A sustainable compensation model can be a make-or-break for DAOs trying to retain and onboard contributors, especially in the current market conditions.

This article will cover:

• Overview of DAO Compensation
• DAO Compensation Structures and Working Groups
• How DAOs use Coordinape
• Native Token Compensation Incentives
• Hybrid Compensation Models

Let’s dive into the current state of DAO compensation, what’s working, what isn’t, and what different DAOs are doing.

DAO Compensation Overview

The DAO compensation space is complicated, inconsistent, and varies based on the individual needs of the DAO and the needs of different workstreams within the DAO. However, one need remains consistent: flexibility.

DAO structures are constantly changing, and so are the needs of DAO contributors.

Some DAOs have incredibly flexible compensation structures that require each contributor to submit a proposal for each project they complete/each payment they request. Other DAOs allow contributors to choose compensation structure (% in native token vs. stables) or break compensation down into different workstreams, where is structure is voted on for each individual workstream.

Compensation Structures and Working Groups

It’s important to have clear, transparent compensation guidelines, but flexibility is critical in keeping up with the evolving nature of any DAO. Here’s where working groups / workstreams come in, which you’ll see mentioned a lot throughout this article.

DAOs like Index Coop, CabinDAO, Lido Finance, ENS, and Gitcoin create different workstreams for greater composability when it comes to compensation. Each workstream creates its own budgets, proposals, and compensation structures. This is useful because DAO has different functions, and each function has its own needs. Working groups allow for each budget and compensation structure to be tailored to the individual needs of each specific function of the DAO. Budgeting for each working group is typically broken up in quarters, which many DAOs refer to as “Seasons”.

Other DAOs like Yearn Finance and DXdao use a tier system to create different compensation structures based on the level of commitment from each contributor.

Many DAOs who have adopted workstreams use Coordinape to allow each workstream to determine their own compensation, where DAOs who use a tier system often have a set compensation structure. While some DAOs split the entire DAO into workstreams/working groups, others only use them for their part-time contributors, and create completely different structures for their core-contributors.

Before we go into detail on compensation structures, let’s dive into Coordinape and why it’s an extremely useful tool for DAOs.

What’s Coordinape?

Coordinape is a powerful tool that focuses on DAO compensation allocations. Coordinape, which emerged from Yearn Finance’s grant program (we’ll touch on Yearn later), is all about deciding compensation.

Contributors use the platform to report and validate the work they’ve done, and have their peers decide on the appropriate allocations. At the end of each period, contributors will receive a % of GIVE tokens out of the amount dedicated to the working group within the DAO, and the contributor will receive that % of the total working group budget (in stable coins or native tokens, varies by DAO) as their salary allocation.

100s of DAOs are currently using Coordinape, including DAOhaus, BanklessDAO, Index Coop, Yearn Finance, and Seed Club.

Bankless uses Coordinape to compensate their part-time contributors, which are split into 3 sub-groups: Level 1 contributors, Level 2 contributors, and Guess Pass holders. Each level receives a monthly allocation of 500k BANK, and contributors in each level will determine each others BANK allocations using the Coordiape platform. Like other DAOs, Bankless keeps its core contributors on a set compensation structure. See their Snapshot proposal along with the proposal specs for a detailed outline of the DAOs compensation for “Season 4” (5/2/22–7/29/22).

While some DAOs use Coordinape for all contributor reward allocations, others use it for a specific tier of contributor, and create different compensation models for their “core” contributors. Let’s dive into what these structures look like and how they vary across the top DAOs.

The Different Compensation Structures of DAOs

Many DAOs, as mentioned above, split their contributors into different levels and tiers. Certain levels receive only stables, certain levels receive only native tokens, and in some cases, a mix of both! This varies across each DAO. Let’s look at a few different DAOs and how they aim to incentivize contributors to mission-align with the DAO while minimizing impact to their treasury.

Native Token Compensation Incentives

DAOs like Lido Finance and Yearn have created incentive programs to discourage contributors from dumping the DAOs native token. By locking your tokens, the DAO gives you the opportunity to earn an extra % on-top of your native token compensation based on how long you agree to lock your tokens. ShapeShift has used this strategy as well, which we’ll dive into later in the article.

Why are these incentives important?

