PIP-40 Pre-Proposal: Simplified updates to PIP-38 Compensation Language

Proposals Pre-Proposals
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Attributes:

  • Author(s): @msa6867
  • Category: Governance / New PIP-38 Compensation
  • Replaces: PIP-38 Compensation Scheme

Summary:

PIP-38 was passed with intention to be supplemented with a follow-on proposal to fix perceived defects in the compensation portion of the proposal. @zaatar et al have proposed one fix to this section of PIP-38. This author finds the @zaatar proposal to be unduly complex, restrictive and burdensome. This alternative proposal, on the other hand, retains almost all the original wording of PIP-38 but offers a few tweaks to correct some perceived defects. The body of this proposal is presented in strikethrough (deleted wording)/Italics(added wording) format of the original PIP-38 text. The four changes captured by the strikethrough/italics are listed below:

  • Reduces Shannon award by half each quarter starting end of Q3 2025 in the event that Shannon completion is delayed beyond Q3 2025. This preserves a feature desired by @zaatar et al, but does it more gracefully than declaring an all-or-nothing cliff in August 2025. (Language is ported verbatim from @zaatar as placeholder to define when the Shannon completion milestone is achieved; this language may need refining from the dev team)

  • Limits Shannan and Milestone Remuneration rewards to 80% of DAO treasury at the time the milestone is achieved. This preserves a key feature desired by @zaatar et al to protect DAO integrity from an event that drains completely its treasury, but does so much more simply than the @zaatar proposal.

  • Adds a 3-person DAO Remuneration Committee to approve Foundation-suggested remunerations, in keeping with @zaatar proposal, especially the comment by @o_rourke stating he was amendable to such a committee so long as it was to approve Foundation suggestions, not to initiate suggestions.

  • Closes a loophole that allows the Foundation to unilaterally decide to remove the lock period associated with the rewards by making the DAO, rather than the Foundation, responsible to to correct defects in award lock if so advised by legal counsel.

Proposed Change to PIP-38 wording (in Strikethrough Italics format)

[nb:The following text is taken verbatim from PIP-38 recently approved by the DAO, excepting that: strikethrough text indicates proposed deletion of words from the PIP-38 text and italicized text indicates proposed addition of words to the PIP-38 text]

Summary: Each of the following is a proposed change remuneration package – the first to the developers of Shannon and the second to Michael O’Rourke individually. This omnibus form is proper, despite the language of Section 6.2 of the Constitution, because the proposed changes below are meant to be considered in relation to and combination with one another and these proposed changes cannot feasibly be divided into separate proposals without losing their meaning.

Reasoning: The goal is to align interests between the various parties building and promoting the Pocket Network.

a. Shannon Remuneration

Approve the following incentive-based compensation package for Shannon developers and contributors.

Subject to the oversight and determination of the Foundation board of directors, and further subject to approval by a 3-person Remuneration Committee to be stood up by the DAO, the developers and contributors to the Shannon upgrade to the Pocket Network shall be entitled to the following grant of POKT:

  • 48,000,000 POKT**

** Maximum Shannon remuneration shall be reduced by half if Shannon rollout is not complete by end of Q3 2025, and by half again for each subsequent quarter that ends without Shannon rollout being complete. Shannon Remuneration shall not exceed 80% of the DAO treasury at the time Shannon rollout is complete. Shannon rollout is deemed complete when all POKT, nodes, and traffic have migrated to the new chain and the current chain is deprecated.

Remuneration Package Terms:

  • This incentive opportunity will be time limited and will expire three years from the date of approval.
  • Payment in satisfaction of this incentive will come from the DAO treasury, be held separately in a multi-signatory wallet controlled by the Foundation board of directors following grant and be distributed to the various developers and contributors at the Foundation board unanimous decision and discretion.
  • Except as otherwise determined by the Foundation DAO, upon advice of counsel, any POKT earned pursuant to this incentive package will be locked for four years from the date of receipt, with 25% unlocking each year thereafter, , where receipt means delivery of earned POKT to the recipient’s digital asset wallet address.
  • Michael O’Rourke will be personally excluded from this incentive.

b. POKT Performance Remuneration

Approve the following incentive-based compensation package for Pocket Network developers and contributors.

Subject to the oversight and determination of the Foundation board of directors, and further subject to approval by a 3-person Remuneration Committee to be stood up by the DAO, the developers and contributors to the Pocket Network shall be entitled to the following grant of POKT:

  • $0.50: 48,000,000 POKT*
  • $1.00: 48,000,000 POKT*
  • $3.00: 98,000,000 POKT*
  • $5.00: 98,000,000 POKT*

*All prices are the average trailing 90-day price. Each performance-based Remuneration shall not exceed 80% of the DAO treasury at the time the price milestone is achieved.

