Why I voted "No" to the treasury tax reduction Governance Action

Governance DRep Discussion
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Voting Rationale – Treasury Tax Reduction Governance Action

As an active participant in Cardano’s governance, my priority is to support decisions that ensure the long-term sustainability and viability of the Cardano ecosystem. Treasury funding is critical in sustaining innovation, development, and governance mechanisms by supporting ecosystem initiatives such as Project Catalyst, tooling, infrastructure, and other community-driven proposals.

Why Treasury Sustainability Matters

Cardano’s treasury is designed to be a self-sustaining financial mechanism that provides resources for ecosystem growth. Historically, the treasury has accumulated funds, ensuring Cardano remains well-funded without relying on external sources. However, the proposal to reduce the treasury tax from 20% to 10% significantly alters this dynamic by cutting the inflows in half, while expenditures—primarily through initiatives like Project Catalyst—remain unchanged or grow.

To better understand the long-term implications, I conducted a Monte Carlo simulation modeling the impact of the tax reduction on the treasury’s ADA balance over the next 10 years. The results indicate that:

  • Under the current 20% tax, the treasury has grown steadily, accumulating around 300M ADA annually.
  • With a 10% tax, inflows would drop to ~150M ADA per year, while spending is projected to continue at around 200M ADA per year (based on Catalyst’s historical funding rates).
  • This creates a net deficit scenario where outflows exceed inflows, meaning the treasury would start to shrink year over year.
  • In the median scenario, the treasury balance could decline by 30-40% over the next decade if spending is not adjusted.
  • While Cardano’s treasury will still hold substantial funds in the short term, the long-term trajectory raises concerns about potential depletion or the need for future tax increases to compensate for the deficit.

My Voting Decision

I firmly believe that a sustainable treasury is essential for ensuring Cardano’s long-term resilience. Given the projected decline in treasury balance under the proposed tax reduction, I am inclined to vote against the reduction unless there is a clear, alternative plan to balance spending and revenue.

My decision is not about opposing lower taxes or increased ADA circulation—I recognize the benefits of allowing more ADA to be distributed through staking rewards. However, any reduction in treasury revenue must be accompanied by a well-structured strategy that:

  • Aligns spending with new revenue expectations, ensuring funds are available for essential ecosystem development.
  • Encourages efficient use of treasury funds, avoiding unnecessary or excessive spending.
  • Explores alternative funding mechanisms, such as increasing transaction fee contributions to the treasury over time.

Without such a strategy, reducing the treasury tax introduces financial risks that could limit Cardano’s ability to fund future development, governance, and community-driven projects. Cardano’s long-term health depends on responsible financial stewardship, and any governance action that impacts the treasury must be approached with careful consideration of its sustainability.

Final Thought

My vote reflects my commitment to preserving Cardano’s economic viability while ensuring it remains a self-sustaining and decentralized ecosystem. I encourage all stakeholders to carefully evaluate the implications of this proposal and consider not just the short-term benefits but also Cardano’s long-term financial health.

The code used for the Monte Carlo simulation is available here.

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I don’t quite get why you do a Monte Carlo simulation if the only random thing you put in there is that you just assume that inflows and outflows could fluctuate by 10% “for unpredictability”.

If you look at the currently proposed budgets, Catalyst is not the most important part of it anymore (but it is also far away from 200 million).

Why do you assume that the spending will always stay around 200 million (±10%) independent of any development in ADA value?

And most importantly: “Expected Inflows drop roughly 10% each year, reflecting the declining reserve rewards as Cardano’s reserve depletes” This is also true for the current situation. The 20% tax rate is also not sustainable. No tax rate can be since the reserves will approach zero (except if we change the constitution, drop the hard supply cap, and go for tail emissions) and it is totally unclear if transaction fees can make up for that (currently, they are pretty much irrelevant).

So, we will have to spend from the treasury stock at some point and we will have to be conservative enough in the spending to not spend from it too fast.

But then it is not a binary decision between “20% is sustainable, we can continue as is” and “10% is unsustainable, let’s not do that” anymore. If we have to take a good look at all the spendings – including but not limited to Catalyst – if they are really worth it, anyway, we can also come to the decision that keeping the staking rewards up for longer is more important and we should rather go for 10% treasury tax and have an even harder look at the spendings.

And that was my conclusion for this governance action. (…, but it doesn’t look promising.)

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Hola,

Based on the latest funding for Catalyst, I assume the 200 m from Catalyst. I didn’t consider the budget proposals as they are still proposals and have not been applied.

I agree with you, this is not a binary decision. We may have a different approach to set a tax rate, perhaps, not a fixed one but a dynamic rate that can fluctuate as the market. I know my approach may not be perfect, but I decided to use the tools I know to better understand potential scenarios.

Thanks for sharing your insights.

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I agree with your point of view; establishing a floating tax rate might be a more precise solution to the problem!

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Hello @jarturomora

Thank you for openly discussing your voting decision. Posts like these are always informative for the community. :slightly_smiling_face:

It seems that you ran a simulation with one range bound variable, so the results you got after 10k iterations were just a range of that variable. There may be a bit more significance if you allowed for at least two variables to interact (such as %tax vs expenditure fluctuations) in order to show some meaningful levels.

100% agree. :+1:
That’s why I think we should focus on working with inflows only. For example:

Budget must be < or = to 90% of tax + fees inflow.

The only time we dip into the treasury should be for security, base protocol development (major work) and increase of inflows.

By limiting spending to what we get we will have to:

  1. Prioritize necessary spending only
  2. Work on increasing network activity for adaption and boost to inflows.

That is because of emissions incentive. This incentive is diminishing regardless of % of the tax rate.
We are at “What’s next?” stage and not at the optimization stage of treasury inflows.

I say we stay frugal and leave most of it for future generations. Work with what we get and save a little if we can.

:blue_heart:

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