SCRF Interviews | Treasury Management and Funding Public Goods - Jason Potts and Scott Moore (Ep. 5)

Governance and Coordination
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The second episode of our treasury management mini-series co-hosted with the Royal Melbourne Institute of Technology (RMIT) features a conversation between distinguished professor Jason Potts and Gitcoin founder Scott Moore. Associate Professor and RMIT Blockchain Innovation Hub co-founder Chris Berg moderated the event.

Links:

Video

Audio (Apple, Spreaker, available on major podcasting platforms)

Transcript

At issue:

  • How should a treasury be spent? When should grants be offered as opposed to prizes, tenders or building internally?
  • What are some of the ways that voting can work in relation to treasury spending? How should a project minimize Sybill attacks and freeloaders?
  • How does treasury management for a web3 organization differ from a traditional corporate treasury?

Takeaways from the discussion:

  • Treasury management is more about mission than management. Funding public goods can create a virtuous cycle, bringing in more users and funds.
  • Exit is easy in the digital world. Treasuries can help raise exit costs and keep communities together and allow the opportunity to invest in idiosyncratic goods.
  • Funding innovation is a search problem. Grants are about soliciting a solution. Prizes are about finding a solution from an unknown source.

Gitcoin, a community of “internet citizens who build and fund digital public goods” has assembled one of the largest treasuries in the web3 ecosystem. “[This] allows us to take a broader view of what counts as relevant spending and lets us be experimental,” says founder Scott Moore. “For us, treasury management is less about management and more about mission.”

Communities need to pool resources for public goods. To do so they need governance; a way to hold one another accountable for spending, maintenance and contributions. Big solutions for managing resources and holding a community accountable have existed for millennia, but DAOs and web3 organizations present new challenges and opportunities.

“We have lots of solutions to that big problem [of managing public goods] but we don’t yet have well developed solutions to what this looks like in the digital world,” says RMIT Professor Jason Potts.

Gitcoin relies on representative democracy (stewards and representatives standing in for larger numbers of voters) and algorithmically assisted methods for distributing funding on top of that model.

“We have checks and balances to ensure representatives are paying attention and that anyone can quickly swap delegates when they need to,” says Moore. “The other side is figuring out ways of signalling preferences. Quadratic funding works by taking the number of people supporting a given set of projects and distributing funds proportionally to the number of contributions that a project gets.”

Quadratic funding helps identify projects that people are the most invested in and distribute funds to those projects. Carefully considering the form that funding takes and when funds are spent can also radically change outcomes.

The standard model for generating research is to spend as much as possible as soon as possible. That may not be the case with web3 communities. “In the digital world, exit is easy,” says Potts. “By building up a treasury as much as possible you raise the cost of exit, that makes it safer to invest in idiosyncratic resources because we can’t exploit one another.”

Research–where much of DAO spending is currently focused–is about funding under uncertainty. Increasing administration can reduce fraud but risks strangling innovation. Grants are about maximizing the utility of a fixed sum of money. “Grants are amazing when they have good grants committees,” says Potts.

Prizes tend to have a solution in mind but don’t know where that solution will be coming from.

“Monitoring and assessment is a huge issue,” says Moore. “If a community is consistently losing money on a certain type of grant then they need to learn why these mistakes keep happening.”

An excellent way of protecting a community’s grants programs from stagnation and potential applicants intent on gaming the system is to introduce a certain amount of randomness, suggests Potts. One approach that many DAOs have been using is to think of DAOs almost like a startup and to begin “shipping” small grants and iterating on the results as soon as possible.

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Thank you both so much for coming on SCRF’s podcast series! I’ve really been enjoying this series. One question I had from listening to the podcast – when do tenders become an important funding vehicle? Are there other spending mechanisms that DAOs might employ aside from grants, prizes, and tenders?

Would you recommend experimenting with the structure of a DAO on a testbed before introducing real funds and a treasury or do the lessons learned from iteration come only from real money?

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Really looking forward to this!

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Thanks for an engaging conversation that resolved some big questions for me, while also raising some fresh new ones.

One of my new quandries arose around Scott’s notion of “externalities” or “spillover” from a specific problem set to a larger one. To this, Jason responded that a resource created by a specific DAO can spill over as “nested public goods” that carry their benefits to higher-order problems “nested” above them. In Jason’s words, “It’s the same problem, just repeated at a higher level.”

Crucially, he used the term “self-similar” to describe these “DAOs of DAOs.” The word “fractal” wasn’t used, but of course fractal is reasonably close to a synonym for self-similar.

I’ve been wrestling with the whole concept of decentralization and crypto networks, and so it was intriguing to find Scott’s colleague (the founder of Gitcoin) Kevin Owocki hosting a podcast with the founder of Coordinape on the subject of Fractal Sovereignty.

This use of fractals feels like much more than just an image or a metaphor. It feels, in fact, like we’re getting back to (and then going beyond) the design of the original Internet before it was co-opted by corporations.

Are we literally modeling our biggest planetary systems on something close to the structures of nature and the physical world and is this the way we escape the monopolies of Web 2.0?

Does anyone have any reactions, comments, pointers to these ruminations on self-similar structures and fractal sovereignty?

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DAOs in Web 3 are analogous to traditional corporate organizations. So it will be fair to analyze the treasury management of DAOs and the treasury management of traditional corporate organizations side by side with a focus on their differences.

DAOs were formed in the first place to complement the deficit functions of traditional organizations. So it shouldn’t come as a shock that DAOs have superior advantages over traditional organizations in managing a treasury.

In the following paragraphs, I will cover three salient points in the differences between DAO treasury management and traditional organization treasury management.

Decentralized control
Decisions on the use of a DAOs fund is a collective responsibility by members (investors) of the DAO. This is achieved through voting based on the amount of governance token held by each member. It ensures higher inclusiveness as opposed to traditional organizations.

Also, DAOs make use of multi-signature wallets with signatories being members of the community and thus encouraging more inclusiveness and decentralized control.

In traditional organizations, the CFO or treasurer and the treasury staff have the final say in the decisions and running of the treasury. The investors in such organizations/companies have little or no opportunity for determining what happens with the treasury.

DAOs run on smart contracts
DAOs run on smart contracts. The rules and regulations of these DAOs once executed cannot be changed unless voted on by the community. The smart contract spells out conditions for withdrawals of funds and cannot be accessed by a single individual since it runs on multisig wallets.

However, investors in a traditional company have their trust in the company based on its reputation. They thus entrust their money with the company and stay at their mercy hoping they don’t disappoint. Once they sign the terms and conditions while getting involved, it would be hard for them to be directly involved with how the company’s or organization’s fund is managed.

Present DAOs have a centralized treasury
Most of the DAOs existing today have a high percentage of its assets in its native token. If per adventure there is a mishap such as a security breach, there could be a significant slump in price of the tokens. This slump in price could trigger other unwanted activities that could affect the health of the DAOs.

For traditional organizations, most of their assets are left in government fiat currencies as they do not have native currencies. This seems a less risky option although it could be affected by inflation.

Experts risk managers encourage DAOs to have assets in stablecoins to be able to manage the running of the DAOs in times of financial crisis as in the present bear Market.

Conclusion
DAO treasury management comes with several advantages over the traditional corporate treasury management. But that doesn’t make it a faultless system as it has its own shortcomings.

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