# Summary

**While the Polkadot community has previously discussed diversifying BTC and ETH in the treasury reserves, a key argument remains:  Can these assets bring consistent or sustainable income?**

This proposal suggests an alternative approach: allocate treasury funds to mature DeFi protocols by **holding revenue-generating parachain tokens**. This strategy adds yield-generating assets to the treasury portfolio, potentially improving long-term financial sustainability.

In addition, the proposal also introduces a **new financing model** where funds remain **staked within Polkadot**, but using inflation to fund projects instead of spending principal. 

We have already seen similar proposals in the community—using inflation as a funding source:

https://polkadot.subsquare.io/referenda/712

https://forum.polkadot.network/t/economic-growth-incentives/14300

---

## Motivation

### **Strengthen Polkadot’s Treasury by protocol dividends**

If the invested parachain projects can offer stable income, the treasury can receive returns through dividends, forming a sustainable funding cycle. Compared to simply assets holding, continuous dividends are more beneficial for long-term development.

Currently, there are parachain projects that can provide dividends with growth potential, such as **Hydration** and **Bifrost**.

For instance, in Bifrost's upcoming [new economic model](https://docs.bifrost.io/tokenomics-2.0/core-bbbnc#bbbnc-usdbnc--usdvbnc--revenue-sharing), holding bbBNC means participating in protocol revenue sharing. Although bbBNC is a non-transferable credential, the Polkadot treasury address can hold bbBNC on the Bifrost network and transfer dividends back through XCM calls. 

In addition, the same logic can be leveraged on Hydration. Hydration continuously [buys back HDX](https://hydration.subsquare.io/referenda/125) through their Treasury and distributes dividends to HDX stakers. The Treasury can act as a staker as well.

Through this model:

- The **Treasury retains its principal.**
- **Parachains** receives staking reward to cover development and operational cost.
- The **Treasury also receives parachain tokens and protocol revenues**, ensuring long-term sustainability.

## Case of Funding Assumptions

**This assumption does not represent the actual application and is for reference to understand the contents only.*

- **DOT Lending**
    - Treasury **lends USD 5,000,000 equivalent in DOT for 4 years**. - All DOT will be staked via vDOT, **the principal always retains and will be repaid after 4 years.**
    - The staking reward will be investment for parachain. In return, Polkadot receives Parachain Token Commitment.
- **Parachain Token Commitment**
    - Parachain provides **USD 1,000,000 worth of native tokens** to the Treasury. which the value is the same as the staking rewards generated by $5M DOT in 4 years
    - Native Tokens are locked for **4 years**, and may participate in:
        - Polkadot parachain staking (i.e. via Hydration staking).
        - Revenue-sharing from the parachain. (i.e. via Bifrost bbBNC).
    - After 4 years, community decides via referendum to continue, adjust, or terminate.
- **Yield & Revenue Settlement**
    - **Quarterly settlement** of DOT staking yield and parachain staking/protocol revenue.

## Examples of Revenue & Fee Metrics

Bifrost and Hydration have achieved stable revenue for at least six months to a year. As protocol operations expand and revenue increases, the Polkadot treasury will receive greater returns.

| Project | Annual Fees | Annual Revenue (12M / Estimate) | Source |
| --- | --- | --- | --- |
| **Bifrost** | **≈ US$11 million** annualized fees | **≈ US$1.48 million** annualized revenue | Staking/vToken operation |
| **Hydration** | **≈ US$381,555** annualized fees | **≈ US$66,588** annualized revenue | Trading fees |

### Example - Bifrost

**bbBNC** - the protocol revenue sharing representation token in Bifrost's new tokenomics. 100% of protocol profits go into **BNC buybacks**, where **90% is distributed to bbBNC holders** and **10% is permanently burned**. 

