Thank you @adam and @zaatar for your feedback. Below I have outlined some suggested amendments which we believe address the concerns we found to be valid, I have explained which concerns we have chosen not to address and why, I have outlined which suggestions we have added to our roadmap, and I have taken the time to clear up some misunderstandings.
Suggested Amendments to the Proposal
Update the definition of Supermajority DAO Resolution to add a Quorum requirement
Supermajority DAO Resolution shall mean a resolution validly passed on the DAO in accordance with the governance protocols of the DAO with at least 75% approval by DAO participants who voted on the resolution, subject to the vote lasting no fewer than 14 days and a quorum of at least 25% of DAO participants who have cast a vote within the 12 months immediately prior to the date that voting commences on such Supermajority DAO Resolution.
This clause provides security against minority governance attacks, while minimizing the risk of stalling governance due to inactive voters. Note that while this excludes inactive voters (defined as those with at least 1 year of absence) from the quorum count, it does not preclude those voters from casting their vote.
As an example of how this would work in practice, only 3 of the current 56 voters have not voted in the last 12 months, which would result in a quorum of 14 of the remaining 53 active voters. If we were to make the quorum 50% instead, the quorum would be 27, a vote count that is surpassed only by 3 proposals: PIP-22 (33 votes), PEP-32 (28 votes), PEP-31 (28 votes).
Add a “DAO Oversight” section
Clarify the nature of transparency reports
4.42 Financial transparency reports should be published quarterly by way of DAO Notice within the first 4 weeks of the end of the previous quarter. These should include management accounts showing actual vs forecasted spending, an updated balance sheet, and cash flow forecast. The budget should include total director remuneration as determined by 4.37, total contractor remuneration, and any other material expenses categorized as the directors reasonably see fit.
This clause is pretty self-explanatory. This level of detail in transparency reports was always the plan, this just makes it explicit.
Note that, given the timing of this proposal, the first financial transparency report for Q1 2023 would have a deadline of 8 weeks, not 4 weeks, from the beginning of the year. This does not prevent the Foundation from publishing the report as soon as it is ready.
Add consent-based approval of a forecasted annual budget
4.43 Financial transparency reports in the first quarter of the year should include a forecasted annual budget. The annual budget shall be automatically approved unless there is a Supermajority DAO Resolution rejecting the budget, subject to the vote starting within 2 weeks immediately following the date of the DAO Notice. If the budget is rejected, the directors must amend the budget using their own reasonable judgment, subject to any limitation imposed on them by existing contracts, but shall not be compelled to go through any further rounds of approval.
Giving the DAO the power to micro-manage the budget is entirely impractical. The directors need autonomy to effectively manage the Foundation’s affairs and we should generally lean towards trusting the directors to act in good faith to exercise reasonable judgment, given:
- their incentives to retain their position,
- their legal duties to the company,
- their relative closeness to, and expertise of, the affairs.
Budget debates can easily become proxies for strategy debates, which may often lead to impassable conflict between the directors and certain subsets of the DAO, though this does not mean that the DAO as a whole disagrees with the directors. Therefore, in these conflict scenarios, following the principles above, the DAO should only be able to override the directors judgment with a supermajority.
The DAO is given 2 weeks to digest the DAO Notice, prepare a rejection proposal if they wish, and begin voting. This timeline is chosen because 1) we should not risk stalling the directors from entering into important contracts 2) if the DAO takes longer than 2 weeks to build consensus on rejecting the proposal, it is unlikely to achieve a supermajority anyway. Coupled with the 4 week DAO Notice limit and the 2 week supermajority voting requirement, this means that in a worst case scenario the Foundation can achieve budgetary certainty by the end of February.
In the scenario where the DAO does obtain a supermajority to reject the budget, the directors should be compelled to amend the budget, but should not be compelled to go through further rounds of approval. Further, there should be no strict rules about the nature of the amendments, since there may be a multitude of reasons for a diverse group of DAO participants to reject the budget and there may be items that are subject to contracts and which therefore cannot legally be amended. Per the first paragraph above, the directors should be trusted to act in good faith to exercise reasonable judgment in addressing what they understand to be the most substantive reasons for the budget’s rejection, then explaining to the DAO which steps were taken and why. If the directors exercise poor judgment, the DAO’s recourse is to replace the directors. When considering such extreme steps, however, the DAO should focus on how the directors manage the budget over time to account for feedback, rather than potentially unrealistic expectations about how quickly the directors amend certain line items.
