KIP DRAFT: Establishing a Budget Process

Author:

@DaddyMatty

Proposal

Ratify a systematized budgeting process for the purpose of creating a predictable, transparent, and efficient mechanism to allocate funding and support proper financial reporting and planning. The individual governance items as contained in this proposal can be identified as follows:

  • KIP14(a): Budget Framework - Establishes the requirement for a budget and subsequent quarterly reviews
  • KIP14(b): Establish a Treasury Team - Defines the role and responsibility of a treasury team
  • KIP14(c): Checks and Balances - Establishes the power to perform certain actions as it relates to fund allocation
  • KIP14(d): Process by Activity - Establishes the required process to allocate and disburse funds by activity type
  • KIP14(e): Capital Reserves - Establishes that funds for capital reserves should approximate 3-6 months of operating activities
  • KIP14(f): Grant Proposals - Outlines the requirements needed to be factored into a grant proposal
  • KIP14(g): Investment Proposals - Outlines the requirements needed to be factored into an investment proposal
  • KIP14(h): Discretionary Investment Limit - Empowers the CEO and CTO to have the power to make discretionary investments without going through governance up to a certain amount.
  • KIP14(g): Executive Wallet - Establishing the creation of a separate wallet for the CEO and CTO to cover deficits or address other pressing issues needing quick funding.

TL;DR

A systematic approach to how we allocate funds

Structured planning and budgeting are critical to the growth of KeeperDAO (”KD”) and organizations in general. Before attempting to make any material financial transactions, we must ensure a holistic approach to viewing how our mission, treasury assets, investment strategy, and cost structure are interrelated.

This document outlines a practical foundation for creating a budgeting process that identifies and establishes the following:

  • The process for establishing and approving a budget
  • The responsibilities and powers of the different parties around the process
  • Checks and balances to ensure proper financial design and implementation
  • The timing and frequency of budget reviews

Background: KeeperDAO’s Structure

CEO and CTO

With ratification of KIP-12, the DAO has empowered a CEO and CTO to coordinate global processes and planning, act as public figureheads, assist in formulating strategy, and serve as executives of last resort in the event of an emergency. These positions were ratified directly by DAO governance to serve a particular term, initially set at 3 years, after which they may be renewed, removed, or may choose to step aside.

Teams

The basic administrative division of the DAO is the team.

Teams are groups of contributors that support long-term work areas essential to the DAO’s mission. Teams can support a maximum of 10-15 full-time contributors. This is approximately Dunbar’s number [3] for a circle of “deep trust” (around 15 people). A team may also onboard short-term contributors to accomplish specific projects.

Teams are proposed by the CEO and CTO, and ratified by KeeperDAO governance. Once ratified, a team’s members can define their own internal processes, natural hierarchies, and make independent decisions.

Facilitators

One member of each team is designated as a facilitator. Facilitators serve as the team’s bridge with the DAO governance. They handle special responsibilities like administering the team budget, coordinating quarterly reporting, and providing accountability to DAO members.

Establishment of a Treasury Team - KIP14(b):

As KD grows and the impact on the ecosystem expands, the DAO will require regular policy review, financial analysis, and financial reporting, in order to provide the information necessary for the DAO to make informed decisions; therefore, the creation of a dedicated Treasury Team (“TT”) is critical to the success of the DAO and its mission. This team will be tasked with holistically focusing on financial reporting, treasury management, diversification, risk, and growth. The TT can provide additional value by exploring changes to tokenomics, incentives, and providing in-depth analysis to support financial KIPs. If KIPs are passed and executed, KD will also need a dedicated group to analyze the value add of such programs.

The TT’s core purpose would be:

  • Ensure safety and prudence goes into every decision
  • Drive future protocol growth
  • Identify sustainable solutions
  • Present objective data to the DAO
  • Facilitate, coordinate, and ensure the soundness of financial data produced by the different components & teams in KD.

The TT would be composed of a team of contributors and a facilitator who coordinates communication, posts feedback/comments on the forum, and maintains close communication with KD’s CEO and CTO to ensure both the TT and the protocol are working toward the same goals. The TT would be composed of team members with expertise on composability within DeFi, finance, capital management, and risk management.

To ensure proper segregation of duties, the TT would have no power to execute a transaction and would have no custody of treasury assets. Any proposed strategies or analysis shared with the DAO would serve to only empower members and give data-driven guidance when making decisions. While the TT will have its own goals and mission, it will also act as a key control in the DAO’s design by acting in an independent and objective way.

