As Polkadot referendum 1104 enters the on-chain voting phase and gains widespread support, the Polkadot community is witnessing a significant shift in the treasury management strategy.

According to reports, referendum 1104 proposes to convert 5,256,001 DOT into stablecoins USDT and USDC. Currently, this proposal is in the on-chain voting stage and has received overwhelming support with a 99.8% approval rate. If nothing unexpected occurs, the passage of this proposal is almost certain.

However, the community still has many questions about the motivations behind this initiative and its potential impacts. This article will delve into the background, execution details, and underlying logic of this proposal to address the community’s concerns.

Background and Motivation

Since its establishment, the Polkadot treasury has primarily used DOT as its main reserve asset. However, as the ecosystem continues to develop and become more complex, the challenges faced by the treasury are also increasing. Ensuring fund stability, reducing volatility, and guaranteeing the sustainability of future budgets have become important goals for treasury management. Against this backdrop, the need to convert part of the DOT into stablecoins has gradually emerged.

Stablecoins, especially USDT and USDC, play an increasingly important role in the crypto market due to their price stability and high liquidity. For a decentralized ecosystem like Polkadot, holding some stablecoins can not only diversify treasury asset allocation but also reduce the volatility risk in treasury fund management, thereby providing a more robust foundation for future expenditures.

It’s worth noting that through the previous referendum 457, the Polkadot treasury has already successfully tested the implementation process of a similar plan and achieved good results. That proposal suggested converting 3.4 million DOT into USDT and USDC, which has now been passed and executed. For more details, visit: https://polkadot.polkassembly.io/referenda/457

As of the time of writing, the Asset Hub account already holds 5.3 million USDC and 4.33 million USDT (it’s not yet certain if all of these are converted from executing referendum 457). For more details, visit: https://assethub-polkadot.subscan.io/account/14xmwinmCEz6oRrFdczHKqHgWNMiCysE2KrA4jXXAAM1Eogk

Referendum 1104 detailed analysis

The core content of Referendum 1104 is to convert 5,256,001 DOT into USDT and USDC, aiming to diversify the asset structure of the Polkadot treasury. Specifically, the proposal suggests using the DCA (Dollar-Cost Averaging) function on Polkadot’s parachain Hydration to convert 2,628,000 DOT into USDT and another 2,628,000 DOT into USDC over a year. Additionally, the proposal reserves 5,001 DOT as transaction fees to ensure smooth operations.

The process flow is roughly as follows: Polkadot Treasury DOT → Hydration DCA (USDT) → Asset Hub Fellowship Account

Application of DCA mechanism

Unlike traditional one-time large-scale exchanges, the DCA mechanism effectively avoids the impact of market fluctuations on the exchange process by converting DOT into stablecoins in batches. This batch operation also helps smooth out market volatility and reduces the risk of price manipulation.

In this proposal, the plan is to convert 2,628,000 DOT into USDT and USDC respectively over 365 days, with transactions occurring every 20 blocks (about 4 minutes), each transaction involving 20 DOT. This equates to exchanging approximately 7,200 DOT daily for USDT and USDC respectively.

Fees and Execution Timetable

The proposal estimates total fees to be about 0.4% of the total exchange amount, including transaction fees, slippage fees, and on-chain operation costs. The entire exchange process will last 365 days, with multiple small exchanges conducted daily to ensure the robustness and security of the exchange.

View proposal details: https://polkadot.polkassembly.io/referenda/1104

Why Choose Stablecoins?

At the core of the proposal, the Polkadot community is considering converting a portion of the treasury’s DOT assets into stablecoins USDT and USDC. This choice is rooted in multiple factors. The following analysis will detail why stablecoins have become the prioritized asset class in this proposal and the key role they might play in managing the Polkadot treasury.

Addressing Treasury Asset Volatility Risk

The price of DOT fluctuates with the crypto market, introducing uncertainty into the Polkadot treasury’s budget and expenditure planning. The treasury needs to fund various ecosystem projects over the coming years, but DOT’s price volatility could lead to significant fluctuations in the treasury’s purchasing power at different times, potentially affecting the stability and continuity of projects.

According to data from https://polkadot.dotreasury.com, from May 2022 to July 2023, while the accumulated DOT in the Polkadot treasury generally increased, its corresponding USD value showed a volatile downward trend. This is because DOT’s price itself fluctuates with the market, thereby increasing the volatility of the Polkadot treasury.

