The growth and evolution of the blockchain ecosystem relies on continuous innovation, especially when it concerns the development of projects that benefit the entire community. Consequently, ecosystem and public goods funding (PGF) plays a crucial role in providing the necessary support to such initiatives.
In today’s post, we explore the subject further and provide our thinking around the recently-proposed Community Treasury, as well as provide more context around distribution mechanisms and their evaluation. As with all other posts in the series, we invite the community to consider and provide feedback on the approach.
In the realm of economics, a public good displays characteristics of non-excludability and non-rivalry, meaning that access to it cannot be restricted, and one individual’s consumption does not impede another’s.
Examples of public goods range from natural resources such as clean air to man-made constructs like roads. Contemporary industrial-knowledge societies have introduced various new public goods, including open-source code, which has historically served as a foundation for the modern Internet, which can itself be considered a public good. Consequently, it is reasonable to view open digital infrastructure as a public good.
In the world of blockchain, public goods funding (PGF) may refer to supporting open-source projects that contribute positively to the blockchain ecosystem that may not be financially viable on their own. The significance of funding is demonstrated in the need for continuous innovation and development of novel solutions and services benefiting the entire ecosystem, e.g., network client development, decentralized identity systems, as well as blockchain-based decision-making systems.
Moreover, PGF is capable of contributing to the resilience and security of the network layer by funding projects that contribute to decentralization on an off-chain level, preventing central points of failure and ensuring a balanced distribution of power. As an example, take the funding the Ethereum Foundation continues to direct towards empowering various client teams, thus democratizing the development of decentralized infrastructure, indirectly ensuring that no team possesses enough power to dictate its terms by monopolizing the client infrastructure.
Additionally, PGF presents opportunities for enabling equitable access by supporting initiatives directly or indirectly targeting underserved communities or addressing systemic issues within the broader context, e.g., lack of formal financial infrastructure that 2 billion people struggle with worldwide.
Last but not least, PGF contributes to the long-term sustainability and growth of the blockchain ecosystem, as it invests in projects designed to benefit all participants, not just a select few.
To address the needs of ecosystem and public goods funding, the Community Treasury was introduced and proposed in the recent POL Whitepaper:
The Polygon ecosystem and the whole Web3 industry are still in the early adoption and heavy development phase. To remain on the current growth trajectory, the Polygon ecosystem will need ongoing economic support in years to come.
To address the need for ongoing ecosystem support, we propose the Community Treasury, an in-protocol, community-governed ecosystem fund. It introduces at least three major benefits to the Polygon ecosystem:
- Ongoing, self-sustainable economic support for as long as required;
- Increased decentralization by reducing dependency on the Polygon Foundation;
- Achieving the next level of transparency and community inclusion.
As described in § 5.2, the Community Treasury is funded by a predetermined emission of POL. The emission rate dedicated to this purpose is 1% per year, or ≈100 million POL in absolute terms, and can not be changed for 10 years. This guarantees strong ecosystem support during this period, critical for development, growth and positioning of Polygon.
Once the Polygon ecosystem and Web3 reach maturity, the ecosystem will likely not need significant economic support anymore. At that point, the community should intervene and decrease or discontinue the emission for the Community Treasury. In an optimistic scenario, where maturity is reached before the 10-year period of guaranteed funding expires, the Community Treasury might end up having more funds than the ecosystem realistically needs. In that case, the community should decide how to utilize this excess POL. For example, a decision can be made to burn it.
As mentioned, and as the name indicates, the Community Treasury should be governed by the community, via an agreed upon governance process. The governance process and the wider Polygon governance framework are being designed and established as part of the Polygon 2.0 effort, and explaining them in detail is out of the scope of this paper. Instead, we give a brief overview of its two likely concepts:
Polygon Funding Proposals (PFPs): Formal proposals for funding or other activities or improvements related to the Community Treasury. PFPs can be submitted by anyone, and should be publicly available and discussed. Similar concepts can be observed in other prominent governance frameworks.
Consensus gathering: The process of making a decision on a specific PFP. The decision can be made in a direct manner, where every community member can participate, or via delegates who represent the community. As mentioned in § 4.3, POL should be technically enabled to hold governance rights, so it can potentially be utilized as part of the consensus gathering or the delegate election process. POL holders are directly economically incentivized to approve good proposals and reject the bad ones, which makes the decision making process more likely to benefit the ecosystem.
Having understood the importance and proposed implementation of the Community Treasury, i.e., where the proposed funding for development of the Polygon ecosystem comes from, we would now like to present, categorize, and evaluate several fund distribution mechanisms for community consideration.
In our approach, we present and analyze several models, focusing on a following set of factors:
- the layout of the decision-making actor, i.e., a small set vs. a large set;
- checks and balances coming from the community, i.e., implicit and explicit;
- on-chain/off-chain nature of execution.
An organization where a small group of decision makers selects and executes the distribution of funds from the treasury, which may itself be funded by an on-chain mechanism, e.g., continuous token issuance or revenue from sequencer auctions. There’s no token governance involved to fund the organization, distribute funds, or otherwise.