Remuneration Package Terms:

  • This incentive opportunity will be time limited and will expire three years from the date of approval.
  • Payment in satisfaction of this incentive will come from the DAO treasury, be held separately in a multi-signatory wallet controlled by the Foundation board of directors following grant and be distributed to the various developers and contributors at the Foundation board unanimous decision and discretion.
  • Except as otherwise determined by the Foundation DAO, upon advice of counsel, any POKT earned pursuant to this incentive package will be locked for four years from the date of receipt, with 25% unlocking each year thereafter, , where receipt means delivery of earned POKT to the recipient’s digital asset wallet address.
  • Average trailing 90-day price will be calculated using the volume weighted average price (VWAP) for the preceding 90 days of trading using price data gleaned from CoinGecko .

Motivation

The goal is to quickly gain consensus on implementing the simplest and most salient fixes to the compensation language of PIP-38 without getting bogged down on the more complex and burdensome changes proposed by @zaatar. As this proposal ports and simplifies/modifies some of the main points of @zaatar, it is envisioned that the two pre-proposals may merge, hopefully in this simplified format.

The key objectives achieved by this proposal are:

  • Incentive timely completion of Shannon by making Shannon award time sensive
  • Prevent an event that drains completely the DAO treasury
  • Add DAO oversight to preserve fairness and prevent self-dealing by the Fundation
  • Ensure integrity of the lock-period put in place bu PIP-38

Rationale

Re time-sensitive Shannon remuneration:
This proposal seeks to strike a middle ground between the 3 years granted by PIP-38 to complete Shannon, and the one year cutoff proposed by @zaatar. This proposal gives full reward if Shannon complete by Q3 2025 (roughly 13 months) and cuts in half each quarter thereafter (preserving also the 3 year cutoff of PIP-38).

Re limiting remunerations to 80% of DAO treasury at time of milestone:
Attempt is made to greatly simplify preserving DAO treasury integrity compared to @zaatar proposed solution. Limiting remuneration to 80% of DAO treasury gives the Foundation much greater freedom to achieve its goals than the 20%/10% numbers proposed by @zaatar, and is much more in keeping with the spirit of the intention of PIP-38. It is up to the Foundation to manage emissions, DAO percentage and DAO spend in a way that will allow it to meet its desired award levels.

Overlapping milestone events are quite possible (e.g., Shannon and $0.50 may happen at or near the same time). if that happens, or if milestones are hit much quicker than the Foundation anticipated (and thus before the DAO treasury can build up sufficient tokens to meet a full award level), the Foundation will do whatever it needs to do to modify the award according to what is actually available.; they can’t spend what they don’t have. The DAO does not have to micromanage the Foundation and tell it how to handle such contingencies. This proposal simply makes the tweak that instead of “fact of nature” limit of 100% of treasury at the time of milestone, the hard limit is 80% of treasury at the time of milestone.

Milestones that hit the DAO treasury in rapid succession should not unduly stress the DAO. Suppose $0.50 and $1.00 are achieved back to back and DAO treasury is depleted by 96% (20% of 20% leaves 4% remaining). By dollar value, that 4% at or above $1 has roughly the same value as 100% of POKT level at current prices. Ditto if $3 hits not long thereafter.

Re DAO remuneration Oversight:
@o_rourke has already indicated he would be agreeable to this level of oversight to Foundation remuneration decisions. Oversight is sufficient to prevent self-dealing as opposed to turning the entire process over to an independent DAO committee, which goes against the spirit and intention of PIP-38.

Re Lock Period:
The phrase, “Except as otherwise determined by the Foundation, upon advice of counsel,…” leaves too wide of a loop-hole for the Foundation to unilaterally change the intended lock period of PIP-38. Should some actual legal challenge to the lock period arise, it is not too much to ask for the DAO to be involved in the loop to make the necessary corrections.

Dissent

(Will be addressed as it arises)

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I think that you are seeing the glass half-full here. The cap of 80% of the DAO treasury will drain the DAO treasury, providing greater value to initial milestones and left the DAO with no net gain after the 3 years.

If we suppose that the DAO treasury starts growing at 2x of what it grows today (accounting for greater minting but also greater spending) and that milestones are hit every 9 months, we can see how the 80% cap and a 15% cap differs:

Rewards per milestone

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An 80% cap provides higher rewards for the initial milestones and converge with the 15% as the time runs.
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The same happens if we denominate this in USD. Also note the red lines, corresponding to Michael’s asked amounts, neither approach reach those values (in the calculated scenario).

DAO Holdings

However the biggest problem is here, the DAO treasury evolution:

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You can clearly see how an 80% max take can drain the DAO treasury, a 15% take is much more conservative, keeping roughly 50% of all the DAO holdings.

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If we measure this in USD, the effect is the same. The 80% take is so low that we need a new graph to analyze it:

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You can see that even after all the stress and work that this 3 year period will have on the DAO, the actual holdings (denominated in USD) only grew by ~4x… This will leave the DAO in the same position that it is today.

Calculating the grow of the DAO holdings and the spending of the new PNF is impossible. Different suppositions (DAO treasury growth, milestones schedule) greatly impact the outcome of these graphs. The only thing I pretend to do here is to show trends which are clear:

  • Higher takes make initial rewards larger than later ones, when the opposite should be true.
  • Higher takes impact the DAO holdings after this period, leaving the DAO in a similar position than today, even when the price has gone up. Moreover, the holdings of the DAO in POKT compared to the total circulating supply is much lower, making it a weaker economical actor.

