Retroactive funding, also known as retroactive public goods funding, is an emerging technique used in some decentralized autonomous organizations (DAOs) to reward work done prior to a formal proposal. This allows DAOs to incentivize and compensate valuable work that helps build community resources before governance processes are established.
How Retroactive Funding Works
Retroactive funding enables DAO contributors to get paid for work completed retroactively before a proposal to reward them has been voted on. The key steps are:
- A contributor does work that benefits the DAO before any formal proposal, such as writing documentation, building tools, or creating educational content.
- The contributor then submits a funding proposal to get compensated for their completed work.
- If the community approves the proposal, the contributor receives payment from the treasury retroactively.
This allows the DAO to reward proactive initiatives that add value before governance is fully functional. Simply put, the funding comes after the work but pays for work already done.
Benefits of Retroactive Funding
Some of the key benefits of retroactive funding in DAOs include:
- Incentivizes Early Contributions – Encourages proactive contributions even when the DAO is new and processes are forming. This kickstarts momentum.
- Rewards speculative work – Contributors can take the risk of doing work without assured compensation, knowing retroactive funding may cover them later.
- Provides Flexibility – The DAO can retroactively reward work that improvisationally meets emerging needs early on.
- Compensates Critical Builders – Important early contributors who help bootstrap the DAO can recoup fair value for their efforts over time.
- Historical Record – Creates a record of contributions that helped establish the DAO in its pioneering days.
- Jumpstarts Coordination – Retroactive funding helps aligned coordination form faster around early implicit priorities.
Thoughtfully leveraging retroactive funding allows young DAOs to harness early momentum and properly reward important work that often goes unrecognized.
Examples of Retroactive Funding
Some real examples of retroactive funding in DAOs include:
- Gitcoin – Funded over $500k retroactively to contributors who built tools and documentation for the ecosystem.
- Manifold – Allocated $140k in retroactive grants to 11 teams who created educational content early on.
- MakerDAO – Approved retroactive funding for the community members who originally built the MKR token smart contracts.
- MolochDAO – Initially funded retroactive grants for Moloch v1 development work done prior to the DAO’s launch.
- RaidGuild – Compensated guild members retroactively for work on Raider.io before the funding proposal process existed.
These demonstrate the range of use cases where retroactive funding has proven valuable in early-stage DAOs. The examples set precedents that established the norms.
Determining Appropriate Retroactive Funding
When evaluating retroactive funding proposals, DAOs should analyze:
- Value added – Does the completed work provide meaningful value to the DAO and its goals? Is the quality high?
- Timeliness – Was the work done recently at an important juncture where the contribution was especially needed?
- Opportunity cost – What was sacrificed by the contributor in terms of time and resources that could have been spent elsewhere?
- Market rate – Is the payment request a fair market rate for the work completed based on comparable efforts?
- Funding scarcity – Does paying retroactively take away funds urgently needed for impending proposals and priorities?
- Reputational impact – How will retroactively funding this work be perceived by the community at large?
By weighing these factors, DAOs can thoughtfully assess retroactive proposals rather than blindly approving all of them.
Challenges With Retroactive Funding
There are some potential downsides and risks to be aware of with retroactive funding:
- Moral hazard – Contributors may expect they don’t need approval and can just rely on retroactive pay, which undermines oversight.
- Unchecked spending – Retroactive funding can lead to uncontrolled and excessive spending on low-value work if unchecked.
- Rushed approvals – Members may feel pressured to approve retroactive proposals so contributors aren’t left unpaid rather than making considered judgements.
- Resentment – Contributors who followed the standard process may resent those getting funded retroactively without undergoing the full governance process.
- Scarce funding – Money paid retroactively won’t be available for more pressing priorities that arise later on.
- Exploitation – Bad actors could take advantage of retroactive funding by doing unrequested work then demanding payment after the fact.
DAO governance processes should account for these potential pitfalls when establishing policies around retroactive funding.
Best Practices for Retroactive Funding
To utilize retroactive funding effectively, experts recommend these best practices:
- Establish Clear Guidelines – Have transparent and consistent criteria proposals must meet rather than arbitrary approvals.
- Set Limits – Cap the percentage of treasury or number of proposals eligible for retroactive funding to contain costs.
- Sunset Retroactive Funding – Phase out retroactive funding as formal processes solidify so it doesn’t become excessive or abused.
- Incentivize Documentation – Require thorough documentation of work done to evaluate retroactive funding requests.
- Require Milestones – Have contributors meet defined milestones first to demonstrate progress rather than purely retroactive funding.
- Highlight Recipients – Spotlight contributors receiving retroactive funding to set positive norms and expectations.
Following structured policies enables retroactive funding to provide early benefits while avoiding misuse.
Governance Models for Retroactive Funding
DAOs have taken different governance approaches to managing retroactive funding:
- Core Team Discretion – Early on the core team used discretionary spending abilities to retroactively fund work informally. This kicked things off.
- Limited Member Approvals – A select few members handled evaluating and approving all retroactive funding requests in the beginning.
- Specialized Committee – A specific committee of qualified experts was created to assess and manage all retroactive funding proposals.
- Normal Proposal Process – Regular retroactive funding went through the normal proposal processes open to all members.
- Hybrid Models – A combination of the above, ex. core team first funds informally then a special committee transitions retroactive funding to the full proposal process.
DAOs can choose the model that fits their community and growth stage the best when adopting retroactive funding practices.
Notable DAOs Using Retroactive Funding
Some influential examples of major DAOs utilizing retroactive funding are:
Gitcoin – One of the earliest pioneers of retroactive funding in DAOs. Funded work on swarm repos, documentation, and coordination tools retroactively.
MolochDAO – Moloch v1 development was retroactively funded before transitioning to formal proposal process later on. Set precedents.
Radicle – The Radicle DAO retroactively funded numerous open source contributors to kickstart momentum and incentivize builders.
MetaCartel – Funded ambassadors creating content for MetaCartel retroactively as the DAO formed and coalesced.
Aragon – The Aragon project used some retroactive funding for developers working on v1 before launch.
RaidGuild – Work contributing to flagship Raid Guild projects pre-launch like Raider.io were funded retroactively.
These major DAOs helped establish retroactive funding as an accepted model in the early days of DAO growth.
Future Outlook for Retroactive Funding
There are a few potential trajectories for the evolution of retroactive funding practices:
- Mainstream Adoption – Retroactive funding could become a widespread practice as more organizations adopt DAO models that utilize it.
- Structural Improvements – Better processes and oversight may arise to reduce risks and enhance the rigor of retroactive funding approvals.
- Declining Use – As governance matures, the need for retroactive funding could fade away in established DAOs.
- Specialized Niches – Retroactive funding may primarily persist only in select domains like open source software rather than broadly.
- Synthesized Models – Hybrid approaches may emerge that blend retroactive funding with complementary incentives like awards and recognition.
- Regulatory Guidance – Regulators may eventually provide guidance on proper disclosure and management of retroactive funding.
It remains to be seen how retroactive funding will evolve, but will likely follow an arc seen in past governance innovations.
Conclusion
Retroactive funding enables DAOs to reward valuable work and kickstart momentum before formal processes are in place. It incentivizes risk-taking, unlocks flexibility, and fairly compensates critical early efforts that establish community resources. However, DAOs should take care to manage retroactive funding judiciously.
With careful policies and practices, retroactive funding can be transformational in launching productive DAOs by allowing early contributors to recoup fair value. Though the model will likely evolve, retroactive funding shows the creative ways next-generation organizations are pioneering new incentives and governance for decentralized ecosystems.
