Proposal Details
Hard-Cap The Treasury & Make ADA Deflationary
stumpjumper
Abstract
We should put a hard cap on the treasury and implement a burning of all fees collected any time the cap is reached. For the sake of discussion, I propose a hard cap of 2.25 Billion ADA (5% of the max total supply).
Burning ADA does not destroy value, just consolidates it. This is a fair and frictionless way to distribute proportional value to all other token holders across the ecosystem by leveraging the fundamental economic law of Supply and Demand.
This change would be easy to implement on-chain and is a low-risk way to add significant long-term deflationary pressure to ADA, improving its fundamentals as a digital asset.
Motivation
Having 1.5B ADA in the Treasury feels nice, but at the end of the day, this is just sell pressure waiting to happen. At some point, it can be seen as a looming and unpredictable 'Unlock' that can scare away new investors.
Burning tokens magnifies the value of Staking Rewards by providing ongoing supply reduction. This can help increase community participation and thus network security. The security of the Cardano Proof-of-Stake network depends on financial incentives which rely on token price appreciation.
Like it or not, token price matters. It's how the crypto industry measures success. If we want to be competitive, we need to start focusing on number-go-up. We have the best tech and biggest community in all of crypto. If the price doesn't reflect this, we are doing something wrong.
Cardano needs better marketing in this competitive industry and burning tokens to reduce supply is a tried and true method of boosting token economics and increasing public interest. One might speculate that a marketing budget is better spent by burning tokens than hiring some PR agency to say nice things about us, putting our name on a stadium, etc. Tokens given to these 3rd parties will inevitably get dumped negating the effect of the marketing efforts.
Rationale
How much ADA does the Treasury really need to hold at any given time? 2B should be plenty for any short-medium term needs. Once we have a reasonable cushion, we should start burning ADA to reduce supply over time. If the treasury drops below 2B ADA, we can stop the burn.
The only real downside risk I can see is the possibility that some day, the Cardano community might want to propose a single action that costs more than 2B ADA. I just can't imaging a scenario where this would happen due to the many downstream impacts this could have on the ecosystem.
The mitigation factor would be that, with the boosted tokenomics of a burn mechanism, the value of the 2B ADA in the Treasury should appreciate faster so it would be worth more than if we don't burn any.
Note: I know that Charles H. has always been opposed to burning ADA and the community seems to share this sentiment. I would like this Proposal to be a place where we can talk about this and debate the pros and cons of burning ADA. If you think this is a bad idea, please explain your reasoning and let's have a friendly debate. :)
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Comments (14)
No to burns, supply is already harded capped. Lower tau instead. Eventually three buckets can for fees can exist; Treasury revenue, SPOs staking rewards, DReps delegation rewards for acheiving predefined strategic goals in predefined time period.
Isn't it like that ? If you have a burning mechanic you also will need a minting mechanic as well somewhere in the maybe, fare future..? I would more agree for a Treasury Hard Cap and the Amount which exceeds the Hard Cap, could be spent back into staking rewards to motivate the People to keep the Network running.
No. The treasury is how we build "public good" infrastructure that no VC cares to build. Limiting the treasury size limits what we can build. Yes spending the treasury is a sell pressure but if its spent on things that actually matter the benefits will out weigh the cost and that will be reflected in price. Its not a "looming and unpredictable Unlock" because the net change limit tells you the maximum rate of withdrawls. Burning is a bad strategy when there are so many other tokens and blockchains we have to compete with. It might not be Ada, but anyone can mint a new token (on cardano or otherwise) and we have to compete with that. The only way up is utility.
concentrating on number-go-up is exactly what we DON'T want. Bit bucketing tokens because of the idea that everything is judged on the value of the token is completely against the values that Cardano has been built on.
With all due respecr, this is a ridiculous solution. the total supply js hardcapped by the Constitution. An annual treasury soending limit better solves the concern of this post, and can be adjusted to adapt to the community needs. Lowering fees is a more equitable and growth oriented solultion than burning ADA fees to reward inactivity shule punishing activity. This is a HARD NO for me.
I disagree because the purpose of the treasury is to help fund innovation on Cardano. The more applications that are using Cardano the more use it will get. This is the perfect way to generate a lively chain that continually invests in new participants.
In my opinion burning Ada is a gimmick designed for appeal to "moon bois". If you want to limit the treasury balance then you can instead vote to change the percentage of the reward pot allocated to treasury each epoch. A consequence of reducing the treasury percentage would be an increase in staking yields for those who participate in staking.
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