Add consent-based approval for special transactions
4.44 Subject to any limitation imposed on the directors by any confidentiality agreement, financial regulation, or related laws, the following special transactions shall be published by way of DAO Notice no fewer than 4 weeks prior to the transaction date and shall be automatically approved unless there is a Supermajority DAO Resolution rejecting them, subject to the vote starting within 2 weeks immediately following the date of the DAO Notice:
(a) Incur any capital expenditure (including obligations under hire-purchase and leasing arrangements) which exceeds the amount for capital expenditure in the relevant capital expenditure of the Budget by more than 25% or (where no items were specified but a general provision made) in relation to any item exceeding $300,000.
(b) Engage any employee or consultant on a salary at a rate of $300,000 per annum or more, or increase the salary of any employee or consultant to more than $300,000 per annum or vary the terms of employment of any employee earning (or so that after such variation he will, or is likely to earn) more than $300,000 per annum.
c) Enter into or vary either any unusual or onerous contract or any other material or major or long term contract.
(d) Enter into any transaction or make any payment other than on an arm’s length basis for the benefit of the Company.
(e) Make any loan or advance or give any credit to any person or acquire any loan capital of any corporate body (wherever incorporated).
(f) Do any act or thing outside the ordinary course of the business carried on by it.
This clause grants the DAO a check on special transactions, in addition to the previous annual check on the forecasted budget, in a consent-based manner that minimizes obstruction of the Foundation’s operations. The 2 week time limit on the rejection proposal, coupled with the 2 week length of a supermajority vote, ensures that the transaction date (at least 4 weeks out from DAO Notice) is not delayed in normal circumstances.
Rejected Amendments to the Proposal
Fixed terms/renewals
Forcing a renewal vote to take place after a certain period of time does not introduce any more accountability than we already have; “accountability from the outset” is provided by the ability for the DAO to remove the directors at any time. Fixed terms would threaten the operational continuity of the Foundation by enabling a scenario in which an inability to meet quorum could leave the Foundation without any directors.
Limits on POKT grants based on prior POKT holdings
POKT grants with vesting restrictions are not just about alignment with the project as a whole, but an incentive to continue working on the Foundation. Any existing POKT holder who enters one of these positions is taking on a lot of extra responsibility and risk, so to be refused any extra upside is a raw deal, which undermines the incentives for POKT veterans to volunteer for the role, and is therefore untenable.
The transparency and controls that the DAO will have are more than sufficient to prevent undue POKT allocations. Not to mention, Directors duties ensure that the directors will act in good faith in the best interests of the company and not for any personal or improper purpose.
Publishing accounts and budgetary plans before taking this to a vote
We don’t want this vote to become a vote on the budget itself. There are important governance upgrades here and it would be a huge loss to the ecosystem if this proposal gets rejected because of a disagreement over budget.
Since we are introducing annual approval of budget forecasts, the DAO will have the opportunity to discuss these things with us in Q1 23.
Updated Roadmap Items
Introduce a standard DAO Notice channel
We will create a new category in the forum dedicated to DAO Notices, to which everyone would have the permission to respond. However, the definition of a DAO Notice already requires that the DAO participants should have access to such notice, so we feel it is unnecessarily prescriptive to make an amendment to the Articles specifying the use of a forum category in which people can ask questions. We also plan to hold regular AMAs with the community and continuously maintain a transparent feedback loop, though it would be similarly prescriptive to include this in the Articles.
Protections Against Unfair Dismissal
The Cayman Labour Act already defines unfair dismissal, and the Foundation operates under Cayman Companies Law, so the Foundation is already bound to these rules. The directors and supervisors (per 4.17 and 6.17) are not compelled to follow DAO Resolutions that would break the law, which should protect against unfair dismissals actioned by the DAO. It may be worth checking this with the Foundation’s Cayman lawyers but not so urgent to delay this proposal.
