# Treasury Prosperity

The following is an assessment of the on-chain treasuries for Polkadot and Kusama, and aims to provide thoughts and encouragement to the community on it's improvement.

# The Treasury

To take a step back, what is an on-chain treasury and what purpose does it serve? On chain treasuries (or similarly DAOs, dev funds, and protocol-owned asset portfolios) are powerful tools to bootstrap various parts of a decentralized ecosystem. An on-chain treasury is not unique to Polkadot / Kusama (although the ways Polkadot / Kusama itself manages it's own treasury is, _as defined by the rules in the protocol itself_, and _how the Polkadot / Kusama community decides what to do with it_).

One of the first big examples of a kind of an on-chain treasury was famously [The DAO](https://en.wikipedia.org/wiki/The_DAO_(organization)), which changed a lot of people's perceptions on how and what could be done with a community owned pool of funds. Sadly The DAO itself didn't pan out as expected, but in it's creation set a new precedent for how people began to innovate with trust-minimized collective economic organization. Unlike meatspace entities where rules around capital formation are restricted and enforced mostly by legal and regulatory concerns, on chain pools of assets have their rules enforced _on-chain_ and _as defined by their underlying protocol implementations_. This re-directs a large amount of trust from a company or entity itself to _the actual rules that make up the organization_.

In the context of Polkadot / Kusama, their treasuries are closely tied into the core blockchain protocol itself (as opposed to a layer of smart contracts sitting up the stack). Compared to this other approach of decentralized capital formation where _people_ contribute their own funds into the pool (in exchange for a DAO token for example), the Polkadot / Kusama treasuries **are funded by the protocols themselves**. This closer coupling means that it's within the best interest of the treasuries to ensure the prosperity of the underlying protocols, as well as their ecosystems.

# Mechanics

A brief explanation of the current mechanics of the treasuries is as follows:

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**Treasury Income**

Funds get deposited into the treasury from a few different types of events.

- **Transaction Fees**: for transactions on the relay chain, 20% of the transaction fee goes to the block producer and the remaining 80% of the fee gets deposited to the treasury. Many kinds of XCM execution related transactions also take DOT/KSM as a fee, so treasury income is expected to scale with the amount of cross chain interoperable transactions across networks.

- **Inflation**: there is an ideal staking rate in the network, by which we want a certain amount of DOT / KSM locked up in backing validators to provide security. New tokens are minted [via inflation](https://wiki.polkadot.network/docs/learn-staking#inflation) to validators, the amount of which depends on what the staking rate is. If the staking rate is above or below the ideal staking rate, the remaining amount of tokens go to the treasury in order to incentivize the network to adjust the amount of tokens staked, as validators and stakers will earn more rewards as the staked rate gets closer to the ideal staking rate.

- **Staking Slashing**: When a Validator gets slashed (and the slash is not cancelled via governance), 5% of the slash amount goes to the reporter (in the case of an equivocation), and the remaining 95% of the slash goes to the treasury. In the case of slashing for correlated offlineness, 100% of the slashes go to the treasury as there is no reporter.

- **Identity Slashing**: In the case where [an identity is killed](https://github.com/paritytech/substrate/blob/master/frame/identity/src/lib.rs#L829), the reward destination for the burned identity bond [for Kusama](https://github.com/paritytech/polkadot/blob/master/runtime/kusama/src/lib.rs#L559) and [for Polkadot](https://github.com/paritytech/polkadot/blob/master/runtime/polkadot/src/lib.rs#L592) is the treasury.

- **Council Slashing**: Similarly for Identity slashing, if a council member is forcibly removed, a council candidate doesn't win, or they don't make the runners up list, their council candidacy bond goes to the treasury.

- **Failed Governance Proposals**: For various kinds of governance proposals, a bond must be put in order to prevent sybil attacks. For governance proposals that do not pass, the bond goes to the treasury.

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**Treasury Burn**

To incentivize an adequite amount of spending of treasury funds and to control total token supply, tokens from the treasury may get burned. If there are any native assets in the treasury by the end of a `spendPeriod`, and if all proposals that have been accepted have been funded, a percentage of the leftover treasury funds get burned. One case where treasury funds wouldn't get burned is if a proposal passes that is greater than the amount of funds in the treasury itself.

