NEAR House of Stake Governance Proposal

1. Executive Summary 

The "House of Stake" proposal outlines a comprehensive governance framework for the NEAR Ecosystem. It focuses on designing a structure emphasizing transparency, accountability, efficiency, and most importantly, protocol alignment. The primary goal is to equip NEAR holders with a governance structure that permits equitable and sustainable growth.

‍Critical Components of the Proposal

‍Governance Mechanism (veNEAR)

A vote-escrowed (veNEAR) token is proposed as an integral factor of the NEAR voting system, allowing users to lock NEAR tokens for a period ranging from three months to four years. The system is designed to increase voting power with the duration of the stake, promoting long-term commitment and enhancing governance influence.

‍Governance Architecture

On-chain voting mechanisms are proposed to facilitate broad participation and robust decision-making with checks and balances in place to reduce voter fatigue and fast-track pre-screen proposals.

‍Advisory and Functional Bodies

A Screening Committee is proposed, which will initiate the delegate selection processes, pre-screen grant proposals, and ensure continuous evaluation of governance efficacy. The Screening Committee plays a critical role in maintaining dynamic and responsive governance.

‍Delegate Framework

Definitions and roles of Endorsed Delegates are clearly outlined, including their selection process and responsibilities. These delegates are crucial for operational governance and are selected based on their engagement and compliance standards.

‍Utilization of 0.5% Annual Inflation

A key motivation behind this proposal is to effectively direct and utilize the 0.5% annual inflation rate to fund governance initiatives and incentivize meaningful ecosystem participation. 

‍Path to Decentralization

Steps towards decentralization include expanding delegate membership and periodic reviews by the Screening Committee to adjust strategies based on performance and effectiveness.

To follow along with community questions and feedback, here’s a link to our post on the NEAR forum.

2. Introduction

2.1 Overview of NEAR 

This proposal follows the challenges encountered with the Near Digital Collective (NDC), a highly decentralized, community-led program that did not meet the ecosystem's expectations.

Despite the NDC’s ambitious efforts towards decentralized governance, the initiative revealed critical insights. Among them, the lack of stake-weighted influence, inadequate incentives for user participation, and the absence of a transparent grants process have been noted as areas for improvement.

In response to these challenges, some contributors in the NEAR ecosystem have considered a transition from the NDC model towards a stake-weighted model aimed at streamlining governance and engagement. This pivot seeks to address the NDC’s shortcomings by establishing clearer incentives for participation, enhancing transparency in grant decisions, and more actively supporting DeFi initiatives to stimulate economic activity and growth on NEAR.

2.2 Overview of Gauntlet

Gauntlet is a DeFi-native quantitative research firm specializing in treasury and risk management, and mechanism design. Gauntlet uses battle-tested techniques from the algorithmic trading industry to help protocols manage risk, optimize revenue, and design better incentives. Our simulation models inform parameter decisions for protocols of all sizes, covering over 25% of aggregate DeFi TVL. Gauntlet specializes in optimizing incentives, refining fee structures, and implementing optimal ecosystem control policies.

3. Scope of the House of Stake Proposal

3.1 Scope

The document's current scope is to illustrate the House of Stake mechanism, explain how it works, and provide a roadmap for the steps required to implement the proposal. Specifically, aligning on leveraging the 0.5% annual inflation to fund governance and incentivize community participation is crucial.

3.2 Out-of-Scope 

Gauntlet will not write smart contracts or audit contracts; these are outside Gauntlet's scope. Intricate details, like deciding the total reward for delegate incentives and the Endorsed Delegate Application/Selection Framework, will be addressed in a separate follow-up document.

4. Governance Participation

4.1 Transition to House Of Stake 

The NEAR Digital Collective (NDC) was established in 2022 to enable the community to manage and distribute funds from a community-managed treasury. While the vision remained consistent, some challenges developed. The proposed transition to House Of Stake aims to address some of the challenges faced by the initial governance of the NDC. One of them is aimed at improving the voting structure from a one-person-one-vote to a stake-weighted system. The House of Stake also aims to simplify and align the organization of governance bodies and how they interact with each other to increase efficiency by pre-screening grant proposals & implementing an Endorsed Delegate Mechanism into the governance procedure.

‍Challenges of the NDC Governance Framework

‍Community Management and Voting Rights:

The NDC used a proof-of-humanity system instead of a stake-weight-driven mechanism. This approach aims to democratize voting by verifying identity rather than the quantity of tokens held. However, this method lacks stake-weight alignment— which can offer stronger incentives for active and beneficial participation within the ecosystem — and is susceptible to manipulation given the smaller scale of most blockchain communities. Stake-weighted mechanisms align voting power with economic interests and ensure that those with a significant stake are more committed to the project's success. By encouraging stakeholders to lock tokens for voting rights and providing rewards for governance participation, stake-weighted alignment can foster a more engaged and responsible community, ultimately driving ecosystem growth.

‍Limited Scope and Functionality:

The structure of the NDC had inherent limitations. Notably, it lacked explicit incentives for network users to engage. Without these incentives, such as stake alignment and penalization mechanisms typical in Proof of Stake (PoS) systems, there is diminished motivation for sustained and impactful participation. NDC voters remained in strikingly low numbers throughout when compared to participants in other ecosystems and reduced from 503 to 109 in a span of 2 years.

‍Transparency in Fund Allocation:

The community has struggled to maintain clarity and effectively participate in the grants forum without an open and transparent governance structure. The community has expressed a desire for a more open process where they can have a say in project funding decisions. The grant approval process hasn't been clear before, contributing to these transparency issues.

‍Support for DeFi and Token Launches:

Due to what may be perceived as the difficult grant approval process, the current framework did not encourage the successful grant distribution to native DeFi protocols in the last year. This has limited growth and can be observed as a bottleneck for capital formation and innovation in the sector, hindering the ecosystem’s overall growth potential.

‍Proposed Solutions within the House of Stake Governance Framework

To address these challenges and leverage growth opportunities, a strategic transition is proposed away from the current framework to adjust three things:

1. Stake-weighted voting rights:
   • Replace 1-1 voting with a stake-weighted, lockup voting token: veNEAR.
   • Allowing conversion of stNEAR, liNEAR, NEAR to veNEAR, which maintains all voting rights.
2. Governance Structure:
   • Pre-Screen Grant Proposals.
   • Establish Endorsed Delegates and encourage further delegation within the ecosystem.
3. Funding Structures:
   • New funding types and funding guardrails.
   • New incentives to delegates and veNEAR holders.

An essential component of this proposal is the strategic use of the 0.5% annual inflation rate. By directing this stable and predictable funding source towards initiatives, we aim to support the operational needs of the House of Stake framework and incentivize meaningful participation from the community. While this approach provides a consistent stream of resources, its sufficiency will depend on other competitive on-chain yields and market conditions. Gauntlet will offer detailed recommendations on how best to allocate these funds to maximize impact and align incentives with the long-term goals of the NEAR Ecosystem.

4.2 veNEAR Governance Token

To support the House of Stake’s success, veNEAR will be implemented as a new governance token to serve as a critical component of the NEAR voting system, structured within a vote-escrow contract. Users can lock NEAR, stNEAR, and liNEAR. veNEAR’s voting power increases with the duration of stake, incentivizing longer commitments by enhancing the stakeholders’ influence in governance decisions. This section details the proposed governance mechanics of veNEAR.

4.2.1 veNEAR Flow

a. