Many in the DotSama space embrace the cross-chain future of DeFi, recognizing the value (financial and otherwise) in the ability to interoperate seamlessly between various blockchains. However, to realize this cross-chain vision, chains themselves must take an active approach. This approach can also be leveraged to improve the liquidity of the chain’s own native assets.
Taking the lead set by Cosmos Hub’s recent Atom 2.0 Whitepaper, I propose implementing an allocator module for the Polkadot ecosystem. This document put the rationale for this best, stating that “Sustaining the rapid growth of the interchain will require new approaches to on-chain economic coordination”. In other words, promoting the cross-chain future of DeFi requires innovative tactics applied to the actual economics on chains. This can benefit the DOT tokens and the users and protocols that hold it, augmenting its liquidity.
With its Interchain Allocator, the Cosmos Hub aims to accomplish this; the Allocator is described as “a venue for economic coordination and interchain project alignment”. Specifically, the Allocator facilitates the ATOM Treasury’s commitment of ATOM to various locations in the Cosmos ecosystem (across various chains) to make money for the treasury and the protocols it supports, thus driving secure, sustainable interchain growth.
Similarly to the step being taken by the Cosmos Hub with its Interchain Allocator, Polkadot should implement interchain allocations by the DOT treasury, supporting various projects that integrate with Polkadot and align with its interests. This injection of TVL will help grow the involved projects. This support can eventually be repaid, delivering financial gains to the Polkadot Treasury. Perhaps most importantly, this system will solidify Polkadot as a hub of cross-chain operations, with its DOT token a sought-after form of cross-chain collateral.
Like the Interchain Allocator, the following pieces of infrastructure would be required:
- A Covenant: a governance proposal-generated agreement between Polkadot and parachains for the injection of DOT from the Polkadot Treasury into DApps on these connected chains, and then the repayment of this DOT
- A Rebalancer: a means of automatically managing (i.e. rebalancing) the DOT distribution between various DOT portfolios across different DApps
Using these tools, the flow of interchain allocations on Polkadot would be as follows:
- A covenant is proposed and approved via Polkadot governance
- The DOT treasury commits some amount of DOT to a protocol, as outlined in the covenant
- The covenant is signed
- DOT is injected into a protocol from the treasury
- This increases the protocol’s total value locked (TVL)
- Then after a period of time (established in the covenant), the DOT is repaid to the treasury
- The covenant has been fulfilled
There are many benefits that can be derived from this implementation of interchain allocations in the Polkadot ecosystem including:
- Ecosystem incentive alignment between Polkadot and the projects that interface with it
- Supporting the creation and growth of projects that integrate with Polkadot
- Supporting cross-chain operations and enhancing available (cross-chain) liquidity of DOT and other assets
- Promoting DOT as a highly desirable asset in the ever-growing cross-chain economy
The interchain allocation of DOT from the Polkadot Treasury can be used in a number of ways, including those that are specific to the DApps being supported by the Polkadot Treasury. Just a few of these many opportunities are outlined below:
- Participation in the governance of Polkadot and other chains/DAOs, pushing forward the aligned desires of the DApp and the Polkadot ecosystem
- Participation in/support of cross-chain liquid staking opportunities for DOT, enhancing these opportunities for the DOT token
- Incentivizes for major/promising projects to deploy on/expand onto Polkadot
- Guarantees on insurance, under-collateralized loan defaults, auctions, etc.
- Creation of automatic liquidity provisioning around the DOT token, or liquidity provisioning of the DOT token on another platform
To ensure that the Polkadot Treasury remains funded for its other purposes (such as for implementing approved governance proposals), there should be a cap on the amount of treasury funds distributed via interchain allocations. I propose that no more than 10% of treasury funds can be deployed in a month for this purpose, at least initially. Of course, governance votes could then increase or decrease this percentage.
I propose that the Polkadot Treasury should implement interchain allocations, in a similar manner to the innovative approach set forth in the Cosmos Hub’s ATOM 2.0 Whitepaper. This will help support the interchain blockchain space as a whole, as well as the growth of individual projects aligned with Polkadot’s vision. Moreover, this will augment the Polkadot ecosystem itself, solidifying Polkadot’s role as a frontrunner in the cross-chain space with a highly desirable native asset for cross-chain use.