The following are the parameters for Polkadot and Kusama:

Polkadot:
- **Spend Period**: `24 Days`
- **Burn Rate**: `1%`

Kusama:
- **Spend Period**: `6 Days`
- **Burn Rate**: `0.2%`

_One thing to also note is that on Kusama, the burned treasury funds don't get taken out of the total token supply, but rather go to the pot of funds for [Kappa Sigma Mu](https://hackmd.io/@gavwood/ByEiaFgZ8), the KSM Society. On Polkadot, burned tokens get taken out of the total token supply._

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# Treasury Statistics

The following describes some of the following stats on prior treasury engagement (numbers are from [doTreasury](https://www.dotreasury.com/ksm/)):

## Polkadot


### Income

As of today (Dec 14, 2021), the treasury has about ~22,135,795.147 DOT in it.


Every era (24 hours), as of recent, the treasury has had about 60+k DOT added to it as a result of inflation. This is generally where most of the income comes from. Slashing from staking makes up the second largest portion, at ~528k DOT.

### Spending


As of now, the top beneficiaries have received at most $260k worth of DOT (priced at time of receiving).

## Kusama


### Income

As of today (Dec 14, 2021), the treasury has about ~487,757 KSM in it


Every era (6 hours) it receives about 200+ KSM from inflation. It has additionally received about ~15k KSM from slashing.

### Spending


As of now, the top beneficiaries have received at most ~$360k worth of KSM (priced at time of receiving).

## Types of Funding

The following are general categories of funding that the treasury aims to accomodate:

- Infrastructure deployement and continued operation
- Network security operations (monitoring services, continuous auditing)
- Ecosystem provisions
- Marketing activities (advertising, paid features, collaborations)
- Community events and outreach (meetups, hackerspaces)
- Software development (wallets and wallet integration, clients and client upgrades)
- Bounties



At the moment, public goods infrastructure makes up the largest category of proposals. T

# Utilizing The Treasury More

Based of the amounts of income to the treasuries, the amounts getting burned, and the amounts going to proposals, the treasury can be utilized more. This includes spending more funds, spending more categories of proposals, experimenting more, and encouraging more participation across ecosystem. The current governance community has done a great job of supporting the ecosystem and should continue doing so. We're at a point where we should think about ways to scale this and incorporate additional means of supporting nascent parts of the ecosystem.


According to [DeepDAO](https://www.deepdao.io/#/deepdao/dashboard), a dashboard that tracks various kinds of on-chain treasuries and decentralized organizations, Polkadot is in the top 5 largest treasuries of any ecosystem in terms of how much funds it currently has, with Kusama in the top 15.


Compared to other treasuries though (the above image is sorted highest to lowest spending), Polkadot isn't even in the top 50 in terms of how much it has spent, and Kusama barely makes it into the top 50.

Many other ecosystems additionally have started multi-million dollar centralized funds to deploy to their ecosystems, both for the purpose of funding new teams, but also to deploy to initiatives like liquidity mining programmes that try and encourage participation and liquidity in on-chain protocols.

## Spending More Funds

Broadly, the treasury should spend more of it's funds to support the ecosystem in order to scale with it's income. This includes both larger proposals as well as more of them. Given the amount of treasury funds being burned each period (_in Polkadot this is millions of dollars each spend period_), we should find ways to encourage the community to utilize the treasury more. There's a ton of growing needs in the ecosystem, and an endless amount of possibilities for things to create. The beauty of Substrate and Polkadot is it gives the freedom and flexiblity to empower developers and builders to create whatever they want. Whether it's protocols, applications, dashboards, UIs, tooling, educational content, growth strategies, or more, there's funding available to take advantage of. Given how synergistic the nature of the Polkadot ecosystem is, there's a lot of leverage to build things that can be utilized across multiple teams, verticles, industries, and communities.

## Portfolio Management & Risk

One can think of these on-chain treasuries much the same way a hedge fund or venture capital fund manages their portfolio. The end goal is to encourage value accrual - in the case for Polkadot/Kusama it should be in either the treasury itself, the projects building in the ecosystem, or the communities and end users participating in these networks. Managing funds inherently comes with risk though, either in funds themselves (in particular volatility in value), missing out on opportunities, or investing in bad teams/projects that don't deliver on the value given to them.

## Diversifying the Treasury

Given that the treasury is currently only denominated in native assets (DOT/KSM), there is a bit of risk involved related to volatility in prices and the inflexibility of funding opportunities. These risks get inherited by treasury recipients unfortunately. People can only accept DOT/KSM currently, and to deal with volatility, rolling averages of prices are used to denonimate amounts. In many cases, treasury recipients need to pay costs in some way, shape or form, which often means selling the assets not long after they receive them. This can be limiting, as people may not always have access to ways to buy or sell DOT. Additionally the timing at which they exchange DOT/KSM for fiat or other services may result in a lower value than what they recieved at the time of their proposal. This limits treasury recipients to people willing to accept KSM/DOT, and are okay with the inflexibility that comes with this.