Based on **$1.48M** in annual profits and a 100% buyback policy (without considering protocol operation fee):

- $1.33M (90%) → distributed to bbBNC holders
- $148K (10%) → burned
- At BNC spot price of $0.1431, this equates to:
    - **~$0.0299 annual value per token**
    - **20.9% buyback yield** relative to circulating supply (44.6M BNC)

Treasury Return Assumption

| Investment (from 4yrs staking inflation) | BNC Price | Annual Return | APY |
| --- | --- | --- | --- |
| $1,000,000 | $0.1431 | **$208,945** | **20.9%** |

Hence, by holding bbBNC, Polkadot Treasury will continuously get a share of protocol revenue from $BNC buyback.

## Qualification

For **DeFi** protocols, "Liquidity" contribution is the most direct evaluation metric. Introducing external assets to Polkadot brings financial resources from other ecosystems, enhancing liquidity while fulfilling Polkadot's core value of cross-chain connectivity.

| Project | Method of Bringing External Assets | Typical External Assets | **Key Data** | Value to Polkadot |
| --- | --- | --- | --- | --- |
| **Bifrost** | Uses **Liquid Staking / vTokens** to transform staking rights of native or cross-chain assets (ETH, DOT, MANTA, ASTR.) into derivatives usable within Polkadot and multi-chian. | vDOT, vETH, vMANTA, vASTR etc. | TVL **≈ $117M, Cross-chainable asset TVL ≈ $100M** | Unlocks liquidity of staked assets and channels their “yield rights” into Polkadot DeFi. Channels DOT staking to other chains. |
| **Hydration** | Aggregates multi-chain assets, stablecoins, and derivatives into shared liquidity pool. | USDC, USDT, ETH, BTC, AAVE, SOL etc. | TVL **≈ $480M,** monthly trading volume in the tens of millions. **Over $100M liquidity from other chains.** | Directly imports external trading assets into Polkadot, significantly enhancing liquidity and price discovery |
| **Hyperbridge** | Provides **verifiable cross-chain bridging (ISMP / state proofs)** to securely bring native assets from other chains into Polkadot,  and vice versa. | Native assets from Ethereum, Optimism, Arbitrum, Base, BNB, Gnosis, etc. | Supports for 14 **major chains**; ~**$56M of cross chain transaction between other chains and Polkadot.** | Channels major-chain native assets into Polkadot with minimized trust assumptions. |

---

## Decentralization

Investing in parachains can theoretically be fully implemented through Opengov execution, without requiring any third-party intervention. Whether staking HDX or holding bbBNC, on-chain execution can be completed through XCM calls to Hydration or Bifrost.

### Example - Bifrost

All actions below can be implemented via OpenGov:

On AssetHub:

1. Referendum - Request DOT from Polkadot Treasury

On Bifrost:

1. Bridges DOT to Bifrost Treasury via XCM
2. Bifrost Treasury stakes DOT - by vDOT minting
3. Sends BNC to Polkadot Treasury address on Bifrost.
4. Dispatches Polkadot Treasury address to stake BNC to bbBNC and lock up for 4 years.
5. Claims dividends from bbBNC quarterly and bridges to Polkadot Treasury on Asset hub.

## Community Confidence

- The growth of parachain projects will greatly enhance Polkadot's visibility, especially those projects that deeply integrate DOT at the product level. Additionally, increases in Parachain token prices will further boost treasury revenue.
- Implementing on-chain governance, investment, and dividend distribution models will be completely transparent, which could be a groundbreaking application paradigm for other chains.
- Parachain Token management by the Polkadot community can enhance user confidence.

### Risk

- Parachain project tokens have higher volatility than BTC and ETH. Additionally, there are unpredictable risk factors such as protocol security issues, team stability, and development roadmap.
- Protocol revenue is closely tied to business scale; if the business scale shrinks, treasury income will decrease accordingly.

Make some on-chain remark.

Can be executed by every `origin`.

#1778 Exploring Protocol Revenue to Strengthen Polkadot’s Treasury

No Active Proposals