Time for Blockchain Foundations to Move On from Massive Treasuries

The recent debacle over Arbitrum Foundation’s AIP-1 proposal and the strong community backlash against it—especially around the proposed transfer of 750 million $ARB to a foundation-controlled 'Administrative Budget Wallet’ and their selling of 10 million $ARB prior to the governance vote—has highlighted a dire need to relook at foundation operating and financing models.

The model of creating a large treasury to fund operations and ecosystem growth only works during bull runs. With elevated token prices, foundations could dish out large grants with minimal impact on token price, and it was comparatively easy to achieve a net positive effect.

However, during bear cycles, this entire model will get flipped upside down. With token prices down as much as 90% from ATH, foundations will have to grant or sell multiples more tokens to unlock the same amount of funding, creating much greater sell pressure when prices are already rock bottom.

And naturally, the hodler communities, already hurting from the sea of red in their portfolio, will vigorously rally against any spending from the treasury. Additionally, if the funds are wholly controlled by the foundation with no community oversight, any use of the treasury—even with the best of intentions—will likely create a loss of trust and increased division between the foundation and its community.

This is clearly not a sustainable model.

Now that we’ve established things need to change, the question then is how? First, we need to understand the unique challenges faced by blockchain foundations. We need to lead the governance and development of the blockchain but without centralized decision-making, and attract and fund high-potential projects without building large war chests like VCs. It’s a really odd position to be in, with lots of lines to straddle.

While we do not profess to have the perfect solution, at Klaytn Foundation we’ve put forward a series of proposals to transform Klaytn’s tokenomics and governance towards a model that we’re confident is a huge step in the right direction.

First, we’re doing away with our war chest. By burning almost the entirety of our reserves on April 17 alongside the Kore hardfork upgrade, we are sending a strong signal to our community and Klaytn hodlers that there will never be a risk of the foundation dumping and leaving them as bagholders.

Instead of funding operations and ecosystem growth via a treasury stash, we will instead be directing a portion of the block rewards into a community fund: a constant, steady stream of funds for constant, steady growth.

Next, every proposal that wishes to draw from this community fund must be put up for on-chain voting, to ensure that all disbursement decisions are transparent and decentralized.

However, this still creates inflation. So last but not least, we’re putting in place burn mechanisms, and prioritizing projects that utilize $KLAY to bring greater demand and utility to our native coin, with the goal of achieving deflationary tokenomics.

None of these ideas are particularly revolutionary on their own, but together they form a more sustainable, verifiable, and collective operating model for blockchain foundations. As our proposals have all passed the required governance votes, we’ll be forging ahead with this new model—and we welcome any foundation to adopt, tweak, and improve on this as we collectively shape the Web3 future.