Let’s look at one of the top DAOs, who does monthly payments rewarding contributors with a significant amount in their unlocked native token. In 2022, there were 5 payment distribution days that resulted in a negative price impact. Across these 5 dates, 85% of all payments sent in native tokens were sold almost immediately, resulting in an average negative price impact (within 48 hours of payment distribution) of ~6%.

Another top DAO, who pays contributors more unlocked native tokens than stables for their salary, sent more than 50% of their 2022 payments on one distribution day, leading in a negative price impact of ~11%.

These examples show how sending contributors unlocked tokens, while not letting them choose their compensation allocations, can lead to immediate and significant dumping of the DAOs token on the open market. On the other hand, across a certain DAO’s most frequent contributors, only ~30% of all native tokens paid were sold, which can be accredited to the ability for contributors to stake their tokens (>20% of all native tokens paid were staked).

DAOs are combatting this issue in different ways, so let’s dive into how a few of them are doing so.

Yearn Finance

Back in April, Yearn’s Chris Eberle spoke about their new compensation structure at the DAOist GGG in Amsterdam, where he outlined what makes their compensation philosophy so unique.

The DAO splits their contributors into 4 levels:

• Entry: receive bug bounties or individual payments
• Contributor: through Coordinape, where payments are determined by peers
• Trusted contributor: No set standard; this can be grants or project-specific payment requests for a specific amount of time
• Doer: full-time/core-contributors who follow their streamlined compensation strategy

Before the streamlined strategy, compensation became a new conversation for each team member, there was little payment transparency, and all YFI (Yearn’s native token) came with a “no-dumping” understanding. The DAO decided this was unfair, as contributors need to meet their short-term financial needs.

Yearn addressed all these problems with their upgraded compensation plan. Now, all compensation to their “Doers” is in the stables. Contributors are given the option to buy YFI with the compensation they received that month in stables. As seen in the table below, contributors can buy VFI with a time-lock, with a minimum of 1 month and a maximum of 4 years. The longer the lock-up period, the greater discount the YFI can be bought at.

Upon using stables to buy discounted YFI, it will immediately be locked for the chosen time-period and returned in veYFI. Not only does this structure help contributors meet their short-term needs, it also encourages them to buy into the DAO, mission-align, and participate in governance, all while keeping YFI off the liquid markets.

Lido Finance

Lido has 83 contributors spread across 20 workstreams. Each workstream is allocated both LDO & DAI for compensation, with a larger sum in LDO (Lido’s native token). LDO is distributed to contributors with no time-lock, but contributors are given the option to earn a bonus on their LDO.

Lido’s Long-term Incentive (LTI), which was just proposed in early July, allows contributors to earn a bonus on their base annual salary by locking LDO: 1 year cliff with 3 year total sequential monthly vesting.

MakerDAO

While they compensate their “recognized delegates” (part-time contributors) in DAI, MakerDAO differs from Lido and Yearn as the compensate their core contributors exclusively in MKR (MakerDAO token). Core contributors are rewarded in vesting MKR: 3 year vesting period with a 12 month cliff. After the first 12 months, MKR will vest every 3 months until the end of the 3 year vesting period. The DAO uses the trailing 6 month average of MKR price used to calculate USD value for MKR payout, but allows for manual pre-pricing to prevent contributors being punished by negative market conditions. This strategy is a great way to mission-align with contributors and keep tokens off the open market, but not all contributors can afford to only receive their compensation in illiquid tokens.

USDC, or Stables, That is the Compensation Question

Compensating contributors in only stable coins can quickly drain a DAOs treasury and shorten their runway, while compensating in only native tokens leads to contributors dumping their tokens to meet their short-term financial needs, often leading in negative price impacts for the DAOs native token. Certain DAOs are starting to ask; why not compensate contributors with a mix of both?

Hybrid Compensation Models

DAOs like ShapeShift and DAOhaus (both on Gnosis Chain) are using hybrid compensation models to send contributors a mix of stablecoins and native tokens locked inside NFTs. This model is a compensation powerful tool that more DAOs should explore to help weather the bear market.

DXdao, Seed Club, and Index Coop also use a hybrid compensation model, rewarding contributors in both native tokens and stables. Let’s look at how they do this, and how ShapeShift and DAOhaus use the Hedgey protocol to execute their hyrbid compensation strategy.