While the complexity and informational needs of the DAO are diverse and will evolve over time, we see the following base deliverables as the initial set of reports that will be developed by the TT:

  • Monthly, quarterly, and annual financial reports
  • Budgets, forecasts, and other forward-looking analyses
  • Specific analyses to support the formulation or assessment of current and future KIP’s
  • Custom reports related to material events or transactions

Additionally, the Treasury Team will be tasked with the development and maintenance of a treasury management framework that will ratify a practical foundation for establishing a treasury management system that identifies and establishes the following:

  • The current makeup of KD’s treasury, current processes, and cash flows
  • The expected use of treasury funds
  • Diversification and risk management guidelines around:
    • Treasury composition metrics
    • Allowable investment options
    • Minimum internal rate of return (IRR)
  • Rebalancing and execution process

Checks and Balances - KIP14(c)

By creating a Treasury Team, KD can create a key operating control that ensures that proper fund allocation and financial reporting are maintained. The following chart outlines the powers of different entities in KD as they relate to activities impacting fund allocation and the budgeting process:

image

Note: Any power not listed here must be delegated using a separate KIP. The DAO can propose to revoke or modify these powers via KIP.

Mission-Driven Budgeting

A common attribute of organizations that have a high-performance culture is that they have a clear, well-specified purpose that states both how and why the company makes a positive impact on the world. It’s their fundamental reason for existence beyond just making money. This is not a “feel-good” statement, it actually pulls people forward especially in difficult (and good) times. It helps people make better decisions and generates tremendous energy that aligns everyone towards a common cause.

The reason it is so powerful is because it’s the why: the emotional connection the DAO has to the world. It’s an outside-in perspective, rather than the more common inside-out approach typically used by organizations. Humans are emotional beings that buy-in to communities based on how much the purpose resonates with their own values.

Luckily, KeeperDAO’s why (its mission) is clearly defined:

KeeperDAO is a DAO dedicated to Keepers and the work they do. We are united around a shared mission: to bring about a decentralized economy in which Keepers create more efficient, secure, and egalitarian blockchain networks.

Because KD is driven to create a more profitable, fair, and secure decentralized economy, our allocation of resources must be directly tied with the granular objectives to accomplish this vision (”mission-based budgeting”). A mission-based budget is less concerned with the detailed revenue and expense line items typically found in a traditional budget. Instead, these classifications are aggregated into a smaller number of line items. By doing so, there is less emphasis on the accuracy of specific items and a greater focus on the overall goals to be achieved. The focus of strategic budgeting, therefore, shifts away from the triviality of budget-building and into four dimensions:

  • Objectives – This defines what exactly we are trying to achieve, which are our goals
  • Strategy – The second step would be to develop a strategy to achieve a set goal
  • Measures – After implementing the strategy, we need to track and evaluate its performance using relevant standards
  • Target – Finally, the goal is the place where we aim to be by the end of the period

There are numerous ways for organizations to budget and each approach must be aligned with the organization’s mission and objectives. Budgeting should be a governance process that sets the direction for improvement and efficiency. It should be a financial process that assimilates and ties together a wealth of financial data. It should be a marketing process, by which the DAO sells the value it has created and hopes to create. And finally, it should be an accountability process, through which governance communicates its decisions about priorities and expected performance.

In its budgeting, a decentralized entity needs to undergo a kind of cultural revolution. It must better link purposes, resources, and results to become a positive force for the next billion people onboarded to this new financial system. By adopting mission-driven budgeting, it can:

  • Provide the DAO with better means to make governance choices, set goals, and establish priorities among many competing demands and desirable ends for stakeholder
  • Encourage long-term thinking, define goals, translate them into desired results, and use performance measures more effectively to make more informed decisions on directional priorities and resource allocations
  • Translate choices about goals and priorities into performance objectives and standards and communicate those objectives and standards more effectively to the ecosystem as a whole
  • Convert accountability for spending funds to accountability for achieving results that are compared to performance standards and objectives

The Budget Process

Process Overview

Due November 1st every year, each of the DAO’s teams will be asked to develop an annual budget broken down by quarter. As part of the annual budget process, each team starts out with a 0-balance budget that they rationalize and determine what they need in order to fulfill each objective or initiative for the year. These team budgets are compiled and flow into a combined annual budget for the DAO.

