds.

• Key Benefit: Rewards verifiable work, not just capital.
• Key Benefit: Exit rights create a real-time price check on governance decisions.
• Builder Action: Implement non-transferable reputation tokens (like POAPs on Gnosis Chain) for voting on specific domains.

High-yield liquidity mining pools on Curve and Balancer attract TVL but distribute governance tokens to actors who immediately sell. This dilutes the stakeholder base.

• Key Problem: TVL is a vanity metric that doesn't correlate with governance health.
• Key Insight: Look for models that vest governance rights (e.g., ve-token model) to align long-term incentives.
• Investor Signal: Favor protocols where >30% of circ. supply is locked in long-term vesting contracts.