PCP_TreasuryTax-tau-parameter_EarnCoinPool

Governance Parameter Change Proposals (PCP)
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Summary:

The tau parameter sets the rate of tax that is used to grow the Treasury. The current Treasury tax (tau - τ) is set to 20% (.20). The treasury tax is applied before the reward calculation and distribution, so the whole epoch reward pot is taxed first.

The current balance of the Treasury as of Epoch 444 is 1.38 Billion ADA*.
*Source: Pots | Cardano Explorer (cexplorer.io)

Looking at the last 12 epochs starting at Epoch 443 to 431 the average growth of the Treasury is approximately 5 Million ADA per Epoch. While the remaining rewards that go to delegators and SPOs is approximately 10 million ADA.*
*Source: Epochs | Cardano Explorer (adastat.net)

So approximately 30 Million ADA is added to the Treasury each month.

Goal:
We seek determine if this rate should be lowered to its original intended rate of 5% or if some other reduced rate should be considered.

We also seek to understand what factors should be considered as determining factors for adjusting the rate of tau. For example, the price of ADA, the current Treasury balance and so on.

We seek to determine the adjustment frequency of tau rate.

In summary we seek to create a consensus on an acceptable rate of growth for the treasury, the tau taxation rate and if it should be adjusted, and how often the rate should be adjusted.

History:

IOG researchers analyzed the right mix for tau, the parameter that sets the treasury taxation, at the beginning IOG researchers evaluated and had considered setting the tau parameter to 5% (0.05). However, before the Shelley mainnet launch they determined the rate should be set to 20% for the treasury tax (tau).

Reference: Philipp Kant, Lars Brünjes, and Duncan Coutts. Design Specification for
Delegation and Incentives in Cardano

Design Specification for Delegation and Incentives in Cardano (adatainment.com)

List of Updatable Parameters including “treasuryGrowthRate” - CF Explorer
Protocol Parameters | Cardano Blockchain Explorer

Next Steps:

This is the first step of the PCP process of engaging with the community. We are hoping the community will join this discussion and community members will help create analysis, charts and research in support of rate changes, frequency and Treasury growth.

Once the community has had time to discuss and provide analysis over the next several weeks or months, if a consensus seem to have been made, we will formally request a technical review and recommendation from the Parameter Committee at that time.

Please Note: Instead of adding to this post or revising we decided to post supplements below. We will only edit the above post if numbers need to be updated or corrected.

Supplement #1

Thank you! - ECP

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Nice PCP!
It is definitely time to reevaluate Tau.
My understanding was that it was set to 20% in order to quickly bootstrap the treasury so there would be funds available for Catalyst.
With over 1 billion ADA in the treasury, that goal has been reached.
I support resetting the value to the original 5%.

Also, the questions here about defining the factors involved in the decision and their relative importance is something that should be done for all of the economic parameters.
Having a plan and schedule for parameter evaluation especially as the price of ADA changes substantially would be beneficial to the stability of Cardano and provide clarity and guidance to community members.

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Supplement #1

The Tau parameter (t) establishes the fraction of rewards (R) which is contributed to the Treasury each epoch. Tau functions as a tax contribution to the Treasury. Tau is currently set to 0.20, or 20% of the total reward pot. The current balance of the Treasury as of Epoch 444 is 1.38 Billion ADA*.
*Source: Pots | Cardano Explorer (cexplorer.io)

Between Epochs 433 and 443 the average reward pot was 26.4M [ rho * reserve + fees ] , the average treasury contribution per epoch was 5.2M [Pots | Cardano Explorer (cexplorer.io)], the average distributed to SPO’s and delegators was 10.1M, and the amount returned to the reserve was 11.1M.

11.1M was returned to the reserve due to the fraction of unclaimed rewards returned to the reserves.

The effective treasury tax rate is closer to 33%. So approximately 30 Million ADA is added to the Treasury each month.

Possible Adjustment that could be made:

Reduce the treasury tax rate to approximately 5.0% of distributed ADA rewards by setting Tau to 0.030. Making the effective rate roughly 5.0% This reduction could be adequate until Voltaire self-determination governance.

