The Net Change Limit (NCL) acts as a safeguard against excessive withdrawals of ADA from the Treasury. Its establishment and approval for a specific period are enshrined in the Cardano Constitution. In this article, we will explore the NCL in greater detail and context. Treasury Overdraw Prevention The NCL specifies the maximum amount of ADA that can be withdrawn from the Treasury within a given period, typically one year, which corresponds to 72 epochs. As of now, no NCL has been ratified, making withdrawals impossible. For withdrawals to occur, a governance action defining the NCL for a specified period must be ratified. Once ratified, governance actions for ADA withdrawals can be submitted, as outlined in the Cardano Constitution. The NCL applies to all Treasury withdrawals within a given period. When the total amount of ADA withdrawn reaches the defined NCL, any further withdrawals exceeding the limit become unconstitutional. The Constitution Committee oversees adherence to the Cardano Constitution and ensures that the NCL is not exceeded. While the Constitution does not mandate a one-year period, a one-year horizon is conventionally adopted for budgeting purposes. This corresponds to 365 days or 73 epochs. However, 72 epochs are typically used to prevent overlap with the previous and subsequent years, as epochs do not align with the calendar year starting on January 1st or ending on December 31st. To define a period closely resembling a year, the submitter of the governance action selects the first epoch beginning in January and the last epoch ending in December, which spans 72 epochs. During a given period, governance actions can be submitted at any time to increase or decrease the NCL. If ratified, the new NCL becomes effective. The rule states that the most recently ratified NCL takes precedence. If the NCL for the next year is not ratified, the most recently ratified NCL remains in effect. This means, for example, that if no governance actions are submitted to set the NCL for 2026, or if submitted actions are not ratified, the NCL valid for 2025 will continue to apply. It is anticipated that the NCL will evolve over time, as Treasury-related decisions are among the most crucial aspects of Cardano governance. An alternative approach to setting the NCL The NCL can be defined as a specific amount of ADA for a given period. For example, 300M ADA for 2025 and 250M ADA for 2026. An alternative approach is to express it as a percentage of Treasury revenue from a past period. For instance, 80% of the Treasury revenue for the previous 72 epochs. In this case, if Treasury revenues for the last 72 epochs amounted to 300M ADA and the NCL was set at 80%, the NCL would automatically be 240M ADA. Key monetary parameters such as Tau and Rho are expressed as percentages, meaning there would be no need to adjust those parameters. The community decides which approach they prefer. Ultimately, it depends on how the NCL is defined in the governance action and whether it is ratified. The first approach, which sets the NCL as a fixed amount, is more flexible. However, it is recommended to adjust the NCL annually, as Treasury revenue is expected to decline in the coming years. The second approach, which uses a percentage of past Treasury revenue, could provide long-term stability without requiring annual approval. Nonetheless, changes to the NCL could still be voted on if necessary. Monetary Policy The Cardano Treasury currently holds 1.71B ADA. Treasury revenues come from monetary expansion and fees. At present, fees contribute only a negligible amount, with the majority of revenue derived from monetary expansion. Specifically, 0.3% of the reserve is added to the virtual pot every epoch, along with any fees collected during that epoch. Subsequently, 20% of the virtual pot is transferred to the Treasury. The reserve currently contains 7.2B ADA. This reserve is used to fund staking rewards and transfer ADA to the Treasury. However, the reserve is steadily decreasing with each passing epoch, trending towards depletion. Until fees form a significant portion of the revenue for the virtual pot—and, by extension, the Treasury—Treasury revenues will continue to decline annually. It is essential to manage the Treasury responsibly. Expenses should not exceed revenues to ensure its sustainability. Although this principle is not mandated by the Constitution, it is a prudent approach if we want the Treasury to maintain sufficient ADA for the next decade. Impact on market capitalization An important consideration of the NCL, particularly regarding withdrawals from the Treasury, is its direct negative impact on the market price of ADA. Entities receiving ADA from the Treasury may sell these coins on the market to cover their expenses. If the market supply exceeds demand, the value of ADA decreases. This selling pressure can adversely affect stake pool operators (SPOs) and stakers, who typically anticipate an increase in ADA's market value. SPOs often sell ADA on the market to cover the operational costs of running their pools. In extreme scenarios, reduced profits might render pool operations unprofitable. Ultimately, a decline in the market price of ADA can also negatively impact the Treasury. During bear markets, if ADA’s value drops, the Treasury might need to sell even more ADA in subsequent years—potentially as soon as 2026—depending on the overall sentiment within cryptocurrency markets. It is crucial to strike a balance between the long-term potential positive impact of investments and the medium-term market price of ADA. This balance can be challenging to achieve and difficult to model. The NCL does not dictate that the approved maximum must be spent. For example, while an NCL of 300M ADA might be ratified, only 200M ADA in withdrawals may be approved during the period. Selling pressure depends on which withdrawals are ratified by DReps. The NCL serves as a safeguard against exceeding the defined limit; it does not determine the amount of ADA that will actually be withdrawn. Ultimately, the decisions made by DReps on individual withdrawals hold greater significance than the NCL. Each withdrawal must be justified with confidence that the investment will yield a long-term positive impact on the ecosystem. Two governance actions for NCL There are two governance actions concerning the NCL for the current year. The first action, submitted by the community, proposes setting the NCL at 300M ADA for 2025 and 250M ADA for 2026. The second action, submitted by Intersect, proposes setting the NCL at 350M ADA. The community's governance action is somewhat vague in defining the period, relying on the assumption that DReps understand the concept of NCL. In contrast, Intersect's governance action provides a clear definition of NCL and specifies the period as spanning from epoch 532 to epoch 604. Both governance actions are currently being voted on simultaneously. It will be intriguing to see if both are approved and how this might impact the NCL. Ultimately, the NCL ratified most recently will take precedence and be considered valid.
