The problem isn't capital, it's impact

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POKT Network
Jan 3, 2024
The problem isn't capital, it's impact

Capital has been a success in governance systems throughout history as a simple measure of skin in the game.

People generally don't want to support decisions that could cause them to lose money. Some argue that this is a major reason why capital-led governance - via token-weighted voting - is the dominant governance system in DAOs today.  

Or maybe it was just the easiest ¯_(ツ)_/¯

The ongoing conflict between crypto's open-source egalitarian values and the inherently centralising effects of capital is a tale as old as time. But when objective metrics illustrate that even the most values-aligned and innovative DAOs active today have a Gini coefficient worse than the most unequal countries in the world, it's probably time for a bit of introspection, and that's before we even start further down the list of other well-known DAO issues.

If capital-led governance is not the answer, or at least not the whole answer, what's a better way to produce the type of stakeholder-led systems that blockchains can help coordinate and enable?

We believe the answer to this can be expressed in just one principle: governance power should be earned, not bought.

Earning governance power

A crucial foundational mistake in most DAOs arises from commingling the right for anyone to buy the economics of a cryptonetwork with the right to have a role in its governance.  As we shared in a recent post on Citizenship in DAOs, having a permissionless system does not mean everyone who enters it should have unrestricted power. Permissionlessness is about empowerment. Governance should be about allocating power to those that have earned it.

But how to earn it?

A naive approach is to give governance power to those that deserve it. However, is it so naive to only give governance power to those who demonstrate 1) that they align with your values and 2) do something of value? It turns out that focusing on "those that deserve it" is a helpful frame. Really, we are talking about the emergent role of reputation within a given system.

Reputation can be both contextual and dynamic, so let's unpack each of these two descriptors in turn:


As they say, your reputation precedes you.  We all have a reputation, whether it's the one we hope to have or not.  Reputation emerges from all of our interactions.  While it may be imperfect, it's more evenly distributed across a given sample of active community members than when using other measures such as token holdings or tenure.  Of course, there are 100x engineers, but as reputation is multi-faceted, you would struggle to justify a 100x differential in governance power amongst a group of aligned and productive contributors. But the beauty of a governance system designed around reputation is that nuance can be represented more easily, depending on the context of the question or the decision to be made.


Reputation is not static.  It evolves. And can be lost just as quickly as it is gained. Even then, reputation typically has a lagging effect, taking time to layer upon itself to become something (or someone) you could say is "rock solid". On the other hand, token-weighted governance (mostly) removes any connection between your actions and your subsequent influence or efforts.  You can be a governance whale overnight and retain such power for as long as you like and rarely as long as you deserve. This type of inertia and ossification harms the legitimacy of the whole system over time, as a narrow focus on returns to capital can subsume all other priorities and measures of progress. A more dynamic system would separate economics and governance and ensure that the voting power of stakeholders continues to increase/decay over time, subject to how much they are actively contributing to the community's goals.


Ultimately, reputation is about impact. Generally speaking, those that drive more impact have more reputation, even if the quantum of this is always somewhat subjective. But if we strive to create impact and positive externalities, it's essential that impact, not effort, is rewarded. For example, 100 hours of work to ship a new feature that nobody uses shouldn't be valued higher than the 5 hours spent to fix a critical bug, close a major new customer, or develop a simple but very widely used (and helpful) new tool for your community.

If we want to create a meritocracy, the effort can only be fairly valued on the output it results in. The impact of everyone's collective contributions is all that matters to the future of a community-run organisation. Focusing on outcomes (quantity of impact) also helps us understand how to value contributions relative to each other and what needs to be incentivised. Once we understand where a contribution fits in the grand scheme of potential contributions, we can decide how to calibrate the rewards we attribute to such effort. Did the contribution advance your priorities as an ecosystem? If so, how impactful was it?

We applaud approaches that define impact as a primary driver for how we think about reputation. But impact should be rewarded by so much more than just profit.  Using the frame of what is impactful for your community makes it much easier to integrate financial and non-financial contributions into one governance system. Merely holding a token shouldn't be treated the same as staking a token to validate a network, carry out video transcoding work, provide storage capacity, and/or provide data from full nodes in response to an RPC request, or making valuable contributions to the project's codebase. Once you realise that impact is the metric that matters, representing capital - provided that it is productive - in your governance system becomes much easier to justify.

One way of framing all of this: Impact = Reputation = Governance

POKT Network's new modular governance system leverages verifiable credentials to enable contributors to earn governance power across three dimensions that reflect reputation and impact across our key stakeholder personas and perspectives:

By designing the system this way, we believe it codifies POKT Network's ethos of "assigning governance powers to the most engaged, knowledgeable and experienced members of our Pocket Network community" while avoiding the system drifting towards plutocracy. By representing more types of contributions, which means more types of impact, the system is more resistant to governance capture.  This aligns with our broader ethos on governance: think modular!

Not Capital or Reputation, but Both

Monetising governance is a road to hell paved with good intentions. If you don't think it's a good idea to auction off the right to spend your organisation's funds or to allow people who could have failed interviews for your organisation, were fired, or simply want your organisation to fail to propose major strategic initiatives, why does it make sense for a DAO to let this to happen?

Left to itself, token-weighted governance leads to short-term thinking and extrinsic motivations dominating. Economic maximisation becomes the guiding principle instead of the community's stated goals. Or perhaps worse, key stakeholders will no longer care as they believe the governance system doesn't serve them.

The holy grail is designing a productive, sustainable governance system that recognises the impactful - financial and non-financial - contributions of aligned community members in an open and meritocratic manner. Focusing on reputation based on impact is a potent guiding principle if you want to design such a system, as it provides a powerful framework for quantifying all types of contributions, overcoming any need for a binary decision between capital and reputation.

Finally, at the heart of the debate about how to design a governance system is the reason for doing so in the first place. Is it a business model innovation so you can launch a token? Is it a legal strategy to overcome regulatory concerns? Is economic self-interest the primary concern? Or is it to align and represent your stakeholders in an organisational form that makes decisions affecting your community more legitimate and your community more productive? If it's the latter,  we believe the simplest principle to start from is that governance should be earned, not bought.

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