Reputation

Reputation is a personal judgment of trustworthiness based on past actions.

Reputation is an essential component of DAO governance. Meaningful and secure reputation makes the ideal basis for power in a DAO.

This page outlines the mechanisms DGF uses to design meaningful and secure reputation tokens, called REP. Reputation tokenomics is the subject which analyzes the economic effectiveness of the design.

Background considerations

When we enter into a business contract, we rely on our counterparty’s reputation to predict how they will act during a transaction, to give us the confidence to enter a bargain. History has repeatedly proven the proper attitude for a healthy market environment is when all parties are incentivized to improve and protect their reputation for the long term, not to simply acquire as much money as possible in a single business deal. A secure and reliable system that accurately accounts for meaningful reputation discourages such zero-sum competitive behavior concerned with immediate profits, instead motivating future-oriented, sustainable cooperation.

How can we foster a culture which respects and values reputation more than money when our DAOs allow pseudonymous members to join or leave at will? It is not a simple task to properly design and program a robust mechanism that is secure against the infinite strategies for gaming our algorithmic reputation system. This page explains how to capture the meaning of genuine reputation with digital REP tokens, analyzes the system’s security, specifies precisely the economic value of a REP token, and details important applications.

Game theory

When a DAO focuses on immediately fungible cash rewards as its highest goal, then a zero-sum incentive structure is established, which leads to harmful competition that destabilizes the group. When, instead, reputation is the measure of power over decision making, then a positive-sum incentive structure obtains.

When fungible cash is the goal, there is a limited quantity available in any business transaction. In that case, whenever your counterparty competitor gets any of the cash on the table of your business deal, then there is exactly that much less for you to enjoy (zero sum). The fungibility of cash rewards focus the incentives on the present. But the right perspective in good business is to concern yourself with the next transaction and the one after that. When the parties are concerned with business in the future, then the incentives change.

When a single game turns into a repeated game, the incentives are transformed. In a system with repeated business, reputation is actually a positive sum quality, since it can be created from nowhere. Whenever two parties behave well and collaborate productively, perhaps sacrificing their own short-term gain on some aspects of the deal, they produce valuable reputation that demonstrates the market is a healthy business environment with the promise of further positive interactions in the future. When we are focused on creating the opportunities for future business, our concern becomes improving our reputation over our temporary cash total.

Reputation is fundamentally different from cash, because reputation is a positive-sum index, not zero-sum. Reputation can be created in the course of any transaction, from nowhere. Positive collaboration leads to increased reputation for both parties. Outsiders can watch the collaboration and gain new respect for both participants, and for the platform that hosted the business deal, which can attract future business deals and future profits. When there is a system for remembering the past behavior of business parties, when there is a system for accounting for reputation, then collaboration becomes a more attractive strategy than competition.

Gaming the system is an ever-present threat to any algorithmic design for representing meaningful reputation. With this in mind, several qualities are necessary for making a secure and meaningful reputation token. The following REP token design assures these qualities.

REP token design

REP Token Minting Mechanism

Reputation tokens (REP) are minted when a fee is paid to the DAO. Ownership of REP is determined by the work done to earn that fee. The fee is distributed to the entire group, proportionately according to ownership of past REP.

This basic mechanism is the heart of the entire DGF. The mechanism gives REP tokens for work, delaying the fungible cash money reward and diffusing it to the entire group. The smart contract that governs the REP Token Minting Mechanism is called the Validation Pool (VPSC).

DAO workflow

To clarify the process for minting and distributing REP, here is the explicit DAO’s workflow:

1.      A public outsider (non-member of the DAO) asks the DAO for work in return for a cash fee.

2.      The DAO chooses a member to do work for the outsider.

3.      The member does the work for the outsider.

4.      Outsider gives the fee to the DAO.

5.      The DAO mints new REP for the worker, if the work was done properly.

6.      The DAO shares the fee with everyone who already has REP.

In the course of the workflow, the fees the DAO earns are not given to the member who did the work to bring in the fee. Instead, the fees are shared with everyone in the DAO, proportional to their REP holdings. This is called the REP salary.

REP Salary Mechanism

Any fees the DAO earns are split proportionally with every REP token holder.

Specifically, suppose the total number of REP tokens in the DAO is ${\textstyle R_{T}}$, the number of REP tokens member $m$ holds is $R_{m}$ and that the DAO earns a fee of $\$f$ in cash. Then member $m$ earns $\$f*R_{m}/R_{T}$.

Instead of fees going directly to those who do the work, newly minted REP tokens proportional to the fees are given to those workers. Workers only get cash later, as their REP continually earns parts of new fees through the REP salary.

The REP salary mechanism is the last stage of the Validation Pool smart contract.