Updating the Constitution
The Constitution needs updating but there is no reasonable argument that the Foundation (or this proposal) is unconstitutional (see “Claims of Unconstitutionality” below). Therefore, this is a Q1 workstream that shouldn’t block this proposal.
Rearranging Existing Items
I am going to move the “Clarify governance structure, process & vision” item to Q1 23. I remain hopeful that we’ll be able to execute on the “Launch the new PNF” item in Q4 22.
Clearing Up Misunderstandings
Retroactive Reimbursements & Claims of Author Inconsistency
The topic of retroactive reimbursements is not relevant to this proposal, for a few reasons:
- This is a PIP to appoint new Foundation directors/supervisors and unblock full-time operations, not a PEP to request funds
- The Foundation’s directors/officers will be full-time operators who are doxxed and have a fiduciary duty to the Foundation, not anonymous one-time DAO contributors
- The claimed precedent about retroactive reimbursements doesn’t exist
I am addressing this topic mainly to clarify a misunderstanding stemming from Adam quoting me out of context. Let’s look at the full context:
The bad practice I was referring to was calling it a retroactive funding proposal when in reality the DAO was being asked to proactively make an assessment about the value of the contribution. I posted my message on the back of a heated debate that centered around this.
To test the claim about any precedent of retroactive reimbursement, see PEPs 27, 31, 33, 34, 41, 42, 43, and 45.
Claims of Unconstitutionality
Edited this section 12/14/22.
@adam and @zaatar have both raised concerns about the constitutionality of the Foundation using discretion. They have pointed to 4.10 in the Constitution as the violated clause, specifically, “deferring decision-making to the Council in all cases”:
Qualified Code Deference and the Foundation’s Custodial Rights & Responsibilities
4.10. The Foundation shall serve as a custodial entity for Pocket Network, deferring decision-making to the Council in all cases except Material Adverse Exception Events (MAEEs), i.e. crises resulting from incomplete contracts and unforeseen events.
However, the Foundation’s role and its relationship with the DAO are already well established in the Constitution itself, in the Foundation’s Articles, and through precedent. This is clear if one looks comprehensively (not selectively) at the Constitution and considers the history of the DAO.
My explanation is comprehensive and therefore long. If you want to read more, open this toggle.
So what is the Foundation’s role, according to the Constitution?
The Role of the Foundation
4.5. The Foundation’s objectives are to:
- Steward Pocket Network
- Hold legal custodianship of Pocket Core
- Request funds from the Council for specific projects that have strategic value to the Pocket Network ecosystem, by submitting PEPs.
How does the DAO control the Foundation?
The Council’s Control of the Foundation
4.6. The Council’s control of the Foundation is hard-coded into the Articles of Association of the Foundation, which separates the powers of all Foundation agents and defers those powers to the Council:
- Directors/Supervisors are appointed/removed by each other on behalf of the Council
- Directors must resign from other positions of authority in the Council (except Voter)
- Supervisors ensure that Directors comply with the articles
- No Supervisor decision is valid without Council approval.
4.7. New Directors/Supervisors will be appointed/removed according to PIPs approved by the Council.
Note that, where the DAO’s control of the Foundation is concerned, the Constitution defers to the Foundation’s Articles. Indeed, the Constitution is not the only document that the DAO relies on. The Foundation’s Articles are currently the only formally enforceable document and it is the Articles that provide the DAO with explicit checks and balances over the directors. We should therefore not so easily dismiss the relevant clauses in the Articles when seeking to understand the relationship between the DAO and the Foundation.
So we’ve established the Foundation’s role and the DAO’s controls over the Foundation, as defined by the Constitution and the Foundation’s Articles. Where does 4.10 fit in? To understand the spirit and limits of this clause, we need to understand the concept of Qualified Code Deference (QCD) as well as what we mean by the Foundation being a “custodial entity”.
QCD is designed to structure exception handling in crisis events for automatically governed (smart contract) systems, i.e. times where “code is law” may not always be desirable. In other words, it is all about emergency powers. For example, if a smart contract is compromised, a multi-sig authorized by a QCD agreement would be able to rescue vulnerable funds without the delay of DAO voting.
