Bitcoin Reserve for the Polkadot Treasury

[hippiestank]

In response to Wish-For-Change referendum #1394, I am presenting a proposal to introduce a Bitcoin Reserve for the Polkadot Treasury as seen here.

This proposal will convert 500,000 DOT into tBTC over the course of a year using Hydration’s “rolling DCA” feature. After a short accumulation period, chunks of 0.005 tBTC will be provided as liquidity into the Hydration Omnipool. This will allow diversification of the Polkadot Treasury portfolio while also supporting ecosystem DeFi incentives.

One of the strongest assets of the past decade, Bitcoin continues to perform. This is an opportunity for Polkadot to hedge against uncertainty while signaling to the broader industry that we do believe in and support a multi-chain future.

Following some discussion, I hope to bring this proposal on-chain early next week.

[hippiestank]

@PolkadotFollower
I believe Polkadot exists to provide trustless digital infrastructure in a world where truth and verification is becoming increasingly necessary.
I believe Bitcoin exists to change the way we interact with money and store value on a global scale.

Both are valuable.

[hippiestank]

@et90266

Thank you for your reply. I appreciate some discussion and the opportunity to clarify goals and reasoning.

The goal of this proposal is to create a resilient treasury and ensure funding for ecosystem development through turbulent market cycles, starting with a Bitcoin Reserve.

Timing
I believe the “DOT ATL, BTC ATH” argument misframes the situation.
This proposal is about risk management and operational continuity, not market timing or speculation.

The “timing isn’t right” argument has been raised each time this discussion has been brought up, but if we wait for “perfect timing” we will never diversify. Lets focus on time in the market, not timing the market. The DCA mechanism helps average our cost through the peaks and valleys.

Operational Resilience

@et90266

Yes DOT has decreased ~60% vs. BTC since the WFC was first proposed in January, however had it been enacted then, the net gain for the Treasury would have been ≈$1.5M, all else being equal. So the Treasury would now have $124M in assets instead of $122.5M. That’s a 2.46% annualize return.

This analysis illustrates why diversification works. A 2.46% annualized return during a 60% DOT decline vs BTC is great risk-adjusted performance. While the upside seems small now, if the decline continues, the difference compounds significantly and the community continues to function.

Market Confidence

@et90266

Buffett famously said he prefers buying back $BRK shares when they’re underpriced, rather than spending cash on overpriced acquisitions.

Share buyback is more analogous to burning tokens. This proposal is not about manipulating scarcity, it is about economic resilience through portfolio diversification, something the Buffet approach supports, and is demonstrated in how Berkshire Hathaway holds their operating capital.

Risk management is fundamental to every major institution. Nobody concentrates 100% of their operating capital in a single asset, even the Ethereum Foundation has diversified into other assets. By showing the ability to introduce risk management into our system we are signaling that Polkadot is truly maturing into a modern and resilient enterprise.

[et90266]

@hippiestank

This analysis illustrates why diversification works. A 2.46% annualized return during a 60% DOT decline vs BTC is great risk-adjusted performance. While the upside seems small now, if the decline continues, the difference compounds significantly and the community continues to function.

If we want a resilient Treasury then we would diversify into different asset classes. Not sell one highly volatile asset for another.

Buffet owns $300B in T-Bills (5% of the entire market). Current yield on the 10-year is 4.5%

That’s double the return we would have gotten from acquiring BTC when the WFC was first proposed.

[PolkadotFollower]

Thank you. Shame on everyone pushing for selling DOT into other cryptos.

[hippiestank]

@et90266

If we want a resilient Treasury then we would diversify into different asset classes.

I agree but I am unfamiliar with any outlet that would allow the Polkadot DAO access to traditional asset classes in a decentralized manner at this time, while a small Bitcoin reserve is implementable now.

[tom.stakeplus]

We should instruct the PCF to open an investment account on behalf of the treasury. We should roll funds over time from the treasury into investments with yield and use the yield to buy DOT and top up the treasury on a regular basis. Treasuries were one thing that were brought up. Raw materials are normally pretty good too somewhat anti/counter-inflationary and with regular yield.

Unless we want to vote in an active manager all we can do is build a passive portfolio and rotate yields back into DOT.

Maybe we can buy some MSTR and get Saylor on board.

but I am unfamiliar with any outlet that would allow the Polkadot DAO access to traditional asset classes in a decentralized manner

That is the entire purpose of PCF ( REF - WIKI )

A real world entity of, for and by the Polkadot Community. The PCF is “Web 2.5”, it’s a 1.0/2.0 compatible/compliant entity that acts as a bridge to 3.0. This entity would have no issues establishing a traditional investment holdings account.

Update:

After giving it more consideration and running the numbers I just don’t see how we can do this and for it to really provide any value short or long term. Even with amazing yields it’s likely to do more harm than good with the additional downward pressure that we’re already contending with from other DCAs mixed with lack of interest.

We need interest (and excitement) that we will only get by deploying services and applications that people want to use over traditional services because they’re better and/or cheaper. A few niche production ready use cases are really all we need to turn things around in a big way. With that increased interest it would make the numbers for ideas like this more practical.

[hippiestank]

@tom.stakeplus
I appreciate your thoughtful input and update.

