The depletion of the Polkadot Treasury intensifies! Adjusting Treasury expenditures is imminent
In our previous discussions, we highlighted the sharp decline in the total funds of the Treasury. On May 17, we also published an article on how to increase Treasury revenue: “Polkadot Insights | Polkadot Treasury funds are experiencing a steep decline, how to provide more funding for the Treasury.”
Recently, there has been a further decrease of almost 20% compared to the previous period, exacerbating the excessive consumption of the Treasury. The Polkadot Treasury is a crucial source of development funds that must be used more prudently. To ensure the sustainability of the Polkadot Treasury, measures must be taken to enable both inflow and outflow. While our previous insights focused on increasing revenue for the Treasury, this article will delve into strategies for expenditure control.
How should the Treasury funds be utilized?
One way to approach the utilization of Treasury funds for the development of Polkadot is to consider it as the government’s use of financial resources to govern. By drawing inspiration from traditional models of Treasury usage, the Treasury can be divided into two parts: annual income and surplus funds. This translates into three concrete questions: how should the annual income be utilized, how should the surplus funds be utilized, and how can the flow of surplus funds into the Treasury be sustained?
1. How should the annual income be utilized?
A reasonable approach is to establish a limit on the annual expenditure plan of the Treasury, not exceeding 100% of the annual income. This involves creating various Fellowships targeting different goals such as technology-oriented, marketing-oriented, etc., and allocating fixed proportions of funds from the annual income to these Fellowships. This concept mirrors the allocation of fixed percentages of funds from the government’s annual financial allocation to different departments for specific purposes.
Each department requires a portion of the funds for annual fixed expenditures related to public goods, essential for the department’s basic operational needs. For instance, salaries of Technical Fellowship members to ensure developers supporting Polkadot’s future development receive on-chain wages. Infrastructure operational expenses like Polkassembly, the governance site for Polkadot and Kusama, are funded annually from the Treasury to ensure the necessary operational costs for the continuous functioning of Polkadot. Supporting content and communities in different language regions is essential to ensure widespread dissemination of Polkadot content and community engagement. Additionally, regular hackathons or global events should be organized to maintain developer activity, new project outputs, and enhance global user consensus. To encourage more people to participate in Polkadot governance and dissemination, a fixed percentage of Treasury funds should be allocated quarterly as airdrops to active participants. This approach is similar to government initiatives like investment promotion and talent recruitment incentives, essential for actively attracting and incorporating external talent, projects, and funds rather than passively focusing on technology and publicity.
This part can be seen as planned expenditures.
2. The remaining funds are used to support unplanned directions.
These funds are primarily utilized to explore new initiatives that may be more effective in specific directions, such as experimenting with new marketing activities to enhance Polkadot’s outreach. If a method proves effective, it can be included in the annual expenditure plan for continuous support. Otherwise, it will no longer receive support.
3. How should surplus funds be utilized?
Surplus funds are mainly used for temporary one-time expenditures or non-long-term purposes. For example, establishing an ecological fund to invest in promising ecological projects.
As early as 2022, the Polkadot Treasury created the Polkadot Pioneers Prize, allocating around $18 million to incentivize significant technical achievements within the Polkadot ecosystem, such as zero-knowledge proofs and further infrastructure development. This initiative is akin to establishing a government industrial fund to support specific industrial sectors.
In my opinion, Polkadot possesses significant scalability potential and can encompass various technologies, including different programming languages, virtual machines, technical solutions (such as scaling, modular solutions), and application ecosystems, consolidating the industry’s technological and intellectual achievements. Therefore, it is imperative for Polkadot to establish various targeted support funds to achieve this goal.
Additionally, surplus funds can be utilized as a risk reserve to address potential risks. As previously discussed, to prevent Treasury funds from causing selling pressure, surplus DOT can be placed in protocols for over-collateralized stablecoins before generating stablecoins for distribution to proposers. In times of price volatility, utilizing surplus Treasury funds as risk capital can mitigate such risks.
Furthermore, Treasury funds can be invested in other assets to diversify the Treasury’s investment portfolio. This strategy not only safeguards against value declines due to market conditions but also leverages different assets’ varying market cycles to hedge against the risks of Treasury depreciation.
Alternatively, allocating funds for token swaps with other ecosystems can foster strong alliances similar to companies holding mutual shares, enhancing collaborative efforts.
4. How to ensure sustainable inflow of surplus Treasury funds?
The fundamental question to address is why it is crucial to ensure sustainable inflow of surplus Treasury funds. Sustainable cash flow into the Treasury is essential for Polkadot’s long-term development.
Achieving this goal is simple – ensuring that annual expenditure is less than the annual income of the Treasury. However, the current situation is characterized by unstable income and unregulated expenditures.
Currently, the main sources of Treasury income are inflation and a portion of transaction fees. However, the current Treasury income is unstable, calculated based on the difference between the current Staking ratio and the optimal Staking ratio, determining the amount of inflation funds flowing into the Treasury. The smaller the difference between the two ratios, the less funds flow into the Treasury. Without adjustments, there is a risk of minimal income for the Treasury, insufficient to meet basic operational needs.
In July 2023, there was a heated debate on whether to adjust the current inflation model to ensure a fixed 2% inflow of inflation funds into the Treasury, with the remaining 8% following the current mechanism. I support this initiative because many expenditures are essential fixed expenses for public goods, and only by guaranteeing fixed income can Polkadot’s governance and operations meet basic needs.
Expenditures from the Treasury can be managed by proposing annual expenditure plans and approving Treasury proposals as needed. By identifying proposals that fall under public goods categories and must be supported annually, ensuring continued support for these proposals is prioritized before considering other proposals. For instance, for technical proposals allocated 30% of the annual Treasury income, deductions must be made for public goods proposals, and the remaining funds should be allocated to other (technical-oriented) proposals. If the remaining funds fall below 5% of the total 30% allocated for that category, other proposals in that category for the year will not be approved. This approach ensures that around 5% of funds are transferred to the Treasury surplus.
Planning expenditures annually may incentivize all proposers to concentrate their applications at the beginning of the year to avoid running out of funds and risking their proposals not being approved. To combat this, the planning cycle can be changed to quarterly, with a fund usage plan for each quarter, which is more suitable.
5. Final Thoughts
This leads to the most complex question posed in this article. Who will propose plans, and how will they be executed?
In my view, official guidance should be provided for planning, encouraging influential individuals or organizations to reach consensus and implement the plans. However, due to Polkadot’s decentralized governance, different influential groups or individuals have divergent ideas. Without sufficient consensus, potentially beneficial plans may not materialize. However, in the evolution of human collaboration, this is an inevitable phase. Only through consensus can strength be consolidated, conditions improved, and change achieved. This perhaps is one of the significant challenges Polkadot faces on the forefront of governance.
In conclusion, the funds for Treasury expenditures mentioned in this article can be in DOT or stablecoins generated based on DOT. This can resolve the issue of selling pressure from Treasury funds. We have proposed detailed solutions and discussed the advantages and disadvantages of this approach. Feel free to refer to the original article: “Polkadot Insights: Is the Polkadot Treasury causing significant selling pressure? Here is a solution that benefits in multiple ways.”
How do you approach the issue of adjusting Polkadot Treasury expenditures? We welcome any other ideas for discussion.
