Treasury Proposal

A treasury proposal is the formal process for requesting funds from a DAO or protocol treasury. It functions as the primary on-chain voting mechanism for resource allocation. The lifecycle typically involves:

• Drafting & Discussion: A proposal is drafted and debated in community forums.
• On-Chain Submission: The formal proposal, including funding amount and recipient address, is submitted via a smart contract.
• Voting Period: Token holders vote using their governance tokens (e.g., UNI, AAVE).
• Execution: If the vote passes quorum and majority thresholds, funds are automatically disbursed from the treasury.

Treasury proposals can fund a wide range of initiatives critical to a protocol's growth and maintenance. Major categories include:

• Grants & Funding: Allocating capital to developers, researchers, or projects building on the ecosystem (e.g., funding a new DeFi integration).
• Protocol Development: Paying for core engineering work, security audits, or infrastructure upgrades.
• Marketing & Growth: Budgeting for community initiatives, content creation, or partnership programs.
• Operational Expenses: Covering legal, administrative, or contributor compensation costs.
• Tokenomics Adjustments: Proposals for buybacks, burns, or staking reward changes.

On a technical level, a proposal is a transaction that interacts with a treasury's governance smart contracts. Key components include:

• Proposal ID: A unique on-chain identifier for the request.
• Calldata: The encoded function call that will execute the fund transfer if the vote passes.
• Voting Power: Determined by the amount of governance tokens held or delegated, often using a snapshot of balances from a specific block.
• Timelock: A security delay between vote conclusion and execution, allowing users to exit if they disagree with the outcome. Frameworks like Compound's Governor Bravo and OpenZeppelin's Governance provide standardized implementations.

A landmark example is Uniswap Proposal #1 in 2020, which established the Uniswap Grants Program (UGP). This proposal requested an allocation of 2.5 million UNI tokens from the community treasury to fund ecosystem development.

• Purpose: To create a sustainable mechanism for funding community-submitted projects.
• Process: It underwent extensive forum discussion, an on-chain temperature check, and a final vote.
• Outcome: The proposal passed, creating one of the largest DAO-run grant programs and setting a precedent for decentralized ecosystem funding.

The proposal process introduces significant security considerations for treasury management.

• Governance Attacks: An entity acquiring a majority of voting tokens (51% attack) could pass malicious proposals to drain funds.
• Proposal Spam: Submitting many proposals can clog governance and force voter fatigue.
• Timelock Exploits: If not properly implemented, malicious transactions could be executed before the delay.
• Calldata Manipulation: Malicious encoded data could execute unintended functions. Mitigations include quorum requirements, proposal thresholds, and multi-signature execution safeguards.

Treasury proposals exist within a broader governance framework. Key related mechanisms include:

• Signal Proposals: Off-chain votes (e.g., on Snapshot) to gauge sentiment before an on-chain proposal.
• Delegation: Token holders can delegate their voting power to representatives or delegates.
• Multisig Treasury: An alternative where a council of signers controls funds, often used alongside or before full DAO governance.
• Optimistic Governance: Models where proposals execute automatically unless challenged within a dispute period. Understanding these concepts is essential for analyzing a protocol's decentralization and operational resilience.

A secure proposal follows a defined lifecycle with mandatory delays to prevent malicious execution. Key stages include:

• Submission & Discussion: Initial forum post for community feedback.
• Voting Period: On-chain voting using governance tokens.
• Timelock: A mandatory waiting period after a vote passes but before execution. This is a critical security feature, allowing users to review the final transaction and exit the system if necessary.
• Execution: The proposal's on-chain actions are carried out.

To mitigate single points of failure, treasury funds are often held in multi-signature (multisig) wallets. These require multiple trusted parties (e.g., 3 of 5 signers) to approve a transaction. This adds a layer of human oversight for high-value proposals. Furthermore, proposals can include on-chain execution safeguards, such as spending limits per transaction or per period, to cap potential losses from a compromised proposal.

Governance security depends on preventing vote manipulation. Key defenses include:

• Token-Weighted Voting: One token equals one vote, aligning influence with economic stake.
• Sybil Resistance: Mechanisms like proof-of-stake or delegation make it economically prohibitive to create many fake identities (Sybils) to sway a vote.
• Quadratic Voting: Some systems use quadratic voting to reduce the power of large token holders, though this is less common due to implementation complexity.

The underlying smart contracts for the treasury and voting system must be rigorously vetted to prevent exploits. Standard practice includes:

• Professional Audits: Multiple rounds of review by independent security firms before deployment.
• Bug Bounty Programs: Ongoing incentives for white-hat hackers to discover and report vulnerabilities in live contracts.
• Formal Verification: Using mathematical proofs to verify critical contract logic, ensuring it behaves exactly as specified.

All proposal actions are recorded immutably on the blockchain, providing full transparency. This includes:

• Complete Transaction History: Every treasury inflow and outflow is publicly verifiable.
• Vote Snapshotting: A record of voter addresses and their choices at a specific block height.
• Proposal Calldata: The exact function calls and parameters to be executed are visible for community review before voting, preventing hidden malicious code.

Protocols plan for worst-case scenarios, such as a critical bug or a malicious proposal passing. Contingency measures include:

• Emergency Multisig Pause: A trusted group of signers can temporarily halt the protocol to prevent damage.
• Governance Forks: In extreme cases (e.g., a large theft), the community can execute a hard fork to create a new chain that invalidates the malicious transaction, effectively rolling it back. This is a governance action of last resort.

The proposal lifecycle defines the stages a treasury proposal moves through from ideation to execution. A typical flow includes:

1. Temperature Check: An informal signal vote on a forum.
2. Draft Proposal: Formal specification and community feedback.
3. On-Chain Submission: Proposal posted to the governance contract, often requiring a proposal deposit.
4. Voting Period: Token holders cast votes during a fixed window (e.g., 3-7 days).
5. Timelock & Execution: If passed, the proposal enters a timelock delay for review before automated execution.

A grant program is a structured initiative where a DAO's treasury allocates funds to support ecosystem development, research, or community initiatives. Treasury proposals are the vehicle for funding individual grants or establishing the grant program's rules and committee. Examples include the Uniswap Grants Program (UGP) and the Compound Grants Program.