Catalyst is perhaps the most ambitious project in Cardano. In its simplest form Catalyst defines the mechanism through which the decentralized Cardano community selects projects to be funded by Cardano’s decentralized treasury. In a broader sense, it is the beginning of a decentralized governance mechanism --a decentralized autonomous organization (DAO), where the Cardano community comes together to make important decisions about the future of the protocol.
Every few weeks the Cardano treasury makes a certain amount of funds available in the form of grants and anyone can apply to fund their projects. The process is now managed by IOG but is expected to become fully decentralized in 2021. To vote on the proposed projects a Cardano community member must hold a minimum of 8K ADA, which is the currency of the Cardano platform. Each vote equals one ADA.
While the ultimate decisions are made directly by holders of ADA, the treasury system incentivizes the Cardano community members to serve as community advisors. These effectively serve as sanity filter for all the proposals. The role of the community advisor is to evaluate and rank funding proposals across three dimensions: (i) impact (ii) feasibility (iii) auditability.
Why This Guide
As we embark on this bold new experiment as a community, we enter the world of finance and economics, which are governed by their set of laws and principles. These principles, if applied consistently, will help us make better funding decisions, which will add to our success as a community.
The purpose of this guide is to expose future Catalyst advisors to several core concepts and mental frameworks that may augment their mental acuity and ultimately improve the quality of our investment decisions as a community.
The end goal is to adopt a set of analytically rigorous frameworks as guiding principles, which will help the community advisors to maximize their impact and minimize resource waste for Cardano. This guide is the first step in a journey that has yet to take us to our end goal.
The Responsibility of Community Advisors
Although it is not stated explicitly, community advisors have a responsibility to act in the best interests of the Cardano protocol. This comes down to exercising critical thinking to produce well-informed and unbiased assessments of funding proposals. This level of integrity is a foundational assumption and plays a key role in the long-term success of the treasury system and Cardano as a whole.
While we cannot vet every advisor in an open blockchain architecture, we must strive to provide useful mental frameworks to those who take this role seriously so they could do their job well and create avenues for constructive, meaningful discourse. With time, we can only hope that this decentralized organization will encourage the best and the brightest among us to earn the support of the wider Cardano stakeholders through their conduct and through the quality of their decisions.
The very best community advisors will be those who will carefully balance the impact of an idea against its feasibility and auditability while respecting resource constraints. I am confident that their results, measured over a long enough time, will speak for themselves. My preference would be that they be recorded in Cardano’s ledger for posterity and for the objective evaluation of their performance.
Impact
Impact is one of the major pillars of funding “uncuffed innovation” in Cardano. What is impact and why do we not use some other, true-and-tested metric like internal rate of return or net present value?
Each funding period, the Cardano community formulates a funding challenge, which could be thought of as a funding theme the community would like to pursue.
In that context, impact is a broad measure, which allows us to define and apply it to an ever-changing nature of challenges without too much cognitive limitations. Central to the idea of impact is ROI—return on intention . It introduces a crucial distinction from ROI (return on investment), which only measures the monetary form of return. Assessing impact requires that we identify relevant metrics for each funding challenge and measure the outcomes against its declared goals.
For example, the challenge for fund 2 was: “How can we encourage developers and entrepreneurs to build Dapps and businesses on top of Cardano in the next 6 months?”
In this context, impact can be measured with the number of developers and key business decision makers introduced to Cardano. Impact here can be expressed indirectly through awareness building metrics as well as directly through funding specific dAPPs and businesses.
While we need strive to measure economic significance of our funding decisions, we should avoid focusing solely on financial metrics such as IRR and NPV as these could be limiting for a fundamental technology, especially at this early stage, where we are still exploring the potential of the Cardano as a platform.
Thinking in terms of impact therefore is useful, but it does require that we come up with metrics to measure it for each funding challenge. More importantly, it forces us to think more fundamentally about how to set our priorities and formulate future funding challenges. Which brings me to my next point…
The Pyramid of Needs
Any economic activity we observe, is driven by humans. More specifically, by our wants and needs. Everyday billions of people engage in some form of economically productive activity. They produce and consume goods and services in exchange for money. These kinds of exchanges are facilitated by millions of companies and marketplaces. The entire global economy is a beautiful symphony of economic agents coming to life to satisfy our needs from the most basic to the most ethereal.
A very useful framework to think about these is Maslowe’s Pyramid of Needs. In a nutshell, this pyramid describes the full spectrum of human needs from the very basic physiological (food, shelter, water, etc.) to self-fulfillment needs of reaching one’s potential i.e., living a meaningful life.
If we want to truly understand how we should set challenges, we need to study this pyramid carefully and map our challenges to its components. Once we have that level of understanding (it can hardly get more fundamental than that), we should be able to formulate our challenges better and come up with metrics to measure them in the context of impact that they are expected to generate for Cardano.
Source: https://www.simplypsychology.org/maslow.html
The advisors need to understand and link businesses, dAPPs or any other treasury-funded endeavor to these needs. The best businesses are the ones which satisfy our specific needs more effectively and efficiently than their competitors.
In assessing the impact, advisors would need to be extremely careful about understanding the use cases and proposals. Assessing proposals should involve a deep dive into the project to understand and perhaps refine each individual project components in terms of the pyramid above.
