Understanding the Polkadot Treasury
This is the first article in a long thread where we try to simplify the complicated web3 jargons and make it easier for the community to understand things and navigate through the space :)
So, to begin with, what is a treasury?
A treasury is basically a pot of funds. A protocol introduces the treasury to invest back into its developer community.
In Polkadot’s case the DOT in the treasury comes as a natural part of the network with slashes, fees & suboptimal staking configurations being the contributors to the treasury. The funds held in the Treasury can be spent by making a spending proposal(if approved by the community-elected council members.)
The treasury is run by council members and has already received multiple proposals related to infrastructure development, operations projects, and software development.
How is the treasury funded?
Well, the obvious question is -”Where are the 25.83M DOT coming from?”
Well, the Treasury is funded from different sources like:
- Slashing: To understand this, one needs to understand how proof of stake systems work. So, when a validator is slashed for any reason, the slashed amount is sent to the Treasury with a reward going to the entity(another validator )that reported the event.
- Transaction fees: For sending any transaction to the network, everyone needs to pay a transaction fees. This transaction fees acts as an incentive for the validator to stake their tokens and validate transactions. So, for every block that is mined and added to the chain, a portion of each block’s transaction fees goes to the Treasury, with the remainder going to the block author.
- Staking inefficiency: Polkadot is an inflationary token. Inflation is designed to be 10% in the first year, and the ideal staking ratio is set at 50%, meaning half of all tokens should be locked in staking. Any deviation from this ratio will cause a proportional amount of the inflation to go to the Treasury. Basically, if 50% of all tokens are staked, then 100% of the inflation goes to the validators as reward. If the amount of tokens staked goes below the ideal rate(50%), then staking rewards for nominators goes up. On the contrary, if it goes above, staking rewards drop. This is a result of the change in the percentage of staking rewards that go to the Treasury.
- Parathreads: Parathreads are an idea for parachains to temporarily participate (on a block by block basis) in Polkadot security without needing to lease a dedicated parachain slot. This is done through economically sharing the scarce resource of a parachain slot among several competing resources (parathreads). Chains that otherwise would not be able to acquire a full parachain slot or do not find it economically sensible to do so, are enabled to participate in Polkadot’s shared security — albeit with an associated fee per executed block. Part of this bid goes to the validator that accepts the block and the remainder goes to the Treasury.
Okay, so who can receive funding from the treasury?
Anyone who wants to contribute to the development of the Polkadot ecosystem can request funds from the treasury by creating a proposal. Proposals may relate to infrastructure deployment, network security operations, ecosystem provisions, software development, marketing activities, and community and outreach events.
In addition to proposal funding, the treasury will also support community efforts such as document translation, Polkadot-related content creation, educational videos, and general community support.
Some categories eligible for treasury proposals-
Proposals may consist of (but are not limited to):
- Infrastructure deployment and continued operation.
- Network security operations (monitoring services, continuous auditing).
- Ecosystem provisions (collaborations with friendly chains).
- Marketing activities (advertising, paid features, collaborations).
- Community events and outreach (meetups, pizza parties, hackerspaces).
- Software development (wallets and wallet integration, clients and client upgrades).
In the next post, we would be going through the process of creating a treasury proposal(might drop some alphas here ;) )
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With love,
Polkassembly
