Compensation Plan

The predetermined, time-based release of new tokens into circulation, often defined by a minting schedule or inflation rate. This controls supply expansion and is crucial for managing long-term value. Key models include:

• Fixed Supply: No new issuance after genesis (e.g., Bitcoin).
• Disinflationary: Emission decreases over time (e.g., Ethereum post-EIP-1559).
• Tail Emission: A small, perpetual issuance to maintain security incentives (e.g., some Proof-of-Work chains).

Incentives paid to token holders who participate in network consensus by staking (locking) their tokens or delegating them to validators. This is the core mechanism for securing Proof-of-Stake (PoS) networks. Rewards are typically a function of:

• The amount staked.
• The validator's performance (uptime).
• The overall network inflation rate and total stake.

Time-based restrictions on when allocated tokens become transferable, used to align long-term incentives for team members, investors, and foundation treasuries. Common structures include:

• Cliff Period: A period (e.g., 1 year) with no unlocks, followed by linear vesting.
• Linear Vesting: Tokens unlock continuously over a set duration.
• Performance-based Vesting: Unlocks are tied to specific milestones or metrics.

The distribution of voting power or proposal rights, which determines who controls the protocol's future development and treasury. This is often, but not always, tied to token ownership. Models include:

• Token-weighted Voting: One token, one vote.
• Delegated Voting: Token holders delegate votes to representatives.
• Quadratic Voting: Voting power increases with the square root of tokens committed, reducing whale dominance.

A pool of tokens (often 10-30% of total supply) reserved for funding ongoing development, grants, partnerships, and community initiatives. Distribution is typically governed by a DAO or foundation. Funds are used for:

• Developer Grants to build core infrastructure.
• Liquidity Mining programs to bootstrap DeFi pools.
• Bug Bounties and security audits.

Protocols use token burns (permanent removal from supply) to create deflationary pressure or direct value back to token holders. Common mechanisms include:

• Transaction Fee Burning: A portion of every network fee is destroyed (e.g., Ethereum's base fee burn).
• Buyback-and-Burn: Using protocol revenue to purchase and burn tokens from the open market.
• Supply Cap with Burns: Enforcing a hard cap by burning excess tokens from inflation.

A schedule that releases allocated tokens to team members, investors, or advisors over a set period (the cliff and duration). This aligns long-term incentives and prevents immediate sell pressure.

• Cliff: A period (e.g., 1 year) before any tokens vest.
• Linear Vesting: Tokens release continuously after the cliff.
• Example: A 4-year vest with a 1-year cliff means 25% vests at year 1, then monthly installments.

Funds allocated from a treasury or community pool to incentivize development, marketing, and research. Managed via grant committees or DAO governance.

• Purpose: Bootstrap new projects, fund bug bounties, or sponsor community events.
• Mechanism: Proposals are submitted, debated, and voted on by token holders.
• Example: Uniswap Grants Program or the Ethereum Foundation's ecosystem support.

The distribution of protocol tokens as rewards to users who provide liquidity to decentralized exchanges or lending pools. This bootstraps initial liquidity and decentralizes token ownership.

• APR/APY: The advertised return, often in the protocol's native token.
• Impermanent Loss: A key risk for liquidity providers.
• Example: Providing ETH/USDC to a Uniswap v3 pool to earn UNI tokens.

A funding model where contributors are rewarded after their work has proven valuable to the ecosystem, based on measurable impact. Popularized by Optimism's RetroPGF rounds.

• Mechanism: A committee or token holder vote allocates funds to past contributors.
• Goal: Incentivize public goods development without upfront grants.
• Example: Developers who built critical infrastructure for an L2 receiving an airdrop.

Events where a project's tokens are sold to the public to raise capital. Initial DEX Offerings (IDOs) occur on decentralized exchanges, while Initial Exchange Offerings (IEOs) are hosted by centralized platforms.

• Key Features: Fixed price, auction mechanics, or liquidity pool seeding.
• Risks: Regulatory uncertainty and potential for "rug pulls."
• Example: A project launching a token sale on a platform like SushiSwap's MISO.

A sustainable funding source where a portion of the fees generated by the protocol is directed to contributors, token holders, or a treasury. This creates a value accrual mechanism for the native token.

• Fee Switch: A governance-controlled parameter that enables revenue distribution.
• Examples:
  • SushiSwap: A percentage of swap fees can be directed to xSUSHI stakers.
  • GMX: 30% of protocol fees are distributed to GLP stakers and GMX stakers.

A vesting schedule is a time-based release mechanism for allocated tokens or rewards, designed to align long-term incentives and prevent immediate sell pressure. A cliff period is an initial lock-up (e.g., 1 year) before any tokens begin vesting. This is a primary security control against Sybil attacks and ensures contributor commitment.

• Example: A core developer grant might have a 1-year cliff, followed by 3 years of linear monthly vesting.

Compensation funds are typically held in a multi-signature wallet requiring M-of-N approvals from a council or elected committee for disbursement. This prevents unilateral control and is a fundamental governance security practice.

• Common Configurations: 3-of-5 or 4-of-7 signer setups using Gnosis Safe or similar.
• Transparency: All proposed transactions and approvals are recorded on-chain for auditability.

Major changes to a compensation plan (e.g., new grant categories, adjusting vesting terms) are typically enacted via on-chain governance. This involves:

• Temperature Check: A forum discussion and snapshot vote.
• Formal Proposal: A binding on-chain proposal (e.g., using Compound's Governor Bravo).
• Execution: Automated execution of the plan update via the protocol's governance module.

This ensures changes are decentralized and community-approved.

To mitigate the risk of paying for undelivered work, compensation is often tied to objective, verifiable milestones. These are predefined deliverables (e.g., "audit completion," "mainnet launch of feature X") that trigger payment releases upon verification.

• KPI Options: Can include technical metrics, user adoption targets, or security audit results.
• Oracle Verification: Some protocols use oracles or Keeper networks to autonomously verify and trigger payouts for on-chain milestones.

For contributors receiving significant value, the plan may interface with legal entities (DAOs LLCs, Foundations) to handle tax reporting and liability. Streaming vesting through tools like Sablier or Superfluid can create a continuous income stream for tax purposes.

• Consideration: Jurisdictional differences in how crypto compensation is classified (income vs. property).
• Tools: Legal wrappers provide a bridge between on-chain actions and off-chain legal obligations.

A critical security mechanism is the ability to slash (reduce) or claw back unvested tokens in cases of malicious behavior, non-performance, or protocol governance attacks. These rules must be explicitly codified in the plan and are often enforced by a security council or via emergency governance.

• Use Case: Recovering funds from a validator who double-signs or a developer who introduces a critical vulnerability.
• Controversy: Requires careful governance to avoid being used punitively.