If the subject matter is beyond their expertise, the advisors should honestly admit that to themselves and move on to projects that they can assess well. One of the best ways to understand our mental limitations, is to be self-aware enough to understand if we are forced to “manufacture” a critical opinion. We all have our shortcomings and understanding them is a sign of mental strength rather than a weakness.
More importantly, adopting this level of awareness by advisors will ensure that Cardano will continue getting exposed to the innovative ideas while reducing the chance of stifling innovation by those who lack the mental capacity to properly understand and assess complex projects. This is also where subject matter experts could play a great role in the community.
That said, advisors could be faced with assessing projects that are objectively convoluted or difficult to grasp. In these cases, the advisors could engage with proposal teams to clarify their positions. If clarity does not materialize after repeated interactions with the proposing team, these attempts should be documented, and the projects should be flagged as hard to assess.
Feasibility
Gauging the feasibility of a funding proposal involves taking a critical look at the team behind it, assessing the budget and the commitment of the team. Feasibility of the project addresses the execution risk, assuming the idea otherwise makes sense. At this stage we no longer question the impact of the idea but focus on how realistically it could be implemented.
This involves understanding the motivation of the team, its experience, the budget, and the timeline for the execution. These obviously require some degree of judgement by each advisor, so the best course of action is to interact closely with the team BEFORE the assessment and try to understand all these issues.
One thing the advisors should avoid is penalizing teams for execution efficiency. If one team can do the same amount of work in a shorter time frame, it does not mean they are expensive. It means they are better at execution.
Auditability
The purpose of auditability is to ensure that the team will have some form of reporting in place to track the progress of their project and report on it to the Cardano community. These may vary with each proposal but are crucial in measuring success.
Here again the advisors would be very well encouraged to ask questions, engage with the team to help them formulate useful metrics, if needed.
It is a balancing act by both the advisors and the teams. We do not want to over-complicate the lives of teams by requiring them to spend considerable time to gather and report the minute details about their work. A certain degree of trust here is required, and we should realize that the time and effort of the team is a scarce resource and would be best utilized by working on the end-product rather producing reports that go beyond necessary.
That said, the reports should comprise a set of metrics that demonstrate the impact and the execution progress of the project in clear terms.
Constraint: Resource Scarcity
Resources are scarce. This concept is fundamental to every economic decision we make as human species. Those of us who realize this fundamental truth, tend to make better decisions over time and are inevitably more successful as a result. This can be seen on a country and on individual levels.
What are resources? On a scale of a single individual, resources can be thought of as time and the productive capacity of a person. The productive capacity of a person is essentially what he can do and how much his work can fetch in the open market. That productive capacity often depends on the level of skills of a person which is often dictated by some combination of practical experience and formal education.
Time, people, and talent, while fundamental resources, are not easily interchangeable, which is why we invented money as a medium of exchange. Money is a resource. More specifically it is a universally agreed upon proxy for a resource —something that can be easily used to mobilize people and leverage their talents at a global scale. That is its superpower.
For countries, companies, and online decentralized platforms like Cardano, money (or ADA) represents a scarce resource. All else equal ADA is scarcer than its fiat equivalents. Unlike fiat money, which is inflated at a constant rate, ADA’s inflation rate decreases as the time passes.
Resource scarcity acts as a systemic constraint or a filter that prioritizes the projects against the funding challenges set by the Cardano community. We see this on a structural level with each funding period, where the amount of ADA available is fixed, i.e., scarce within that period.
However, it is also helpful to adopt a higher view and understand the implications of our decisions on a longer arc of time, considering the total amount of ADA to be minted.
One way to measure the implications of our decisions would be to divide the amount requested by the total amount of ADA to be issued within a year and base our decisions on that.
Dos and Don’ts
- Do understand the fundamentals of the project. How does it address the funding challenge? If the project addresses the challenge indirectly, ask yourself whether you understand and accept the thought process behind it.
- Do try to understand each project well before assessing it. Even if you think you understand it, always confirm your views with the project team. This is very crucial.
- Do study the subject matter well before assessing the project. Being an advisor offers enormous benefits for the intellectually curious and could enrich your life beyond your wildest dreams.
- Do keep a critical mindset, but give the project teams the benefit of doubt. Always question your own judgement until you arrive at very well-reasoned conclusions by interacting with teams.
- Do not come to the party last minute and try to hammer out as many assessments as you can. It will not help the ecosystem and most definitely will not help you grow as an advisor. This behavior is easily detected and will not help you build a long-term reputation in the community.
- Do not manufacture critical assessments or criticize teams without real substance. If you don’t have anything to add, it is better if you refrain from assessing the proposal. If you fundamentally do not agree with a proposal, always make an honest attempt to understand it, before assessing it. If you have strong reasons to believe a project has serious fundamental shortcomings, make them clear to the team and give them a chance to respond before issuing your final assessment.
- Do not be married to your opinion, however well-formulated. Be open to change your mind if the team addresses your concerns effectively. This is a hard one as we all tend to attach our egos to our opinions. If you do not remove your ego from your thought process as an advisor, you will severely reduce your capacity to contribute constructively.
If I missed anything else, please let me know.
Sincerely,
Umed–[SKY]LightPool