To address this challenge, the treasury needs a strategy to stabilize its asset value. Introducing price-stable assets like USDT and USDC becomes an effective choice.

In recent years, stablecoins (especially USDT and USDC) have played an increasingly important role in the crypto market. These stablecoins are pegged to fiat currencies, with minimal price fluctuations, making them the preferred assets for many DeFi applications and cross-border payments. For the Polkadot treasury, holding some stablecoins can provide a complementary value storage method to DOT, which is particularly important in the context of increasing global economic uncertainty.

Improving Treasury Asset Liquidity and Flexibility

Besides reducing volatility, introducing stablecoins can also improve the liquidity and flexibility of treasury assets. In the Polkadot ecosystem, the treasury needs to regularly pay funds to various projects, teams, and partners. These payments may involve developer funding, community rewards, infrastructure construction, and other aspects.

Compared to DOT, USDT and USDC can be more conveniently used for various ecosystem expenditures, especially when collaborating with third parties. Therefore, by holding stablecoins, the Polkadot treasury can more flexibly handle these payment needs, simplify financial transactions with external partners, and ensure fund liquidity.

Diversifying Asset Allocation and Adapting to Future Treasury Management Needs

The crypto market is known for its high volatility, and the Polkadot treasury, as an important component of the ecosystem, faces the challenge of how to stabilize asset value in the long term. By introducing stablecoins, the Polkadot treasury can achieve asset diversification, reduce dependence on a single asset (DOT), thereby reducing the impact of market volatility on the overall value of the treasury. This diversification strategy is not only to reduce risk but also to prepare for potential future market adjustments, ensuring the treasury can maintain its health under various market conditions.

At the same time, as the Polkadot ecosystem continues to expand, the treasury’s management needs are also constantly changing. In the future, the treasury may need to face more complex market environments and higher funding requirements. Stablecoins, as digital assets with wide market acceptance, can better adapt to these changes. By holding stablecoins, the treasury can more easily participate in the broader DeFi ecosystem, conduct cross-chain operations, and even participate in international financial markets when needed in the future. This adaptability and flexibility make stablecoins an important tool for the Polkadot treasury in future development.

In summary, choosing stablecoins as part of the treasury assets is a strategic decision based on multiple considerations. It not only addresses some challenges in current treasury management, such as asset volatility and payment flexibility issues, but also prepares adequately for future market changes and ecosystem development. Through this initiative, the Polkadot treasury will be able to remain robust in the ever-changing crypto market, providing a solid financial foundation for the long-term sustainable development of the ecosystem.

Concerns about Centralization & Long-term Devaluation?

As Referendum 1104 gains overwhelming support, numerous discussions and questions have emerged within the community. Some community members are concerned that converting DOT to stablecoins might weaken the decentralized nature of the Polkadot treasury, or believe it could lead to long-term devaluation of treasury assets.

To address this, we need to clarify that this proposal suggests converting 5,256,001 DOT into stablecoins USDT and USDC, which accounts for approximately 25% of the new DOT expected to be minted into the treasury over the next year (this may vary due to factors such as staking rates). Therefore, it will not have a decisive impact on the decentralized nature of the Polkadot treasury.

Moreover, converting part of the DOT to stablecoins is not a measure to devalue or weaken the Polkadot treasury, but rather a part of diversifying asset allocation. This diversification can not only effectively hedge against market risks but also provide more stable financial support for future ecosystem development. At the same time, it’s also for better management of treasury assets, aligning with the long-term interests of the treasury.

Summary

The proposal to convert a portion of the Polkadot treasury’s DOT assets into stablecoins reflects an important shift in the ecosystem’s financial management. By introducing stablecoins such as USDT and USDC, the Polkadot treasury can not only effectively reduce risks associated with market volatility but also enhance its payment flexibility and financial planning stability. This strategy helps ensure that the treasury can more confidently face uncertainties while supporting future development, continuing to provide strong financial backing for the community and projects.

Although this proposal is still in the voting stage, it has received widespread community approval with a 99.8% support rate, demonstrating consensus and support for this financial management strategy. Regardless of the final outcome of the proposal, this discussion and voting process has provided the Polkadot community with an opportunity to deeply consider and review treasury management methods, laying a solid foundation for future financial decisions.

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