UMA will be taking part in a live AMA with Aragon on Tuesday August 24th at 4pm (UTC) here: https://www.youtube.com/watch?v=3vJTBabiXmM
Following two indicative votes by the community (Vote 1, Vote 2), Aragon is airdropping 1M KPI options, worth 100,000 $ANT, proportionally to any project that migrates their treasury from Aragon Client to Aragon Govern, up to a threshold of $100m Total Value Locked (TVL). The options will expire on September 30th, 2021, and be allocated on a first-come-first-served basis as a product of treasury size and the TVL at expiry.
Decentralized Autonomous Organizations (DAOs) are a revolution in organizational structure: they architect out the administrative centre and devolve power to community members in a directly democratic way. However, they suffer from two major problems: free-riders and voter fatigue. Having most of the burden of management and governance borne by only a few committed members makes it difficult to orchestrate a DAO towards a common goal and create real value. This is unsustainable, especially at scale, and incentive mechanisms such as standard airdrops have limited effectiveness as they are usually dumped for a short-term profit. At root, the problem is that there is no direct correlation between the work performed for a DAO and the reward received.
As decentralized finance (DeFi) has developed over the past few years, all kinds of crypto-economic solutions have been developed to incentivize communities to learn about protocols, share information, and act truthfully, so it was unlikely to be long before these techniques would be applied to the coordination problems associated with DAOs.
To this end, UMA has invented a DeFi protocol based on Vitalik Buterin’s concept of a Schelling Coin, which allows anyone to contract and build finance products on-chain. Their technology can be adapted to create a futures market for business metrics known as Key Performance Indicators (KPIs). The principle of KPIs can also be applied in the context of DAOs to incentivize members to achieve explicit goals by issuing them with options that are redeemable if those goals are met.
After exploring the idea back in April, Aragon is delighted to formally partner with UMA for a groundbreaking experiment to bring financial derivatives right into the heart of decentralized organizations. In this initial phase, to incentivize a move from Aragon v1 to Aragon Govern UMA has minted one million synthetic options backed by 100,000 $ANT, which will be redeemed at the expiry of the options.
What are KPI Options?
KPI options work similarly to standard financial options: investors purchase or receive a contract that guarantees them a certain payout if a prerequisite is met. In a KPI option, the prerequisite is a DAO metric such as the number of members, total assets locked, or something similar. Like most instruments of this kind, KPI options may be traded on both primary and secondary markets, which can widen the catchment of stakeholders well beyond the primary dealers. If the metrics are achieved, then the payout is released. One variation on this process could be that if only a portion of the target is achieved, only a corresponding percentage of the payout is released.
How the metrics will be determined is usually specified in the contract. In the case of UMA, their protocol contains a plug-in Optimistic oracle, which creates economic incentives to an agreement on external data. For example, if a contract requires the $ETH/$BTC price, anyone can request the price from an oracle provider and post that on-chain with some collateral. If no one disputes the price after a time delay window, then the poster receives their collateral back, and the contract executes. However, if anyone disagrees with the price, then they may post a bond and dispute the price with a chance to win back both bonds. Final arbitration goes to $UMA token holders, who vote on the dispute and are rewarded for their participation from an inflation issuance of 0.05% for every vote, proportional to their $UMA balance. It is worth noting though, that disputes have been very rare in the history of the UMA protocol.
- Who is Eligible for KPI Options? Any v1 DAO may be eligible, as long as they migrate to Aragon Govern before 00:00 on October 1st, 2021 and the $100m TVL threshold has not been reached.
- How will the KPI Options be distributed? 1 million KPI options will be distributed proportionally based on each DAO’s treasury size relative to the total value migrated by all v1 DAOs, up to the $100m threshold. The value of each option will increase linearly with Aragon Govern’s TVL, such that if it reaches $100m then the options will expire at the full 0.1 $ANT per option. At $80m, they would expire with 80% of the value, 0.08 $ANT, and so on.
- How will the migration be audited? All migrations will be assessed on-chain. More technical specifications are available here.
KPI Options: the Engine of Web3?
Web3 is growing rapidly as a borderless jurisdiction in parallel to the offline world and legacy finance. Key to its maturity will be successfully adopting methodologies that we already know work well and tailoring them to decentralized organizations. Options and KPIs are both well understood and ubiquitous in business and legacy finance, but we are yet to see how well they will work within DAOs. The prospect of such a powerful engine of growth applied to DAOs is hugely exciting. If this initial foray is successful, we look forward to rolling out options to DAO communities for an array of additional metrics.
Aragon is building the future of decentralized governance for Web3 communities & organizations. Deploy a DAO, manage your community, resolve disputes and run enterprise-level votes, all within our open-source stack. See the latest at aragon.org, subscribe to our monthly newsletter, join the conversation on Discord, or follow us on Twitter.
UMA is an open-source infrastructure for deploying and enforcing financial contracts. UMA enables developers to quickly and easily build tokens that track the price of anything. UMA’s financial contracts are priceless. Priceless financial contracts are smart contracts that only require an on-chain price feed in the event of a dispute.