In preparation for a soon-to-be-published concept on how to create a budget for the Treasury, I deconstructed current debates to understand the existing theories of Treasury management.
This article intends to give you a better understanding of:
- stakeholder groups and their values
- the four competing ideologies (abolitionism, conservatism, accelerationism, hyperinflationism)
- OpenGov defining its boundaries
- bottom-up vs. top-down
- reactive vs. proactive approaches
Thank you to the members of ChaosDAO for valuable feedback.
Although not part of a milestone, this research was made possible thanks to a Web3 Foundation Decentralized Futures grant.
Enjoy!
What is a Theory of Treasury Management?
Letâs look at present theories for managing the Treasury. This is a complex field with highly diverging ideas. We will approach this by describing how theories differ. Letâs start by explaining what a theory for Treasury management is.
A Theory of Treasury Management is a combination of personal values, opinions, or even complex ideologies that together form a theory. The purpose of the theory is to inform and direct individual behavior on how to interact with other participants to influence the management and deployment of Treasury assets to maximize a positive outcome.
What this positive outcome is, depends on the opinions of the stakeholder and their values.
Stakeholders and their Values
One may naively assume that the Treasury has a single universal goal. But this is not the case! The Treasury might support the core protocol and network, the wider ecosystem, the native token, ecosystem agents, or other things.
Numerous stakeholder groups in the ecosystem have partially overlapping and conflicting interests, such as DOT holders, stakers, protocols, parachains, investors in those protocols, users, network service providers, OpenGov workers, etc.
Deciding how to strategically and operationally balance those demands (and if they even should be supported) can be expressed through tradeoffs. Does OpenGov value the development of new protocols over advertising efforts? Does it rank operational flexibility over making commitments to long-term plans?
These decisions have to be made. How individuals decide them is through personal values. Values are at the base of their conflicts. Understanding the values of others is the best way to understand possible resolutions that satisfy the involved parties.
Four Competing Ideologies
Values are not randomly distributed but rather form clusters that typically lead people to form similar ideologies. We can identify four dominant ideologies of how the Treasury should be managed in in the field. They form a spectrum with specific ideologies in order of âaggressivenessâ. We call them: abolitionist, conservative, aggressive, and inflationist.
Treasury Abolitionism
Treasury Abolitionists demand to âburn the Treasuryâ. They believe that the Treasury acts as a honey pot for bad actors and/or that OpenGov is not able to manage it properly. The underlying assumption seems to be that the possibility of Treasury spending always leads to corruption and it is not possible to do something of net positive outcome with it. Consequently, they propose having no Treasury at all.
Treasury Conservatism
Treasury Conservatives prefer to only spend on safe bets. They might want to only give out grants after a thorough proposal has been developed and sufficiently discussed. Another value might be to contain as much value as possible and spend it in the future once the native token has risen in value. Another opinion might be to limit spending to certain amounts and only give out more value once proposers have proven their reliability.
Treasury Accelerationism
Treasury Accelerationists want to seize opportunities with uncertain outcomes. For them, aggressive spending is the way out of the bear market. They want to engage in bets with significant upside, even if they involve a greater amount of uncertainties. Some of them state that deploying capital to solve a problem will create competition and over time attract better agents willing to perform the service.
Treasury Hyperinflationism
This is typically a more extreme form of accelerationism. Hyperinflationism is a response to criticism that argues that accelerationists will spend the whole treasury. Hyperinflationists argue that OpenGov could just mint new tokens if it ever runs out of them.
The Boundaries and Role of the Treasury
Since proposals to the Treasury are essentially open to everyone, the scope of proposals is virtually unlimited. Who then defines the boundaries and the role of the Treasury?
So far we can observe that the scope of the Treasury has been constantly expanding. Originally, proposals mainly focused on research, development, and operations of the network and related technologies, as well as sourcing marketing services and talent. Over time, more and more territory gets tested, such as supporting individual protocols through development subsidies or increased collaboration with the Treasury. The Treasury also has given out loans and participates in market operations by providing liquidity and giving out liquidity incentives. Recently it has also agreed to a token swap with a parachain project and also funded the setting up of a legal wrapper in the form of a foundation in the Cayman Islands.
OpenGov expands its scope from supporting the core Polkadot relay chain and system chains and technology development to ecosystem development, the economy, and legal representation. Currently, the question comes up of whether the Treasury will also act as an investor and if it will diversify into additional on-chain assets and RWAs.
So far, OpenGov is unchallenged. We can observe that OpenGov is not shy to touch any topic, which indicates that it is willing to claim practically unlimited jurisdiction over Polkadot. If no one else is limiting the OpenGov, it defines its own limits. It is defining itself. Each new proposal helps shape its scope. We can expect this process to continue until legal or business interests start to substantially interfere with it.
Bottom-Up vs. Top-Down
Bottom-up refers to the fact that the social layer is composed of individual actors whose actions shape the network. In a sufficiently decentralized network, no actor can dictate the development of the network top-down. Adopting a bottom-up mentality leads to thinking about how individual actions create emergent dynamics and outcomes. Inefficiencies in the use of time and money are considered acceptable trade-offs to achieve greater resiliency.
Top-down refers to the idea that planning and implementation of holistic concepts can maximize value delivery and minimize inefficiencies. Top-down planning lays out the different major components of the system and prescribes how they should interact. Adopting a top-down mentality allows one to think about which elements are critically needed to make the overall system work and deliver the results it promises and find minimalistic setups to make it happen.
Arguments for the approaches
Some see these approaches as mutually exclusive, while others argue that they should both be considered for the best outcomes.
An argument for a purely bottom-up approach is that the ideal configuration cannot be planned or prescribed and needs to emerge organically. Bottom-up structures are thought to be more resilient, as they have emerged as the winners in a highly competitive field. This is supported by the idea that bottom-up is the default mode of operation in the network. If no one is applying intentional top-down approaches, the bottom-up approach will always be present in everything that happens.
Proponents of a top-down approach argue that bottom-up approaches bring several negative externalities, such as being wasteful of time and money due to a large amount of friction and inefficiencies being accepted. A top-down approach may allow the system to deliver the same results more quickly and incur less structural debt and fewer local solutions that are not beneficial for the overall system.
Locality vs. Globality
Relevant to the discussion of top-down and bottom-up is the locality of our reference frame. We could for example observe that globally stakeholders are employing a bottom-up approach, but within the domain of advertising, a bounty takes full practical control of it and does top-down planning and allocation.
Having a clear understanding of what we talk about global or local top-down approaches is important to avoid misunderstandings in our discussion.
Reactive vs. Proactive
Closely related but still separate from the discussion of bottom-up vs. top-down is the idea of reactive vs. proactive Treasury management.
Reactive Treasury Management is when a stakeholder is passively waiting for proposals to reach the Treasury to decide if they should AYE or NAY them.
Proactive Treasury Management is the intention to actively participate in the organization and planning of future proposals with the idea that proactive planning and coordination can lead to better results.
It can be argued that most stakeholders are reactive in their approach, waiting for the system to make moves. On the other hand, ecosystem agents that are actively shaping the network and working towards ecosystem success can be considered to be proactive. What we can observe is that being purely reactive also leads to bottom-up behavior, because no active effort is being made to implement top-down planning.