DXdao

DXdao uses a tier/level based system to determine the contributor compensation and its allocation in stables vs. native tokens. The higher the level, the higher the pay, and the higher % of the compensation in DXD (DXdao’s native token). It’s important to give contributors stables to meet their short-term needs, but as the commitment and compensation of a contributor grows, giving a higher % of pay in their native token increases the alignment of contributors with the DAO and encourages participation in the governance process.

DXdao contributors create individual proposals outlining their contributions and what level they are/think they should be. Contributors can submit proposals for a week of work, 6 months of work, or any amount of time. Some contributors submit proposals for retroactive compensation (for work they’ve already completed), or for an upcoming 6 months of contributions.

You can find all the DXdao contributor proposals here.

Seed Club

Like many DAOs, Seed Club splits it’s compensation into Core Contributors and Part-time Contributors. Core contributors receive a mix of CLUB and USDC based on their role, while part-time contributors have a choice between receiving 100% in USDC, or 50% in CLUB and 50% in USDC.

Part-time contributors who decide to receive CLUB will have no vesting schedule, while core-contributors receive 1% of the CLUB token supply as part of their compensation, vested over 4 years with no cliff. For core-contributors, all retroactive compensation is paid in unlocked CLUB.

This is an effective model because part-time contributors who need their whole compensation in stables have the option to do so, and because of this, they are less likely to immediately market sell CLUB if the choose to receive it. For core-contributors who are paid larger amounts of CLUB, having a vesting schedule is a great way to create gradual liquidity while preventing significant dumping on the open market.

Index Coop

Index Coop uses Coordinape to allow each working group the freedom to decide on how they would like to set up their allocation structure. Every month, Index Coop pays over 100 contributors across 14 working groups, who each control their own budget and compensation allocations. Hammad1412 does a great job of outlining how Index Coop uses Coordinape in their Flexible Contributor Rewards forum post.

All contributors whose compensation is controlled through Coordinape are considered part-time, while full-time contributors have a set yearly salary and choose between three options for compensation: 100% USDC, 50% INDEX: 50% USDC, or 100% INDEX. Just like Seed Club, allowing contributors to choose their salary allocations gives contributors freedom to make decisions based on their individual short-term and long-term needs.

Using Hedgey to distribute locked tokens inside NFT wrappers

Both ShapeShift and DAOhaus have used the Hedgey protocol to implement their hybrid compensation model. This Mirror article below does a great job outlining how they’ve used Hedgey to execute their monthly compensation distribution by locking their native tokens inside NFT wrappers.

ShapeShift

ShapeShift passed this proposal to enable contributors to receive partial salaries (monthly) in FOX, opposed to just USDC. To incentive participation, contributors can receive a bonus in FOX by taking part of their salary in time-locked FOX. The longer the lock-up period, the bigger the bonus. Here are some of the details:

These time-locked contributor reward distributions come with a twist: using the Hedgey Snapshot Strategy, each NFT retains the same voting power as liquid tokens. This can be merged with other Snapshot strategies to combine voting rights of locked & unlocked tokens.

This strategy allows communities to mission-align contributors while still giving them an active voice in governance.

DAOhaus

DAOhaus was the first to use the Hedgey protocol to send their contributors time-locked tokens, wrapped inside NFTs. DAOhaus already used a hybrid compensation structure, allowing contributors to choose their % compensation in stables vs. HAUS. Implementing the distribution of HAUS locked inside NFTs allowed contributors to earn double the HAUS, locked for one year.

DAOhaus has taken this to the next level by creating a Time-Locked Distribution Boost, allowing any DAO using the DAOhaus platform to send multiple contributors time-locked tokens wrapped inside NFTs.

Read more about the Boost and how it works in this detailed thread, or go directly to the DAOhaus Boosts Marketplace to check it out and create your own time-locked contributor reward distribution.

What next?

As the space continues to evolve, it will be interesting to see what new trends emerge, and how many DAOs adopt tools like workstreams and vesting token distributions.

If you’re interested in delivering locked tokens to your community, or just want to learn more about Hedgey, follow us on Twitter, join our Discord, or reach out to us directly on Telegram at t.me/goforlindsey.