Governance

KPI options, the future of DAOs

April 14, 2021

Focusing a team towards key results is no easy task, let alone driving a whole community towards a shared common goal. Historically, DAOs have been lacking incentivization mechanisms to integrate goal-setting frameworks within their governance structure. KPI options are changing this. 

Decentralized Autonomous Organizations (DAOs) empower individuals to create more secure, transparent and efficient organizations. DAOs incentivize their members to take part in a shared common mission by simply holding a “governance” token.

This “ease of inclusion” can however directly lead to “freeriding”, where a set of stakeholders unfairly profits from the work of others. In short, the problem is that if everyone freerides, who gets the actual work done? Who’s creating value?

DAOs suffer from this collective group dynamic, and as a result, sometimes depend on the contribution of a small subset of stakeholders. This said, this productive minority reaps only a smaller percentage of total rewards. This is not a sustainable model and will inevitably lead to increased inefficiencies in DAOs as they scale, greatly reducing their ability to attract top-tier talent and outperform other firms. After all, as with traditional organizations, “share ownership” should ideally be distributed more fairly amongst those directly involved in creating real value. For this reason, the question naturally arises: How do we combine the conventional financial incentives of traditional companies, with the unique features that only DAOs can offer such as scalability and inclusivity?

Synthetic tokens project UMA introduced a brand-new incentivization mechanism which might turn out to be one of the most important crypto-economic innovations of the decade. Let’s dive into why we at Aragon believe this to be a breakthrough in decentralized  governance. 

Measure what matters with OKRs

If you have worked in a small, medium or large tech company, you have most likely come across Objectives and Key Results (OKR). OKRs are a goal-setting framework developed by Andrew Grove at Intel in the 1980s, and are largely based on the Management by Objectives (MBO) framework popularized by Peter Drucker in the 1960s. 

Any given organizational structure can benefit from adopting OKRs, allowing it to increase productivity through explicit focus on goals as well as improved measurement, accountability and transparency practices. Today, a DAO can both collaboratively decide on the high-level strategic direction, but also set more tangible objectives and tactical key results and make use of Key Performance indicators (KPI), to demonstrate and appraise the advancement of these key results. Here is a quick example to demonstrate how big, bold and hairy ambitions can be disassembled into more specific, measurable, attainable, relevant and time-bound (S.M.A.R.T) results. 

  • Vision: Ensure the survival of humanity
  • Mission: Make human life multi-planetary
  • Objective 1: Develop a lighter engine within 3 months
  • Key Result 1: 25% weight reduction in fuel pump
  • Initiative: Build new fuel pump prototype
  • KPI: Fuel pump’s weight in kg

As far as we can tell, OKRs are one of the most intuitive ways to help us manage and measure progress towards our desired goals. But for OKRs to work in DAOs, we need to understand how to effectively apply this execution framework so as to:

  • 1) Align a whole community to a shared set of objectives, 
  • 2) Incentivize all community members to drive progress of key results. 

So how exactly, would we achieve this in a DAO? 

Meet KPI options 

Traditionally, options are financial instruments providing buyers with the right - the option - to buy or sell an underlying asset before a specific date. For instance, let’s say you are an engineer interested in solving the objective set forth in the previous example. If you were confident that the fuel pump’s weight could in fact be reduced by 25%, how could you bet on it? Technically, you can buy an option with a payout that is inverse to the final fuel pump’s weight reduction rate. In other words, you can bet on yourself achieving a value-adding task

Imagine this concept now systematically integrated within the governance model of a DAO. Let’s take a more crypto-friendly example. Imagine a decentralized exchange who would like to migrate its total liquidity from its current protocol version to a new improved one by a certain date. The KPI options in this case would be set equal to the total liquidity migrated to the new protocol version. As a result, the DAO could allow anyone to directly participate in a primary market and so buy options tied to the liquidity KPI which would expire by set date. The benefits of this incentivization mechanism are quite straightforward. Platform users migrating their liquidity would be directly contributing towards the desired preset key result, inevitably also increasing the value of their KPI options. Moreover, because these KPI options can be traded on secondary markets, external users can fuel demand for a shared interest in the achievement of these objectives, and so further enlarge access to contribution.

Backing KPI options with the DAO's token

Following completion of key results, the final step would be paying out the vested benefits to shareholders. Assuming the KPI was successfully met, options would be “over the money” - meaning that redeeming these would result in a profit for option holders. 

To go one step further, payouts using the DAO’s native token represent increased benefits. By rewarding the most productive members of the community directly with increased ownership of the DAO, we instigate a natural shift of management and execution responsibilities to the most qualified and dedicated individuals of the community. 

Conclusion

KPI options are synthetic tokens that will pay out more rewards if the KPI meets preset goals before the predetermined expiry date. KPI options are a great way to make incentive structures more transparent by more clearly articulating unambiguous goals, and more efficient by aligning the interests between a protocol and its community. While other similar but more complex systems within futarchy such as prediction markets have been widely discussed, KPI options represent today a more simple and elegant mechanism to achieve a similar outcome - allowing DAO communities to have “more skin in the game” or staked participation in the achievement of the DAO’s objectives and key results. 

More on KPI Options

Aragon is the first project to implement KPI options outside of UMA, and we have recently shared a proposal with our community to help us set the right KPI parameters (see vote 1 and vote 2). We will soon release more specific instructions on the correct process to follow. Also, you can find out more on the recently passed proposal in this forum thread

If you want to learn more about UMA KPI options, check out the official documentation on KPI options as well as the UMA’s primer on KPI options.