There is a current governance action that proposes placing a hard cap of 300 million ADA on treasury spend in 2025. The details of this governance action an be read below:
The Cardano Constitution requires an annual “Net Change Limit” - basically a limit to how much can be drawn from the treasury annually - before any proposals can be approved.
Established best business practice is to make this a percentage to allow for flexibility; this governance proposal wants to institute a fixed cap. I’m posting this topic here to gather public feedback.
My personal concern: by making this a fixed amount versus a percentage the community risks handicapping Cardano’s growth in favor of stringently maintaining the treasury at a specific level. It’s likely that this will result in promising projects leaving Cardano to find other chains where growth is happening at a faster pace.
I would like more information because thus far it sounds like a simple disagreement on what route to take. Both options would work.
You say established best business practice but can you cite your source please? Having worked in global corporate, I havent worked off percentages. I suspect with this percentage you still pick a date and lock in that dollar amount, based off the percent for that timestamp. I have heard some say this is to avoid choosing a dollar amount (vs percentage) and potentially having to change it later. The same scenario could play out even if we chose percentage. Look forward to your thoughts.
“Best business practice” is based off of years of working with SaaS, B2B, B2C, and non-prof organizations. It’s also a factoid often repeated in every business rag ever printed or published to the Internet.
I’m posting a few examples from business blogs and articles below for reference. Worth reading and comparing the stated % of spend noted in each article👌:
Thanks for sharing! I’ve never heard of any of these websites so I appreciate you sharing your prospective. I’m not sure how B2B or B2C has related to this chat on budgets but you sure sound like you have a lot of work experience.
Can you please help me to understand how having a percentage based amount, ultimately also just a fixed number whose value is set at a point in time, causes Cardano to handicap growth? Appreciate your thoughts!
Your examples of (alleged) best business practice all seem to talk about a percentage of revenue.
In fact, the governance action we are talking about here, is a percentage of the “revenue”. We can pretty exactly predict what the inflow/growth/revenue of the treasury will be.
300 MADA in 2025 and 250 MADA in 2026 allow to spend roughly 100% of the “revenue” of the treasury. Everything above that would spend from the substance of the treasury. I doubt that that is “best business practice” in any way.
But managing a treasury is something completely different than managing a company. We will have to spend from the substance at some point. I understand this governance action as just saying that we shouldn’t start with that in the first two years. And that’s why I support it.
Cardano (in my POV) is a decentralized business in addition to being many other things that make it unique.
As a contractor, I’ve had the opportunity to work with a range of businesses over several decades. While there are obviously some specific features to operating a B2B, B2C, non-prof, a global enterprise vs a mom-and pop brick and mortar, any of these entities can thrive or die based on the accounting practices they choose to adopt. So the relevance to B2B, B2C, etc. is just from what I have observed and drawn from businesses that have been able to remain solvent and growing no matter the economic environment (for example, COVID and its economic fallout).
My thinking is that it’s better to set the precedent of using a percentage-based net limit in the beginning so this standard is established early. Having a percentage in place allows the spending budget to increase and decrease naturally with the amount of “income” generated in the previous year. This installs a common sense spending cap that is less likely to draw criticism as being arbitrary, and doesn’t have to be debated or changed manually on an annual basis.
If over time it’s observed that the percentage is too low or too high, it can be tweaked to allow the available budget to be commiserate with what the chain has generated for the treasury.
If this governance action is the only one that will be used to allow committee budgets for 2025 to be rendered Constitutional, it appears that DReps essentially have to vote for it to allow budgets to be released to fund this year’s projects. I strongly recommend that this be converted to a percentage for 2026 and going forward.
Per the rest, please see the reply I made to Music above you.
If this is the only governance action on the net limit that will allow budgets to be spent in 2025, it looks like we pretty much have to vote yes on it, but I suggest using a percentage going forward.
I have to hard stop here as I cannot support statements like:
“looks like we pretty much have to vote yes on it”
It’s nothing more than laziness when additional GAs can be submitted if warranted.
It very surely will not be the only one. The budget committee itself still wants to spend more and I would expect them to submit their own, but probably also not percentage-based.
I wouldn’t have a problem with a percentage of last year’s treasury “income”, only with a percentage of the current treasury balance/stock.
What do we do once the “income” goes negative? We can’t spend negative values. And on the way to that, that limit will become smaller and smaller quite fast. Not sure that is really better than deciding on concrete values every couple of years.
Confused:: Are you asserting that the percentage allows the amount to constantly change throughout the year? Otherwise it’s rather mute when we can change the number annually before setting a budget.
The same could be said regardless if it’s a percentage or a set figure, adjust as needed.
If we have a set figure, we can still change it next year. If we have a set percentage, we can still change it next year and even set it to favor a figure we like if so inclined. It’s starting to seem like it’s just personal preference to get to the same result, setting a number that we agree upon which can be done annually.