I think that we need to be more forward-looking here and be a little more conservative on how we allow the future DAO funds to be used.

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TL;DR

MSA’s preproposal is a scaled down, weakened version of the compensation scheme of PIP-39. It fails to address creation of the DAO committee that will oversee the use of its treasury to fund compensation, thereby necessitating yet another proposal and DAO vote (on the committee). All of MSA’s valid concerns are now addressed in the amended version of PIP-39 that incorporates changes proposed by Michael O’Rourke.

Four Key Features of MSA’s Preproposal

MSA highlights the following four key features of his preproposal (PIP-40). I will address these, in turn, below.

Shannon completion compensation package

My understanding is that Shannon will be shipped in time; I would leave one year as a hard limit. However, I would empower the DAO remuneration committee, upon recommendation by PNF, to extend the one-year deadline if the delay is due to circumstances beyond the Shannon team’s control.

Total rewards for price milestones

PIP-39 as now amended preserves the reward package totals as set out in Michael’s original compensation scheme but, like MSA, stipulates that the totals cannot exceed a fixed percentage of the DAO treasury. My proposal (PIP-39) sets this limit at 15 percent of the DAO treasury, though for flexibility, it provides that the committee, following consultation with PNF, can modify this percentage. Ramiro (above) notes that 80% is reckless and that 15% is in the strike zone.

DAO committee powers

PIP-39 as now amended proposes a 3-person committee. Under MSA’s preproposal, the committee would have authority only to approve the distribution suggested by PNF. There is no discussion about what occurs if the committee declines to do so.

Under PIP-39, the committee must treat PNF’s recommendations with deference. However, in cases where the committee does not accept PNF’s suggested distribution, the committee must try and reach agreement with PNF. Only if agreement is not possible would the committee’s decision govern.

Allowing the committee, in these narrow circumstances, to make decisions on how to apportion rewards is in keeping with Michael’s agreement to “leave control over compensation payments to the DAO for hitting price-targets.”

Lock-up loophole

PIP-39 also closes this loophole.

No Discussion of Committee Setup and Operation

MSA’s preproposal fails to discuss the establishment and functioning of the committee - a serious omission. Details on the committee’s creation and operation are a necessary piece of the compensation scheme. Hence, “implementation” is a big and indispensable part of PIP-39.

Best to Avoid Delay & Fatigue of Separate Vote on Committee Setup

MSA’s approach would require two DAO votes - one on changing the PIP-38 compensation scheme and another, afterward, on the committee’s setup and operation (PIP-41?). This would create delay and unnecessarily exacerbate voter fatigue.

Voting for changes to the compensation scheme and creation of the committee should be part of the same proposal as this ensures the committee will be up and running and able to approve the Shannon completion package as soon as possible. It’s important that the Shannon dev team know without delay what they’ll be getting.

Other differences between the PIPs

Several terms included in PIP-39 are notably absent from MSA’s preproposal; some of these are noted below. These missing terms are designed to protect the DAO treasury and ensure the fair distribution of rewards.

Mechanism to address misbehavior

MSA’s preproposal provides no way to deal with possible misbehavior, However unlikely misconduct might be, not having a mechanism to deal with it is imprudent.

KYC

KYC is necessary to prevent improper allocation of DAO funds. MSA’s preproposal does not require it.

Individual Reward Limits

This provision is meant to ensure a wider distribution of the reward pies. For flexibility, the committee can up these percentages. MSA’s preproposal imposes no such limits.

Flexible Criteria for Reward Allocation

My proposal creates a transparent and flexible process for reward allocation decisions by PNF. Any Pocket community member will be able to apply to PNF for a grant based on published eligibility criteria. MSA’s preproposal includes no such framework which makes PNF allocation decisions, however well meaning, susceptible to arbitrariness and bias.

PIP-39 is ‘Complex’ and ‘Restrictive’

By limiting the size of Michael’s POKT compensation packages to a reasonable percentage of the DAO treasury, much of the “complexity” of PIP-39 has been eliminated.

In order to protect DAO funds and ensure fairness, PIP-39 does include restrictions on PNF conduct (e.g., open application process for price-milestone grants based on published eligibility criteria). But at the same time, it’s flexible and contains mechanisms for relaxing these restrictions where necessary.

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Whether 80% or 15% or something in between, the goal of putting forward an alternative wording to PIP-39 was to see if consensus can be found over a simplified mod to PIP38 in the case that no consensus can be found in the PIP-39 approach. Something is better than nothing, even if it is comparatively “weak.”

While 80% might be too aggressive if DAO has growing need to fund things that cannot wait for retroactive rewards, 15% is probably too conservative, in that it strips the spirit and intention of PIP38; Perhaps a number in between these two “extremes” can be found that is to the satisfaction of both the new set of PNF directors and to the DAO?

That being said, if PIP-39 can be massaged into a form that is suitable to PNF and able to pass a DAO vote, then there is obviously no need for this alternate PIP. I don’t plan to pursue this particular pre-proposal any further at the moment, but it can be resurrected with whatever percentage value makes sense in the event that PIP-39 fails to find consensus.

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