In the future it would be ideal to diversify the treasuries with other assets such as stablecoins. Stablecoins help hedge against volatility, and also provide a stable means by which funding amounts can be assessed. Treasury recipients might have an easier time utilizing stablecoins in order to pay for costs and other services they may need, and then don't need to deal with the consequences of timing any sells. Furthermore this limits any sell pressure for KSM/DOT in the case of treasury proposals that may be quite large.

At the moment the treasury isn't quite well equipped to handle multiple assets. Further work may need to include migrating to a multi-asset treasury pallet that takes other assets into consideration for funding opportunties. Things can be done now with governance proposals (instead of treasury proposals), such as forcing an asset transfer from the treasury account, although this is not ideal. Having a pallet that can handle multiple kinds of assets, as well have proposals be able to include what types of assets and their ratios would give a lot of flexibility to accomodate proposers different circumstances. In the future it may also be beneficial to the move the treasury accounts onto something like Statemine / Statemint, which is well suited to deal with accounts, assets, and cross-chain interoperability for transfers.

## Liquidity Provisioning

Right now we're in the stage where a lot of different projects are just launching and enabling all of their features. There aren't a ton of end users actually benefitting from these protocols and applications just yet, although the time for this is starting to unfold now.

One thing that multiple other ecosystems have started are initiatives around liquidity incentives to kickstart projects in their ecosystems. What this might look like is putting funds towards TVL in DeFi protocols or additional rewards to encourage participation in things like staking or governance. Considering a lot of the use cases and features cross-chain interoperability brings in Polkadot, it would be extremely useful to kickstart projects with liquidity for borrowing / lending, money markets, derivatives/options, synthetics, DEX / AMM pools, protocol owned liquidity, and other primitives that allow for protocols and applications to attract end users. These sorts of liquidity programmes have worked extremely well for other ecosystems, and Polkadot / Kusama would be missing out on a lot of opportunities in their absense.

## Considerations for Proposals

As mentioned above, managing funds comes with a bit of risk involved. There should be some considerations in place for any sorts of proposals related to liquidity provisioning, mainly for the purpose of mitigating potential downsides.

Proposals for liquidity should ideally incorporate time horizons, projected yield, potential downside or risk of loss of funds, and what kind of incentives it would bring to not only Polkadot/Kusama, but the wider ecosystem. Provisioning liquidity should be thought of in a way where one goal partly would be value accrual to the treasury funds itself, where the original funds or additional value would be given back to the treasury. In most ecosystems, assets that are sitting idle are actually losing money compared to not putting it into some yield bearing opportunity. The Polkadot/Kusama native example of this would be staking, where the value not staked is losing out on the interest it can get from staking.

Ideally funds given for liquidity provisioning should be done in a comepletely trust minimized, or trustless way, where the treasury itself can directly put and withdraw liquidity into these opportunities. What this might look like practically is in the form of XCM related transactions where funds are directly put and withdrawn from other protocols, pallets, or smart contracts. The yield in this case would get deposited directly back into the treasury in the form of one or multiple assets.

Unfortunately this sort of functionality doesn't currently exist, and may need to require other chains to add some functionality to their chains or smart contracts to enable this sort of XCM behaviour. In the mean time, proposals made can include multisig participants, although the composition of such should include trusted members of the community or governance to ensure proper liability.

For future trust minimized endeavours, the protocols, applications, smart contracts, and governance of the above need to have a reasonable level of trust in order to make things work. The places these treasury funds should go need to be as decentralized as possible to avoid situations where conspirators collude to run away with the funds. All in all, leveraging the nature of things like XCM and capabilities of governance primitives should be maximized to hedge against potential risk.

## Conclusion

All in all, looking at current figures of the treasury show that there's been a good job of supporting funding in the ecosystem, and we should continue to think about ways to innovate and excel in the prosperity of people and teams involved, as well as their communities. We should think about ways to further expand the amount of funding given, encourage a greater amount of proposals with ambitious aims, and branch out into additional categories and means of supporting these networks. We're at a point where there's a lot of opportunities to take part in the success of what the community has been working towards, and we should make the most of encouraging the proliferation of all the innovative, unique endeavours that can come to fruition.