The TT, CEO, and CTO analyze this budget to ensure this is in line with their expectations and that the treasury viewed in the aggregate is being deployed in accordance with the mission of the DAO. The annual budget request is then formalized as a KIP and enters the DAO governance process for ratification.

Process by Activity - KIP14(d)

While the details above outline the budgeting process at a high level, the process that an allocation or disbursement goes through is dependent on the type of activity being performed. The matrix below summarizes the process by Activity Type and identifies:

  • Fund Custody: Where are the funds actually held to fund this activity?
  • Allocation Approval: Who has the ability to approve the budgeted allocation of resources for this activity?
  • Disbursement Approval: Once this activity has been allocated funding, who has the ability to approve the actual disbursement of these resources?

Capital Reserves

A capital reserve refers to a specific fund or amount set aside to cater for future or unpredictable expenses or losses of a protocol. Put simply, capital reserves is the cash reserved for unexpected short-term expenses. The purpose of maintaining a cash reserve is to allow a company to meet unexpected short-term costs without taking on expensive debt. It does not include anticipated or long-term costs. The capital reserve should generally be held in stablecoins within the treasury wallet and adequate capital reserve should be three to six months’ worth of ongoing expenses KIP14(e).

Ongoing Operations

See the overview above for further discussion around the inception of team budgets. Once governance ratifies the comprehensive budget, and thus the teams’ budgets, funding for all teams are then distributed to the Operation’s Team wallet from the treasury. Because the vast majority of the funds distributed will inherently relate to compensation for the team members, most of these funds will quickly be distributed to a Sablier contract or some other streaming contract. Most other operating costs such as dues and subscriptions will be paid out of the Operations Team Wallet.

Team Budget Template: https://docs.google.com/spreadsheets/d/1MbrPeYY5IkF-VUExiJenIAci07rQKI2M/edit?usp=sharing&ouid=105054058334324654256&rtpof=true&sd=true

Community Grants

The DAO treasury funds the operation of the DAO by setting team budgets and issuing grants. A grant is an amount of tokens paid or provided by the Operations Team wallet to another external address under a fixed authorization or plan subject to approval by the DAO governance or as part of a team’s budget.

The three primary types of grant are:

  • Short-term grants: may be made available each quarter to fund those wishing to undertake part-time or project work for the DAO teams. Short-term grants are typically made in ROOK.
  • Long-term grants: may be made available to incentivize and retain long-term contributors. These may be a mixture of a fixed salary and or milestone-based. Long-term grants are subject to conditions on conduct and performance and may be terminated.
  • Operational & Miscellaneous grants: may be made available to pay running operational costs and minor expenses with proof of valid need.

KIP14(f): For a grant to be funded, a proposal must include the following attributes:
image

Strategic Investments

Investment Proposal Process

While investment ideas and opportunities can be diverse in nature and derived from multiple sources, the process for approving investments is relatively uniform. All investments in which the combined transaction value is in excess of 5% of the treasury balance must initially be presented as a KIP. KIP14(g): A KIP relating to a prospective investment or group of investments should include the following attributes:

image

Once a KIP has been proposed, the TT, along with the greater DAO, is then tasked with providing supporting analysis, requesting additional background (if needed), and making a recommendation to the Sophons about moving a proposal into a formal KIP or not. While making a recommendation requires a level of subjectivity, KD will work towards developing a formal treasury management framework that will provide a more defined framework for making decisions in a transparent way. If a proposal is formalized into a KIP the decision to proceed or not goes through the typical governance process.

Discretionary Investments - KIP14(h)

Although DAO input and buy-in are imperative to the long-term success and sustainability of our financial position, certain opportunities present themselves that must be capitalized quickly and in a non-public fashion. To ensure these opportunities are not lost due to front running or other reasons, the KD team must have some discretion to utilize funds without going through the governance process. More specifically, the KD team will be able to make investments up to 5% of the treasury’s balance every two quarters. Note: the limits around discretionary investments are cumulative in that the KD team would not be able to execute ten separate $1M transactions to avoid going through governance.

To ensure proper due care and diligence was performed, the KD team must present their rationale to the DAO within 24 hours of executing the transaction(s). Furthermore, the KD team must present that the investment was approved by the CEO, CTO, and the TT.