As an example, suppose that worker1 has 50 REP tokens in a DAO with 1000 REP tokens total. Suppose worker1 finishes a Work smart contract (WSC) which earns a fee of $100. Then worker1 does not receive the $100 fee directly. Instead worker1 receives 100 newly minted REP tokens. The entire DAO shares the $100 fee between all 1000 REP tokens, meaning each expert receives $100/1000=$0.10 for each REP token they own.

Tokenomics formulas show that, on average, the REP salary eventually pays out the present value of the fees for the work. The system is ultimately fair, since all the profits are shared entirely with the members. The REP salary delays the distribution of the fees, which gives REP tokens some of the meaning of reputation, since they can be slashed if at any point the DAO discovers the actions which earned the REP were harmful to the DAO.

REP Review Mechanism

REP review is the purpose of DAO governance. Executive governance is the automated review of present uses of REP tokens. Judicial governance is the deliberate review of past uses of REP tokens. Legislative governance reviews plans for future uses of REP tokens.

Automated executive review is achieved by automated binding votes with govREP in the Validation Pool. Deliberate judicial and legislative review requires a lengthier process of commenting and referencing a series of proposals with non-binding votes which end with a binding vote to conclude the judgement.

REP design analysis

Labeling a digital token to be a REP token does not automatically mean it serves the practical function of genuine reputation. The REP Token Minting Mechanism, the REP Salary Mechanism, and the REP Review Mechanism engender the following eight essential qualities for REP tokens which partly characterize the traditional concept of reputation.

Qualities of meaningful REP

1. Future orientation

The REP salary guarantees reputation tokens continue to pay off in the future, whenever anyone from the platform earns fees. This focuses members’ goals toward future productivity, instead of immediate rewards, which incentivizes cooperation. This gives us a signal predicting that a member with high REP will likely continue to behave well in the future.

2. Solidarity

By sharing the fees with the group (REP salary), the design encourages solidarity. Members are not merely incentivized to maximize their personal token holdings, but also to protect the group value of all reputation tokens. The ideal individual strategy is to act so that the group will continue to earn future business to maximize the REP salary.

3. Decentralization

This mechanism is inflationary, in the economic sense, since new tokens are continually added to the DAO through the REP minting mechanism, whenever the DAO earns profit. This naturally decentralizes power as the total quantity of REP tokens inflates, since any new work from any source will dilute the existing power base.

4. Meritocracy

The system is entirely meritocratic, since all fees the group earns are distributed to members proportionally to their individual REP token holdings (REP salary), which are earned only when a member contributes something valuable to the DAO (REP Minting Mechanism).

5. Grounding

To guarantee reputation is grounded in meaning, the only time a REP token is minted is when the DAO gains money from outside the organization, when fees are paid for work done by members (REP Minting Mechanism). Fungible cash money is thus seen as a mediator of value between different DAO’s REP types, and is a representative of universal energy.

This grounding of value, combined with the validation provided by the weighted democratic review of the Validation Pool mechanism, gives observers of the process confidence, which promotes trust, which encourages business transactions.

6. Limited Domain

Different types of work should be given different types of REP tokens. Reputation should represent the history of positive contributions for a specific skill. Every DAO will necessarily entail a complex combination of different expertises. To be able to appropriately and efficiently reward members for their contributions, to allow proper decentralized policing of reputation, multiple incompatible types of REP tokens are needed, one for each expertise the DAO requires to function.

For example, every DAO will need help developing the software they use, so devREP is needed that is not interchangeable with the main workREP. A second example every DAO will need is govREP which controls the decisions the DAO makes for how to change the smart contracts they use in response to changes in the market. Basic workREP, devREP, and govREP each represent non-overlapping expertises. Therefore the tokens for tracking and auditing members’ relative power should also be distinguished. Separate types of tokens are incompatible, in the sense that owning one type of token gives you none of the rights or powers that any other type enjoys. How each type of REP is rewarded in a DAO requires continual negotiation between different DAOs' govREP holders.

Separate types of REP are tracked by the REP Minting Mechanism through the Validation Pool.

7. Non-fungibility

The delay in payouts allows the group to slash any member’s REP holdings if it is discovered the actions which earned any specific REP token were harmful to the DAO. This each token is different from every other, since it is associated with a particular action.

8. Review

The future orientation and non-fungibility is magnified when combined with a mechanism for slashing or augmenting reputation tokens. REP is reviewable. By allowing separate review of each particular action that earned REP in the past, tokens earned from a specific action are not interchangeable with any other token.

REP tokenomics

Main page: Reputation tokenomics

REP tokenomics is primarily the study of the economic consequences of the REP token minting mechanism. By mathematically calculating the REP salary from a single token based on the rate of fees the DAO attracts, we can determine the present value of a REP token under a variety of economic conditions. This understanding helps guide governance decisions to choose operating parameters which optimize incentives for behaviors that serve a DAO's goals.