Financing Cardano’s treasury

Voltaire is the era of governance in Cardano. It implements self-sustainability over time, allowing the community to develop the blockchain, proposing and implementing improvements to the system.

To give this self-sustainability to Cardano over time, funds are needed to supply a treasury.

There are a variety of treasury systems to address this task. These systems can consist of iterative treasury periods during which project funding proposals are presented, discussed and voted on.

The paper produced by IOHK in collaboration with professors from Lancaster University in the UK, called “A Treasury System for Cryptocurrencies: Enabling Better Collaborative Intelligence” on treasury systems for cryptocurrencies, introduces a collaborative, decentralized, community-controlled decision-making mechanism for sustainable funding of blockchain development and maintenance.

Source: A Treasury System for Cryptocurrencies: Enabling Better Collaborative Intelligence. Bingsheng Zhang (Lancaster University, UK), Roman Oliynykov (Input Output Hong Kong Ltd), y Hamed Balogun (Lancaster University, UK).

This approach to collaborative intelligence is based on “liquid democracy,” a hybrid of direct and representative democracy that provides the benefits of both systems.

Collaborative decision making is a central component of a treasury system that allows community members to collectively arrive at some decision.

In this system, ownership of the coin is distinguished from ownership of the share, so the owner of a coin may be different from the owner of the share of the coin. This allows the delegation of participation at the blockchain level without transferring ownership of the coin. This avoids the risk of a coin owner losing ultimate control of a coin by delegating his or her stake to someone else.

This approach allows the treasury system to leverage expert knowledge in a voting process, as well as ensuring that all ADA holders have the opportunity to vote. Thus, for each project, a voter can either vote directly or delegate his or her voting proxy to a community member who is an expert on the topic.

Although anyone can submit a project proposal to be funded during each treasury, due to the scarcity of available funds, only a few can be supported. Therefore, a collaborative decision-making mechanism is necessary.

Treasury funding sources

Treasury funding is perhaps the most crucial ingredient in a decentralized community-controlled decision-making system.

The fund is designed in the form of ongoing income to finance projects and fund improvement proposals, without depletion. In other words, the amount of money spent to pay for projects should be less than the amount collected in each epoch, to ensure its continuous growth.

It should not only be regular, but also come from decentralized means. In other words, the source of funding for the treasury system must not introduce centralization into the system.

We note that, although not all possible sources of financing possess these properties, a clever combination of some of these sources satisfies the stated requirement.

Cardano’s treasury system is transparent, and is funded from:

  • 20% of the rewards from each epoch,
  • 20% of the monetary expansion of each epoch, and
  • donations

Funding from rewards is a sustainable source, however they can fluctuate between blocks, and can cause irregularity in the amount of funds expected per epoch.

Monetary expansion is the most constant of the existing funding sources, however it is decreasing over time, as the supply of coins from Cardano’s reserves is decreasing.

Donations are an opportunistic source of funding, not predictable, but cannot be disregarded.

The treasury began its funding with the Shelley era, in epoch 208, on July 29, 2020. It totals 360,161,954 million ADA until the beginning of epoch 255, on March 21, 2021.

Source: Own chart. Project Catalyst Dashboard — Cardano Governance — by Daniel Ribar

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