Retroactive vs. Proposal-Based Funding for DAOs

I’ll probably be a millionaire by now if I received a dollar for every time a member of a DAO complained about an approved proposal that was never executed. If we are being honest with ourselves, then you’d agree that the traditional proposal voting system used by many DAOs is flawed.

It is susceptible to corruption, with influential members lording over the activities of the group. A seemingly novel proposal gets ratified and funds are distributed, but the idea never gets executed. From changing milestones to pushback on the delivery dates, this is how malicious actors subtly drain DAO treasuries. At the end of the day, the once-hyped DAO is typically left with a few interested members, a largely disgruntled community, and of course dwindling reserves.

In retroactive funding, projects are rewarded based on their demonstrated value and success, rather than on persuasive proposals. While this approach significantly outperforms the traditional proposal voting systems, it is not a one-size-fits-all solution. In this article, we examine the pros and cons of both models.

First, a Quick DAO Download

For the uninitiated, DAO stands for decentralized autonomous organization. It’s an internet community collectively controlling shared assets through transparent rules on a blockchain.

DAOs issue governance tokens that let holders vote on decisions. Instead of CEOs in corner offices, regular folks draft proposals and majority token votes decide the outcome.

This peer-to-peer model upgrades democracy for the digital age. But it also requires rethinking old assumptions like how to fund projects.

The Status Quo: Project Proposals

Today, most DAOs fund work through traditional project proposals. Here’s how it works:

  1. A DAO member creates a proposal outlining their project idea and requested funding.
  2. After a discussion period, token holders vote yes or no to approve the proposed budget.
  3. If passed, the member executes the project using the approved funds.

This provides a structure where the DAO reviews and approves ideas before allocating resources. While this approach seems to prevent waste, it also slows velocity.

The Retroactive Funding Revolution

What if we flipped the script with retroactive funding instead?

In this model, contributors just start executing great ideas that benefit the DAO. No need to ask the DAO for permission first or tie up budgets.

After they’ve shipped something awesome, they request funding to cover their efforts. DAO votes yes or no to reward them (and how much) looking backward at the work rather than forward at the plan.

This encourages creators to build freely based on inspiration rather than rigid proposals.

Weighing the Pros and Cons

Let’s break down the key upsides and downsides of each approach.

Benefits of Retroactive Funding

  • Contributors feel empowered to build proactively when opportunities arise.
  • DAO sees finished work first allowing informed funding judgments.
  • Unlocks flexibility to support impromptu efforts not envisioned in any proposal.
  • Rewards doers over planners and aligns incentives toward execution.

Drawbacks of Retroactive Funding

  • Requires heavier diligence reviewing work rather than quick prospective proposal reviews.
  • There is the possibility that some builders may not receive compensation.
  • Uncertainty around covering costs upfront before potential later compensation.

Benefits of Proposal-Based Funding

  • Prevent wasted efforts by vetting proposals before work starts.
  • Gives the DAO forward visibility into resource allocation across projects.
  • Reduces risk of uncontrolled spending outside of approved budgets.
  • Provides funding certainty for contributors once proposals get greenlit.

Drawbacks of Proposal-Based Funding

  • Clunky processes stifle agility and spontaneous initiatives.
  • Favors planners over doers and incentives writing over execution.
  • Committee gatekeeping risks choking off unconventional ideas.
  • Difficulty predicting appropriate budgets and scoping projects with unknown unknowns.

Hybrid Funding Models

Rather than binary choices, combining models situationally can optimize tradeoffs. For instance, larger strategic programs can follow structured proposals with defined milestones while more experimental or reactive efforts qualify for retroactive grants.

Furthermore, DAOs should consider enforcing thresholds that limit max retroactive funding as a percentage of the overall budget. There should also be clear guidelines distinguishing the appropriate usage of each funding mechanism.

Evolving DAO Funding Innovation

Like with voting mechanisms, we’re just scratching the surface of how programmable money enables next-gen funding possibilities:

  • Micro-royalties automatically direct small shares of income to parties whose work enabled it.
  • Vesting contributors in governance tokens rather than fiat payouts to align incentives.
  • Smart contract treasuries algorithmically allocate resources based on metrics without votes.
  • AI/human hybrid systems assessing past contributions and making suggestive funding recommendations.

On a parting note, funding models will keep maturing as DAOs research what configurations best nurture collaboration.

Trailblaze the future of work and value exchange by tweaking and remixing funding flows. Don’t just rebuild broken traditional models – make models that feel native to the community and technology today.

Onward DAO pioneers!