I would love to see a proposal develop a professional strategy, hire an active manager and instruct the PCF to work in this capacity. Realistically, that is a large task and outside of my scope.

@tom.stakeplus

A few niche production ready use cases are really all we need to turn things around in a big way. With that increased interest it would make the numbers for ideas like this more practical.

Asset Hub

[tom.stakeplus]

A better idea might be to use the PCF as a holdings company where it can issue tokens or nfts representing the underlying asset and hold that underlying asset on behalf of the network.

Then you could do something like --use the PCF to buy a solar farm, setup a bitcoin mine on the solar farm, then issue RWAs for both the solar panel and the miners.

Have hydra setup capabilities for users to fill loans or take out loans using the RWAs as collateral.

Same thing could be done for equities / etc. Treasury earns a fee for holding the assets (think “ADRs” – unsponsored “PDR”? ) and a premium for being the issuer.

[et90266]

This should be posted on X where people can openly comment on it.

My counterargument was flagged by the community.

Bring the discussion to the public.

[bill_w3f]

It looks like it was actually flagged by the community, not moderators.

“This post was flagged by the community and is temporarily hidden.”

[et90266]

Thanks for catching! (I’ve updated my post to say flagged “by community”).

[Quantum]

What you have written
Write in simple and decent way

[tacolopo]

This proposal seems to be a tacit admission that DOT is inferior to BTC. It doesn’t make economic sense to devalue your “currency” to buy a different currency to circularly stabilize your currency.

Note: Currency is only in quotes since cryptoassets can function as more than pure currency.

[burdges]

We do not have a decentralized BTC bridge yet, so we lack the technical capability to do this right now.

At a wild guesstimate, the current ETH bridge could be adapted to BTC, with a running cost under 0.005 BTC = 500 USD per day, or 0.73 BTC = 76k USD per year, maybe I’m way low balling these costs though. Also BTC withdrawls would take one day, but could be done “quickly” for maybe 0.0025 BTC = 250 USD.

Assuming those costs wind up prohibitively expensive..

An inexpensive BTC bridge would use a scalar resharing DKG run among the polkadot validators. There exist decentralized BTC bridges like dFinity, but afaik they cannot scale beyond maybe 40ish validators.

As I mentioned here polkadot has a unique technical advantages for doing large DKGs, thanks to (machine) elves aka parachain. In other words, polakdot could become the only really decentralized BTC bridge using a large-ish validators set, say 500-1000 nodes.

We’re moving this direction ala RFC#144 but only slowly. At present though, we favor first doing an aggregatable DKG that’s not the scalar DKG suitable for a BTC bridge, nor close to post-quantum tricks for tranche zero either.

At a technical level, we research guys should first properly explain our case for doing the aggregatable DKG before the scalar DKG. You guys should argue that a BTC bridge, aka scalar DKG, looks economically so valuble we should change our minds.[1] Ask the scalar DKG happen before JAM too maybe, but that’s a huge commitment from Parity.[2]

In summary..

You’re asking for a BTC bridge first & foremost. We’ll eventually do a BTC bridge that’s more decentralized than other ecosystems, just because elves (parachains) provides a better framework for DKGs. We’re making some progress this direction ala RFC#144. Yet so far, we’ve prioritized ETH bridges over BTC bridges, and now we’ve prioritized DKG not suited for a BTC bridge, so someone should convice both research and parity to make the BTC bridge a higher priority.

Footnotes:

[1] I’m personally dubious that a “bitcoin reserve” aka spending DOTs to buy BTC helps much, although sure maybe more useful than AMMs running huge DOT faucets. Ideally, you’d instead want polkadot managing other people’s BTC which they then use or trade within our ecosystem. I suppose one could explain how larger traders use BTC, USDT/USDC, and others, plus what non-faucet services would entice them into doing their trading on polkadot. Afaik we’re talking advanced stuff like options here, for which afaik none of our AMMs look suitable. Anecdotally, ZK options would be a killer app for bitcoin holders, but that’s way off for many reasons. Alternatively one could fix all our usability issues maybe?

[2] JAM services would typically be divided into parachain-like services with a single state root, and actor-like services with multiple state roots, but developers avoid baking state roots, actors, etc in too deeply then zero state roots becomes possible, and this brings liveness advantages for DKGs. Ergo, there is a temptation to wait for JAM for all of this, which could take a while longer.

[Vikk]

@burdges

We do not have a decentralized BTC bridge yet

My thoughts: We have Interlay as a semi decentralized bridge. I’ve previously bridged BTC from the Bitcoin blockchain to Interlay, and it was a smooth experience, it worked well, and I think the product is really cool. However, if I’m not mistaken, Interlay currently has some limitations. That said, I believe these can be addressed if BTC holders begin operating BTC vaults themselves. → Interlay Docs

[tom.stakeplus]

There are economic issues with Interlay and the founders have moved on. I’m aware of conversations with tbtc but they didn’t go well, I believe due to time constraints.

If you just want the BTC to be held – The PFC can open an exchange acct, convert and hold it on the exchange or use some professional custodial services.

I think though, it would be more beneficial to use funds to bootstrap real economic activity on chain than to just convert and hold some other asset in the same class.