Hyperlink of Google Doc “SubDAO Treasury System for the Hub”
Introduction
With the passing of Prop 88, the Cosmos Hub increased the community pool tax, from 2% to 10%. With the Hub treasury now making meaningful revenues, it seems prudent to start funding projects and infrastructure, building on the Hub and in the Interchain. With this new revenue, the Hub has found itself in an interesting situation. Currently, any project, development team or infrastructure project has had to request funding from the treasury directly, meaning they have had to spend 14 days, deposit 250 ATOM and make their best attempt to convince the delegators that it is the right move to fund their project. No matter the scope of the project at hand, under the current treasury model, this is the only way to get funding, directly or indirectly from the Hub. This begs the question, is there a more efficient model, to allocate funding throughout the Cosmos?
What should the Hub treasury fund?
- R&D
- Open source developer tooling and general infrastructure for the Cosmos Hub and Interchain
- Projects building on ICS, and potentially other projects building to give more utility to ATOM
- Services helping to build out the Cosmos Hub and the Interchain
Cosmos Hub Governance Overview
The Hub has one of the most interesting and decentralized governance structures in all of crypto. A delegator/validator gated voting structure, such as the one in the Cosmos Hubs, is a great way to allow the mainstream token holders to contribute to the decentralization of the network. This process ensures that if any change is to be made to the network, it must be approved by the majority of voting power, which equates to the majority of tokens staked.
The framework of this Governance structure is as follows:
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Proposer deposits 250 ATOM, to send their proposal on-chain
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There is a 14 day voting period
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In order for a proposal to pass governance, the first requirement is that it meets quorum, which means that 40% of the tokens staked, must vote on the proposal. This means that a vote of Yes, No, No with Veto or Abstain must be chosen by 40% of the staked tokens.
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If a quorum is met, then, the next step for a proposal to pass would be a majority “Yes” vote, meaning over 50% of the staked tokens that voted, chose “Yes”.
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This Governance model works fantastic in many aspects of Hub Governance. For example, when an upgrade is deemed appropriate, to take the next step towards development of the Cosmos Hub, this must receive a passing vote in governance. Meaning, the majority of the active network agrees that this upgrade is necessary.
Where the model breaks down in treasury Governance:
- Delegators lack the general ability to do duty diligence, and may vote in opposition to a reasonable and beneficial funding opportunity.
- Many delegators may lack technical sophistication, to the point that an R&D proposal may fall by the wayside if deemed too much of an ask by the Hub delegators.
- Projects that may need funding, may ultimately skip going to the Hub treasury for Funding, in favor of going to get funding through other platforms. This could leave a large opportunity cost, to fund a project helping to build out the network effect for the Hub, but also, this is a general business opportunity as well. If a project seeks funding, the Hub needs entities that can negotiate and potentially draw up a legal framework to best benefit the Hub, which is nearly impossible in the current position of treasury funding.
Different models to help to alleviate these inefficiencies in the Hub treasury governance, as it currently stands.
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SubDAO: SubDAO’s act as separate treasury fingers, with specific mandates and various forms of decentralized governance structures. These governance structures can be optimized, to best serve its mandated purpose. These subDAOs could have the ability for more specialized requests and negotiation, amendments to proposals and so on, with items like vesting contracts and subDAO specific tooling to help give meaningful value to the projects requesting funds. SubDAOs can also give better guarantees and more accountability on behalf of the community, that these projects are building what they say they are, or are doing what they requested the funds for.
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Grant funds: Grant funds will be centrally controlled entities, not directly formed through the treasury. These are private entities, acting on behalf of the Hub, but are in full control of the funds. These funds should disclose activity to the community, at a rate that they see fit, in order to keep the delegators informed. This is in the grant funds best interest, as to keep the delegators motivated to want to give them more funds, when the grant fund requests it. These grant funds also add a coordination point, between the Hub and the projects being funded through Hub treasury funds. A centralized party such as a grant fund, also has the ability to draw up legal framework, to hold projects accountable, on behalf of the Hub, helping to ensure that projects aren’t funding a project and the project devs disappear with the funds.
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Interchain Allocator funding model: As outlined in the ATOM 2.0 whitepaper. This is a DAO enabling the Hub to coordinate economic reciprocation, through equity funding between the Hub and other blockchains in the Cosmos ecosystem.
Governance of a subDAO could vary in:
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Quorum
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Voting period
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Voting power (Validator voting exclusion, whale voting caps, etc.)