The organization’s mandate may be provided by (1) protocol-level, on-chain, decentralized consensus of validating stake and full nodes; (2) the wider ecosystem and social consensus, ranging from dapps to infra providers; and/or (3) legal obligations in governing documents. If the ecosystem consensus indicates that the organization doesn’t fulfill its mandate, it may be capable of cutting off the funding by organizing a hardfork. This is also true for all other treasury management models, as long as the funding mechanism is protocol-level.
Notable examples in this category include:
- Efficient in vision setting, decision-making and fund distribution, as well as earning on treasury and its diversification as all decisions are made by a small group, i.e., the org’s board of directors or people it hires. The org can still obtain non-binding feedback from a broad group, e.g., the entire community, on use of funds without meaningfully slowing down decision-making.
- Efficient in fund custody, since it can use both on-chain and off-chain crypto custody, as well as storing value in fiat.
- Small group, i.e., the org’s board of directors or people it hires could be poor decision-makers or be inefficient at properly securing or distributing funds. Admittedly, this can be mitigated with use of non-binding community feedback and influence over board members.
- Informational asymmetries could arise for a small group with internal org knowledge.
An organization with distributed decision making regarding ecosystem funding. The decision-makers, e.g., token holders, might elect a board of an entity that acts as a middleman, e.g., a foundation, to enact decisions made by token holders via votes. Full control over the entity, as prescribed in the founding documents, may remain with the community.
A desirable voting model might be characterized by liquid democracy to facilitate meritocracy:
User A delegates their voting power to user B on issue X, who may in turn delegate their total (A+B) voting power to user C on issue Y. All the while, user A can still vote on every issue themselves if they so choose.
In order to avoid try to avoid the pitfalls of simplistic 1 token = 1 vote models, e.g., overaccumulation of governance power, voting power may be defined by either one of these models or their combination:
- Sybil-resistant token-based quadratic voting, e.g., 10 users voting with 1 POL each > 1 user voting with 10 POL. Relevant example: quadratic funding by Gitcoin.
- 1 Community Member = 1 Vote model with peer-based expansion of membership, i.e., an initial cohort of reputable community members expands the set each season by adding new members each. Example: Optimism Citizens’ House.
Notable examples in this category include:
- Optimism (Optimism Citizens’ House)
- Arbitrum DAO (Special Grants Program)
- Uniswap (Uniswap Foundation)
- A large set explicitly checks:
- the entity that distributes funds, allowing for most efficient action against the entity’s inactivity or malicious activity;
- the use of funds, resulting in community empowerment, fostering engagement and innovation;
- treasury diversification;
- diversification of methods for custodying funds.
- Over-reliance on the community, e.g., a large number of votes and lack of incentives, may lead to voter apathy.
- Large set explicit checks are extremely time consuming and low activity usually requires significant backchanneling.
- Informational asymmetries could arise for a small group with internal org knowledge, even with explicit community checks.
An organization in which a set of permissionless smart contracts govern a treasury. The role of any external entity is limited to initial deployment of smart contracts and funding of the treasury, at which point it becomes just one of other regular participants. The decision-makers are capable of changing any parameter of the system, including full control over the treasury.
A social layer of governance is needed to facilitate coordination and introduce social and reputational checks, e.g., a customary rejection of on-chain proposals if they don’t go through off-chain deliberation first.
Viable voting models for this type of governance may be a combination of:
- variable quorum requirements for interacting with different smart contracts, e.g., the main treasury contract may require higher quorum for votes than a smaller treasury contract dedicated to yearly ops;
- delegation-based governance, including liquid democracy.
Notable examples in this category include:
- Fulfills the Web3 ethos of a decentralized organization for anyone to permissionlessly leverage.
- Greatest potential for decentralization out of all models. However, it should be noted that centralized token holdings may still be a cause for concern.
- It’s notably harder to censor when fully on-chain.
- Any governance and voting model is limited by on-chain data here, unless it takes up risks by introducing oracles. For example, quadratic voting based on sybil resistance can’t be used because no non-gameable on-chain indicators of sybil resistance exist yet.
- Token-based voting leads to plutocracies where money = influence, which in turn leads to non-optimal outcomes.
- There are always clear lines of attack since all rules are defined on-chain. The organization can only mitigate them.
- Social, community consensus is oftentimes the last line of defense against attacks, hence community’s governance culture is critical.
- The on-chain, permissionless fund distribution model may introduce tax and liability risks to token holders.
- A model with complete decentralization that also maintains security and efficiency has arguably not yet been identified in the fund distribution space.
While the blockchain industry persistently experiments with various governance frameworks to optimize for security, efficiency, and decentralization, we know that the Polygon community can have a significant impact on these considerations.
We want to thank everyone who has participated in the discussions and provided feedback on previous Governance Pillar posts. Likewise, we want to invite community feedback and consideration of the potential approaches to Community Treasury fund distribution presented in this post. Which of the presented models would you like to see implemented for the Community Treasury? What have we missed in our classification and what can we learn from existing treasury management systems in Web3? Comment below!