Also anyone can submit another GA, I wouldnt assume we’re stuck with this one because it’s the only one just like prior to it we werent stuck with nothing. It’s often just a matter of time.
You don’t know me personally so I won’t take offense to the quip, but I can assure you I’m the farthest thing from lazy you’ll ever meet. Like most DReps I’m doing this as I have time alongside my regular life responsibilities (running a business, launching a project, maintaining human relationships, etc.) I posted this topic to learn more about this GA and discuss potential future modifications (if possible) before I actually vote on it. I mean, we are already approaching April, so this is a time sensitive process, no? Thus the “it looks like we may have to vote yes” hypothetical.
For every governance action I do exhaustive research before I submit my vote. I take the role very seriously.
With that out of the way, the answer you provided in your second response was helpful:
Also anyone can submit another GA, I wouldnt assume we’re stuck with this one because it’s the only one just like prior to it we werent stuck with nothing. It’s often just a matter of time.
I appreciate the further details and the link that you shared. This is the type of math I was hunting for to see exactly how the net limit was being proposed. I’m spending Saturday doing some more research on this governance action so I’m including the link you shared in my reading.
Good question. Whether a fixed value or a percentage, the amount will become smaller per year unless Cardano can finally figure out at scale how to attract more people to the ecosystem and get more on-chain transactions.
Perhaps the answer is a hybrid approach: a set percentage when the treasury income is positive with a negative year triggering the requirement for the establishment of a temporary fixed value that’s lifted once treasury income becomes positive again?
According to Jaromir’s link above, treasury income is already in decline (negative) so following this narrative, using a fixed figure for now may make the best sense, while switching over to a percentage of income when Cardano starts seeing a positive inflow will allow access to the benefits of percentage-based spend.
Why use a percentage?
I’m thinking about it from the POV of efficiency and automation: with a percentage in place the annual spending amount is pre-determined without the need for manual involvement (or potential bickering) other than over how the amount will be split up and spent. An attempt to diminish bureaucracy, if even by a fragment.
Once Cardano has positive inflows the % can be set at a size that allows room for effective spend on maintenance, growth and development while also ensuring the reserve remains at a healthy size.
So those are my thoughts on percentage over fixed treasury draws.
My other concern is the fixed amount being proposed for 2025 may be too low. I see that at this point a lot of SPOs appear to be opposed to this GA, I have to take some additional time to understand why that is. Maybe they feel that amount along with what Project Catalyst draws and the proposed Intersect MBO spending puts their compensation in jeopardy?
My bad as I did not expect you to take it personally. It was more pointing it out as I dont think you meant it that way and honestly I felt inclined to illustrate how it sounded. To the point though, I have heard numerous people talk about their own submissions so I’m less inclined to think one is done.
My experience in the business world supports the idea of allocating spending as a percentage based on forecasted revenues. This approach is commonly applied in the budgeting process. For example, you might assume that your business unit will generate X amount of revenue next year, and you expect to achieve an X% gross margin. Within this X%, you allocate portions for various expenditures. For instance, in a consumer electronics trading company, you might forecast and allocate 2% for logistics, 1% for service, 5% for marketing, and so on.
Ultimately, this process leads to a final budget figure that you begin working with at the start of the next fiscal year. Adjustments are made throughout the year to ensure that gross profit targets are not compromised.
While this method might seem like a plausible practice for treasury management as well, I have the following concern:
Setting spending as a percentage might restrict us from making significant investments upfront, for example spending a large sum of money in the first couple of months, because we would need to wait for funds to accrue first. The net change limit as a percentage would enforce a hard cap on spending until we accrue at least that amount (all requests would be “unconstitutional” before that), which will cause us to waste a lot of time in such a competitive industry. In contrast, in the traditional / legacy business world, this issue doesn’t arise because there are no such limitations; you can start spending immediately and adjust throughout the year.
Thank you for taking the time to contribute your point of view. Ironically your concern about spending being handicapped and potential opportunities being missed was also one of the reasons I was initially concerned about using a hard cap vs a percentage to set the budget. I’ve had time to deep dive on this GA some more since posting this topic for discussion. Your caution regarding using a percentage of revenue figure to manage a decentralized treasury vs a private sector business is defiantly worth consideration.
You are right. This model should be proposed on treasury inflows since the community is allowed to draw annual budget for a given year based on treasury inflows of the previous year.
For instance, it will be prudent to establish that we spend 80 or 90% of treasury inflows of previous year.
With this, if we had an inflow of 345M ADA in 2024, the community is allowed to spend either 80% ~ 276M ADA or 90% ~ 310.5M ADA for the year 2025. This would leave us with some balance to be saved for future use as block production is marked to deplete over time. Of course, we would have to holistically decide a single percentage.
I see this to be easy and simple for everyone to understand, isn’t it?