*Please Note: The Cardano Foundation released an open source rewards calculation today - 10/30/23. We will work them to verify that these numbers are correct and update as needed.
Releasing an open source rewards calculation (cardanofoundation.org)

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I think it’s important to note that according to Double treasury taxation of 40% and possible workarounds, Tau was changed from 0.05 to 0.20 because the destination of unclaimed rewards was also changed from treasury back to the reserve for the benefit of both delegators and pool operators:

A side effect though is that it introduced a double taxation described in the post.

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Great work Rich… I guess the step is to start pushing on the social media ?

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With the numbers reported here it looks like the total tax rate is at approximately 33%. ( 5.2M to treasury, 10.1 to users and SPOs). ADA that flows from the reserve to the rewards and back to the reserve should not be taken into account for the calculation of the tax rate.
The Treasury receives 1 M ADAper day, and spends ~50M ADA in 7 months in we take F10-F11 as an example. (It was far less before that).
That’s roughly 4 times more intake than expense.
Decreasing Tau to 0.05 will get us to pretty much the spend rate we have at this moment.
However, I assume we want to increase the size and frequency of the catalyst funds over time and we know that the rewards will decrease ( unless the intake in fees drastically goes up).
A tau of 0.05 would therefore lead to eating up the current treasury over time. As we have 1.4B ADA in the Treasury we can support this for the coming years, but it’s not a sustainable situation. A slightly higher tau of 0.10 would be more sustainable.

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Here is our official form request for a technical review and recommendation from the Parameter Committee. cc @Joaquin - Thank you!

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I would like to thank @Fabian -Fabian Bormann for providing stats. Please see his data here:
Treasury Calculation Results (cardano-foundation.github.io)

And his post on the data here: https://x.com/YetAnotherAiGuy/status/1752103805959782531?s=20

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Fantastic write-up @earncoinpool. I’m in favor of lowering Tau to either 0.05 or 0.03%.

My thoughts are that it would lead to increased rewards for SPOs and delegators as well as potentially make Catalyst funding a bit more competitive than it otherwise would be.

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I want to jump in here and say that I would want rewards distributed to more than just POSs and delegators. I believe we need to find a way to get funds to the community and partners to build this ecosystem the way we know it can be built.

For those that aren’t SPOS and don’t have large bags, they likely do have large portfolios of action and commitment to Cardano.

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These are Catalyst numbers and there are many reasons to question the value and legitimacy of these numbers in this discussion but I think if we look at it from a concentration of ADA POV, then the increase to SPOS and Delegators is likely to increase the concentration of ADA for those with the most ADA currently.

How to distribute rewards and not increase centralization isn’t without a significant challenge on this one.

EDIT:

Adding the doc from SCATDAO which includes Funds 5 through 11.

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@earncoinpool Thank you, Rick! I am adding it to our backlog and will discuss your proposal with the committee in the next meeting.

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Dear @earncoinpool ,

I am writing to you on behalf of the Parameters Committee to inform you about the status of your recent Parameter Change Proposal (PCP).

As you can read in the last update from the committee, the upcoming PCP-003 has been selected and so other extant PCP applications will be deferred as per the PCP process. This decision does not reflect a lack of merit in your proposal, but is rather the result of current prioritization and our limited capacity to process all the proposals.

The deferral of extant PCPs after a given triage and selection period provides a period for the authors to continue to refine their message, to accentuate the importance of the PCP for the next period, and to assess its ongoing relevance given developments (including the results of active PCPs) in the interim. When the Committee opens the next submission period, you can notify us that you wish to renew the PCP.

We encourage you, if you wish, to use this time to revisit and strengthen your proposal, incorporate any feedback you have received, and account for any relevant developments in the ecosystem. The Parameters Committee values your contribution to the Cardano community.

Should you have any questions or require further clarification, please do not hesitate to reach out to us.

Thank you for your understanding and for your dedication to improving the Cardano ecosystem.

Best regards,

Joaquín López

Secretary of the Parameters Committee