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There is 1.23B ADA in Cardano's treasury

Published 11.4.2023

Cardano has 1.23B ADA coins in its project treasury. Every 5 days, 0.3% is taken from the reserve (currently about 9.32B) together with collected fees and both are used for the epoch reward. From this amount, 20% is taken and put into the treasury. That's roughly 5.5M ADA every epoch. As the reserve declines, so do the contributions to the treasury. It is expected that in the future the income from the reserve will be gradually replaced by the income from fees. Currently, roughly 20k ADA goes into the treasury each epoch from the fees collected. Cardano should be an ecosystem that is economically self-sustaining. This way it can maintain its independence from VC funds and can remain in the hands of the community. ADA in the treasury belongs to the community, i.e. all Cardano stakeholders. Each ADA holder can decide what projects the treasury will fund.

TLDR

The quality of decentralization is currently judged only by the number of pools, delegators, and validators. In the near future, we will be looking more and more at the quality of decentralization at the project management level, as people will be more interested in finding solutions to problems (like the security budget problem). People don't yet realize how important the project treasury is for decentralizing the blockchain and that the team needs to be in the role of employee, not a ruler.

The importance of the project treasury

First-generation blockchains did not have a project treasury. All coins from the reserve are used to cover the cost of the production of blocks. No thought was given to team rewards or governance. In retrospect, we can only assume that one of the reasons for the absence of a project treasury is probably that it was difficult to set up the rules of operation. If an individual or team (multi-signature) were to gain control of the treasury, this could represent a form of centralization. It could potentially prevent, for example, the creation of alternative versions of the client, as the team would have an interest in maintaining one version.

Some project teams subsequently realized the importance of a project treasury and wanted to force one without the necessary community consensus. Today, no one doubts the importance of the project treasury. If a protocol is unable to fund its own maintenance and development, the absence of a treasury is replaced by external funding, which brings with it a desire for control. This is an undesirable phenomenon due to low transparency and the inability to directly control governance processes by community members.

Cardano is not the only project that has a project treasury and strives for on-chain governance. It turns out that this is probably the only way the community can maintain control over protocol development and weaken the team's strong position.

Every blockchain project needs a team. The community should be in the role of the employer and the team in the role of the employee who implements the protocol modifications according to the community's wishes. Funding for development should be under the control of the community. For this to be possible, the community must control the project treasury.

If the team has full control of the protocol development or even controls the project treasury, it is essentially a centralized entity. The decentralization of the blockchain from a governance perspective can be questioned.

Long-term sustainability of decentralization

The topic of security budget is increasingly debated in cryptocurrency communities. Often there is only talk of rewards for producing blocks, but little about how to keep the team decentralized. This is a bit paradoxical, as it is the teams that will play a key role in the search for a security budget solution, either as solution designers or those who implement the necessary changes.

The team must propose solutions that are in line with the wishes of the community. However, the community does not have to be unanimous on how to solve specific problems. It is not necessarily just the security budget problem, but many others, such as scalability, fees, programmability, quality of decentralization or security, etc. The topics that the community will discuss will increase over time as blockchains become more widely adopted. While it may not seem like it to us now, the teams will become more important over time.

The quality of decentralization will be judged not only by the production of blocks, i.e. by the number of pools, delegators, or validators but increasingly the role of teams will be highlighted. As we wrote above, the team must not be a centralized entity that holds control over the source code. The community must be the one that makes the decisions.

The IOG team is steering Cardano in the right direction by handing over control of the project treasury to the community. Changes to the Cardano protocol will be made through Cardano Improvement Proposals (CIP). Funding and implementation of the CIP will not be decided by the team, but by the community.

If Cardano has any problems in the future, and it almost certainly will, because you can't write software that never has problems, there will be a decentralized way to solve the problems.

There is currently approximately USD 500M in the project treasury. Depending on the market value of ADA coins, this amount is likely to grow. The project treasury will be used to pay for Catalyst projects, decentralized governance (rewards for DReps), and implementation of CIPs.

Just as we talk today about running out of budget for securing PoW blockchains, we may talk about running out of budget for governance in the future. In the case of Cardano, this problem may occur in a few decades. It will depend on the rate at which ADA coins are used from the treasury and what projects will be funded. Funded projects should increase the utility of the protocol and have a positive effect on increasing network effect (adoption). In the future, it will increasingly depend on the number of fees collected.

Cardano can exist for several decades, but only if the community addresses emerging issues in a timely manner and is able to find new opportunities to use the protocol in our society. Only a long-term sustainable fee income will keep blockchain projects decentralized and sufficiently secure. Without sufficient funding, projects will gravitate towards centralization, as this makes it easier from a decision-making perspective and cheaper from a cost perspective.

Conclusion

People tend to underestimate the importance of project treasury. Many don't even know about it, or think that putting 20% of the epoch's reward into it is too high a tax. It is necessary to see things in a broader context and realize that it is absolutely essential for decentralization that there is independent funding for the team that implements the changes according to the majority decision of the community. The ability to propose a protocol change must be available to all and this will be ensured through the CIP process. DReps will be very important members of the Cardano community as they will be the representatives of the stakers who will decide on changes. Media influence can be gained by any influencer, but it is important that changes in protocol and funding are primarily decided by those who are trusted by ADA holders. The choice of DRep will be a fairly significant decision for ADA holders.

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