One of the most important aspect of the networks governance is how shared assets are collectively governed. In the current version of the whitepaper the concept of a stability reserve and treasury are introduced. The purpose of this post is to examine and discuss these proposed mechanisms in more depth.
The goal of splitting the networks assets between a treasury and reserve is to provide stability for the network, make ANT more useful as a currency for collateralizing agreements, and encourage governance decisions that favor healthy long-term growth.
The primary goal of the reserve is to make ANT more practical to use as collateral for agreements, by minimizing downside risk and shifting price appreciation from unit price to unit count. The above diagram shows shows how the reserve mechanism responds to changes in the price levels.
The reserve has a price feed and a given target, for the purpose of this post we will leave the mechanics of the price feed oracle and what price level we target out of scope and instead focus on what happens when prices are observed to be higher or lower than its target.
When Price Level is above Target
When price level is above the price target the reserve would respond by inflating the supply of ANT. This inflation can be directed in the following ways:
- Increasing the supply proportionally to all ANT holders, effectively splitting each unit of ANT into multiple units. This allows us to shift value appreciation from unit price to unit count.
- By minting ANT and …
- Selling it to buy collateral assets for the reserve
- Transferring it to the networks treasury
In general we want to maximize the proportion of inflation directed towards ANT holders while ensuring that the reserve is able to effectively maintain unit price stability. The Fragments protocol, which intends to operate on a similar principle, has a great explanation of how the target reserve and allocations can be dynamically calculated in response to rapid growth or gradual growth.
The relationship between the treasury allocation and the being able to direct a larger proportion of inflation towards wallets will be discussed further bellow.
When Price Level is below target
When price level is below the price target the reserve would respond by contracting the supply of ANT. In order to accomplish supply contraction the reserve must purchase ANT from the market and then burn it.
If there is collateral in the reserve, then it is sold in order to buy and burn ANT. If the reserves are depleted, the reserve can issue debt in the form of bonds backed by both future revenue of the network and by future inflation.
The future revenue of the network is largely a function of the Treasury.
The Treasury is a pool of funds governed by ANT holders. These funds can be used for any purpose, but the types of funding proposals can generally be broken down into Payments, and Investments.
The network is likely to need to employ the services of many groups. In a recent blog post I talked about how value can be created for a community by systematically forking protocols which are operating inefficiently or funding the development of novel service protocols that add value to a communities native currency. While these types of payments can be thought of as investments in the community, they are differentiated from “investments” below because they do not produce a direct revenue stream.
One of the most practical ways for the network to deploy treasury funds is towards direct capital investment vehicles such as decentralized autonomous staking pools. These investments would allow the network to deploy capital and create a diverse array of passive revenue streams. These deployments may make capital illiquid for some period of time, so there may be cases where there are no funds in the treasury, but the network controls significant assets and revenue streams–by ensuring all revenue or withdrawals of these assets must first be applied to paying off the networks bonds we can enforce the networks credit worthiness through smart-contracts!
Relationship between Treasury and Reserves
If the network deploys funds from the treasury as investments that earn revenue, its feasible for the network to reduce the required collateral held as reserves while maintaining stability. This is because funds that are invested by the treasury are effectively still collateralizing the reserve–they just are illiquid and so they cannot immediately be sold and bonds must be issued to compensate.
By moving some of the capital that would otherwise need to be held as collateral to maintain unit price stability, that capital can more effectively earn returns and those returns can be passed on to holders ANT.
In addition, the existence of the reserve policy encourages responsible governance over treasury funds by improving the ability of Network constituents to exit. While it may not be feasible to fork the network (because a large portion of the networks value might be locked and illiquid) in the event of a controversial policy, the ability to sell with significant liquidity and market depth (provided by reserves and bond sales) provides a similar check on bad governance.
Final thought, in the white paper the reserve mechanism also describes a participation rate target mechanism which is not reflected above–such a mechanism could be quite useful but for the sake of simplicity it was omitted.