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Elected council
This variance in governance structure can be a strength in the subDAO, achieving its mandate in as decentralized a manner as possible. For example, a subDAO mandated to fund ICS consumer chains, could likely find benefit with electing a council of well known, respected and resourceful community members. This council could take initiative in keeping in contact with these ICS projects, to help the project in any way necessary, and also provide status updates to the Hub delegators.
This council can also provide much needed inquiry and due diligence, about each project seeking funding. This due diligence could be expressed to the delegators in a report of each project, outlining the project, its goals, roadmap and any other material facts about the project. Lastly, this council could also have some level of legal agreement with these projects, that ensures that these projects launch on ICS, so as to not risk the community being rug pulled out of ATOMs, with no ability to coordinate legal action.
Another potential nuance between this type of subDAO and others, may be a longer voting period, to allow the delegators time to do their research, as well as time for the projects to make themselves and their project known to the community, with appropriate time to scrutinize whatever the community feels is necessary.
This is only one type of subDAO as well. There could also be subDAOs that are fully decentralized, with no council, that are where existing projects or infrastructure projects (example being Confio) can go to seek additional funds for business development and so on. These subDAO’s can have subtle differences in quorum, voting period or whatever else would make each subDAO more efficient than having to go through a full Hub governance proposal process. With these subDAOs ultimately being accountable to the main Hub governance process, for additional funds to divvy out in whatever fashion the subDAO deems necessary. If a subDAO doesn’t perform, then the subDAO does not get funding.
Grant funds: As stated previously, grant funds will be centrally controlled entities, not directly formed through the treasury, but potentially funded though Hub governance or a subDAO directly mandated to fund a variety of grant funds. I am of the opinion that grant funds will provide much benefit to the Hub, as they can do business development in a much quicker and more efficient way than a subDAO. However, these grant funds should be held accountable in as many ways as possible, without stifling their ability to work. It could be wise, in the case of a subDAO which funds, grant funds or in a standard Hub treasury funding of a grant fund, that a vesting schedule be mandated for each grant fund. This is not to tie the hands of a fund, but to make sure that they are held accountable in the rate of funding.
In the case of grant fund accountability, it should be standard practice to make pre-scheduled disclosures to the community with information of what the fund has funded and follow up documents with these projects that have been funded. Full disclosure is the best way to be accountable to the community, and a fund who is not communicating to the community, could find their vested funds clawed back to the treasury or subDAO.
Interchain Allocator: The Interchain Allocator is a DAO concept that was introduced in the ATOM 2.0 Whitepaper. This Allocator is a governance system that coordinates the economic development of interchain projects. This is achieved through the ability for the Cosmos Hub to essentially gain an equity position in various different chains, looking to be incentivized while in development. This equity can be rebalanced as deemed necessary, through Governance, or potentially through automatic weighting adjustments. To my knowledge, this idea did not have a fully formed model, so this is my rough estimation of the allocator as written in the whitepaper. This idea brings the idea of treasury funding, through equity holding, to the table. The concept could eliminate the zero sum game from interchain funding, allowing the Hub to profit from its investments made in the interchain.
Conclusion:
In my opinion, it would be beneficial for the Hub to begin transitioning toward more of a subDAO model of treasury funding. The level of specification that is enabled by subDAOs, grant funds and the interchain allocator, could lead to a much more productive Hub, with less need for total community involvement with every decision made. This distribution of funding from the treasury could make the Cosmos Hub extremely efficient in terms of capital allocation, yet very decentralized, with the delegators ultimately choosing which entities to fund.
As a community, we do not want to bar projects from requesting funds, for valuable projects, nor do we want to intimidate projects out of attempting to request funds, simply because they do not want to go through the Governance process. Small to medium sized funding should likely come from grant funds and subDAO’s. This could make the process much easier and more seamless for those requesting funds, with the subDAOs and grant funds, still remaining accountable to Hub Governance.
In this system, we may be able to create a hyper efficient Hub treasury through various subDAOs and grant funds, with additional revenue generation and use case through the Interchain Allocator. Expanding out the Cosmos Hub and the Interchain ecosystem, while still retaining the overarching decentralized grandeur that we appreciate about the Cosmos Hub.
Please let me know any thoughts you have around this subDAO treasury system. I would love to get the conversation started on what the next steps may be, to improve treasury governance.