Executive Fund - KIP14(i)

When leading a DAO, there are certain budget items that should be of critical concern. Basics like payroll and product costs are relatively more predictable and easier to embed in an operational budget. Because we operate in an extremely volatile space, there are bound to be multiple events, investments, or expenses that can not be predicted or forecasted into a budget. To protect against these unknown variables, the CEO and the CTO should have a separate wallet that gives them the flexibility to:

  • Cover unforeseen, material deficits experienced by a team due to no fault of their or changes in market conditions
  • Mitigation of potential security issues
  • Compensate critical, temporary talent
  • Bring in experts and other consultants that have a pervasive, DAO-wide impact.
  • Reward or retain key contributors and members who have made a disproportional impact on the DAO as a whole

More specifically, as part of the budget formulation, the DAO should approve funding this “Executive Wallet” in an amount to not exceed 1% of the treasury’s budget at the time of approval.

Quarterly Review

Every quarter during a quarterly update, the DAO calls a meeting to review the previous quarter’s results. All parties rationalize, hold themselves accountable, and understand how the previous quarter has gone, and whether to revise estimates. Before these meetings occur, however, the TT develops a budget to actual report for each team and inquires about any material transactions that should be discussed by the DAO and provides an opportunity for the teams to develop supporting analysis to aid the presentation to the DAO. To maximize transparency, a detailed report of all transactions that occurred within the quarter, along with their financial taggings, is released with this budget.

This not only creates accountability around the financial aspects of our operations but also creates greater insight and transparency into how well individual components of the DAO are performing in relation to their stated objectives. In a space that requires extreme speed in being able to adapt, having this set of tooling and procedures is imperative to ensuring the long-term viability of our protocol.

Looking Forward

DAOs are alive. They each have a unique mission, shared language among the community, cultural values and meme power. A protocol and a DAO, are in a sense, living organisms that evolve based on the habitat and environment they are developed in. KeeperDAO, as an organism, can interact with the world in a self-determined way and, in doing so, change it. By taking a deliberate and systematic approach to how we create our processes and infrastructure (i.e. habitat), we can better ensure that conditions we evolve in ensure we thrive as a species in perpetuity.

5 Likes

Like it! Good job :slight_smile:

Here are my thoughts after skimming this

  1. Way too long, barely anyone reads the gov forum, and having a multiple page kip just acts as an additional deterrent for educated voters

  2. Building onto 1, I think it would be best to split up a lot of the ideas proposed in this KIP into several smaller KIPs, this would be to the benefit of everyone in the context of better readability and understanding of each idea. This would also allow for tweaks at some more controversial ideas while allowing apparent consensus to do its work on the universally good components of this KIP

  3. What does this entail for previously voted on acquisitions like the CVX and Rook KIPs?

I’ll add more thoughts after I read it a second time

First off, I really appreciate you taking the time to take a look and for the feedback.

  1. I respectfully disagree on a philosophical level. I think really impactful actions need to be really well thought out and outlined. I don’t think something that establishes really significant infrastructure and processes like this should have any corners cut. I would also feel that is part of the process to become an “educated voter.” I would imagine most of the people here dont have a financial processes background so this should help if they are curious
  2. Towards the top you (and throughout) can see where I did this. We can discuss each of these in-depth and see what changes (if any) need to be made. I can see a situation where if there is massive backlash against something, we take it out. We don’t have to throw out the baby with the bathwater if everything else is looking good
  3. This has no impact on any previous KIP’s. This would only apply to prospective decision-making.

Again, really appreciate the input here and look forward to more of your thoughts.

I think this KIP outlines a well thought through and detailed budgeting process. Well in line with what I have come to expect of the team.

I appreciate the detail down to the process for carrying out key function and the segregation of duties that add a layer of oversight and accountability.

The only question I have around staffing.

Do we have all the manpower needed that will enable Keeper DAO effectively carry out all the functions and tasks listed herein? If not what are the additional critical roles the DAO would need to fill to make you comfortable that we are in a good spot.

Great job on this @DaddyMatty . Its well evident that you put a lot of thought and time into this.

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Thanks a ton for the feedback and glad you thought this was value add.

Regarding your (great) question, we will not initially have everyone we need, but this proposal starts the process of resolving this by establishing a treasury team. We are already looking for an on-chain data specialist and some other roles to be added quickly. Initially, we can leverage the power of the community.

1 Like