We’ve been working on the Steem Proposal System for almost a week now, so I thought it would be a good time to provide an update on the progress.
First, on the marketing front, the name is being changed to Steem.DAO (DAO = Decentralized Autonomous Organization) per the request of Steemit Inc. DAO is a popular term for blockchain-based systems like the worker proposal system.
For the cryptocurrency history buffs among us (mind you, it's a pretty short history), the most famous such DAO was the rather ill-fated “DAO coin” on the Ethereum network, which failed due to bugs in its implementation (so we’ll try hard to avoid that in our design). Personally, I believe the term DAO was a takeoff on the term “DAC” (Decentralized Autonomous Corporation) created by Steem’s own 
We’ve create a github repository forked from the Steem code base where we’ll be doing the work:
https://github.com/blocktradesdevs/steem/issues
We’ve reviewed the implementation of the worker proposal system in BitShares and identified the key differences for Steem. We’ve also spec’d out the basic sub-tasks required to complete the project (see the issues link above) and discussed the algorithms we will use. Our next step is to begin actual coding of the system.
The poll on whether to use an inflationary funding source has been a bit inconclusive so far, and with the available polling tools, I think it will be difficult to reach a solid conclusion on what source to use, even if inflation is the consensus approach to long term funding.
Therefore, I’m coming to the conclusion that the best thing to do is design the initial system as a pure donation system, then allow proposals to be made within the Steem.DAO itself to decide how to add future funding sources to the DAO’s budget.
This has a couple of benefits over existing polling solutions: 1) any user can dynamically add their own competing idea for a funding source by creating a proposal for it and 2) the Steem DAO uses "approval voting", so users can vote on multiple competing alternatives that they like, with the aggregate voting results ranked by stake-weighting, and 3) voters have a way to vote for how many funding sources they want to have, by moving the “refund proposal” up or down the proposal rankings.
One potential problem with the above idea could be that there wouldn’t be enough funds from donations to fund the proposals to add new funding sources, but I’m assuming Steemit’s initial donation should easily cover any such costs.
