Choosing Exchange Rate At The Time Of Compensation In DAOs

Paying in volatile currencies is difficult. This could be a crypto currency or some country's currency. Should you take the rate at the time of the payment, at the start of the month or average of two? This problem raises in DAOs that want to make payments in their own tokens.

EMA Based Compensation
EMA Based Compensation

Paying in volatile currencies is difficult. This could be a crypto currency or some country's currency. Should you take the rate at the time of the payment, at the start of the month or average of two? This problem raises in DAOs that want to make payments in their own tokens.

Let's say you made $1000 worth work in that month. You are going to receive your payment in the format of some crypto token. If your token was $5 at the start of the month and become $10 at the end of the month what is the fair rate you can take? We all know DAOs are risky environments to work but taking $5 doesn't sound fair at all.

Some DAOs taking arithmetic average of the rate along the month. This is called simple moving average (SMA). So you will take $7.5. This sounds fair at first. If price rises, it benefits to the contributors and if it drops, it benefits to the DAO. However, contributors may still find this approach too risky on significant price changes because there will be huge difference in the amount you get paid. When price drops from $10 to $5 and you made $3000 worth contribution you get 400 tokens that worth $2000 at the time of the payment. This may disincline the contributors from work and pushes us more to think about more fair ways.

Introducing Exponential Moving Average (EMA)

An exponential moving average is a type of moving average that places a greater weight and significance on the most recent data points. That means the result is closer to the end of the month rate. That's the essential difference between EMA and SMA. There is one more difference that the result of the EMA is configurable. It can be configured by changing one parameter in the equation. Visually it looks like this:

EMA vs SMA based compensation
EMA formula
EMA formula

As it can be seen in the formula there is a smoothing parameter that provides configuration for the output. The result is close to the arithmetic average as you increase the smoothing.

Whether the price goes up or down, the result will be closer to the most recent rate. But you always have the option of changing the smoothing parameter. Therefore, on significant price drops, contributors can be protected by decreasing the smoothing parameter. In general, any value can be chosen for smoothing. It could be 2, 4, 10 or something else.

EMAprev parameter is the previous month's EMA. In the first month, the starting rate of the month can be taken as EMAprev.

You can access the spreadsheet I made to calculate EMAs from here:

Compensation Based On EMA
Sheet1 EMA Calculator,History,Previous EMA,Last Rate,EMAPrevious EMA,Last Rate,EMA,January,11.15,7.26,85,10,9.35483871,February,8,5.9,6.3Settings,MarchDays,30,AprilSmoothing,4,MayHow to use this page:1. Enter Previous EMA. It’s the previous month’s EMA. The rate of $days before of the rel...

Both compensation and paying in volatile currencies are large topics and there is a lot to discuss. I'm curious how DAO space will evolve regarding to these topics.