Pocket doesn’t have smart contracts and the DAO’s decisions aren’t capable of being automatically executed, so why did we bother to include QCD in our Constitution? Two reasons:
- At the time, I anticipated that we might figure out automatic cross-chain execution of governance transactions. “4.20. The Foundation multi-sig will hold all ACL permissions at launch, but the Council may work to automate (and thus disintermediate) the Executive function by building a cross-chain integration between Pocket Network and the Council’s Aragon Agent (or a similar smart contract representative).”
- Until we have full on-chain governance, or an ability to automatically resolve off-chain votes into on-chain governance transactions, the Foundation custodies the DAO’s governance of the Pocket Network blockchain, i.e. the Foundation holds all of the ACL permissions. QCD seemed like an elegant way to restrict the Foundation to only submitting Governance Transactions that correspond with approved DAO proposals, while having an exception handling path for crisis events.
For full clarity, the ACL is defined as “a permission framework used by Pocket Core to control which accounts can submit Governance Transactions, such as transferring funds from the Pocket Core DAO Treasury, burning funds in the Pocket Core DAO Treasury, updating On-Chain parameters, and activating Protocol Upgrades”, and Governance Transactions are defined as “transactions executing the results of Council decisions On-Chain”.
A more likely need for QCD in Pocket’s case might be a poorly configured parameter value that leads to a network emergency which can only be solved by quickly adjusting the parameter value. The Foundation has not had to use this exception handling path so far. The closest the network came was with with PUP-8, which fortunately was able to be resolved through a quick DAO vote.
The key takeaway to note here is that this exception handling path specifically concerns code. QCD is only necessary where code is concerned because the code powers an automated system that may spiral out of control before the DAO’s normal governing authority has the chance to react. By granting exception authority to the Foundation, there is a quicker path to crisis resolution. Consequently, the limits of these QCD clauses are defined by the DAO’s governance of code, which are defined by the ACL of the Pocket Network blockchain. If the DAO were to expand its boundaries into other blockchains, e.g. by launching a wPOKT smart contract, then it could indeed be argued that QCD also applies to the governance of the wPOKT smart contract as code.
So let’s revisit 4.10 with this context in mind:
Qualified Code Deference and the Foundation’s Custodial Rights & Responsibilities
4.10. The Foundation shall serve as a custodial entity for Pocket Network, deferring decision-making to the Council in all cases except Material Adverse Exception Events (MAEEs), i.e. crises resulting from incomplete contracts and unforeseen events.
In other words, the Foundation is “deferring decision-making” to the DAO in its capacity “as a custodial entity for Pocket Network”, i.e. the holder of ACL permissions, meaning it will not submit Governance Transactions without the DAO’s authorization unless in a crisis (or unless the authority has been delegated to the Foundation as in 6.5, 6.6, and 6.7, or as part of a PUP that requires continuous adjustments as in PUP-11 and PUP-22). This clause is not designed to grant the DAO authority over all of the Foundation’s other affairs.
To validate this interpretation, we can look at precedent, where the Foundation has already exercised discretion and the DAO has continued to consent:
Knowing the full context, I feel confident in saying that this proposal does not fundamentally alter the role of the Foundation or its relationship with the DAO. This proposal does not change the Foundation’s role as custodian of the blockchain’s ACL permissions. Rather, it focuses on the Foundation’s other equally important role as steward, adjusting some of the clauses in the Foundation’s Articles in order to empower it to become a more active steward. This proposal is not unconstitutional.
Reminder of the Purpose of this Proposal
I’ll wrap up by asking us all to take a step back and remind ourselves of the purpose of this proposal, which is to empower the Foundation to be a more active and credibly neutral steward of the ecosystem, who can advocate for and empower all stakeholders and contributors.
Anything else in this proposal – appointing the new directors/supervisors, amending the Articles to provide the Foundation with more operational autonomy – is in service of that vision. Some of the feedback here views the Foundation through the original lens as a lean legal wrapper, which misses the forest for the trees. This feedback not only pushes back on extra autonomy, but would have us take the Foundation in the opposite direction by robbing it of the little autonomy it has already established and turning it into a pure passthrough entity for the DAO. To do so would render this entire proposal pointless.
I hope the DAO will keep these thoughts in mind when deciding whether to proceed with this opportunity that the authors (and Ben) have worked so hard to provide the ecosystem.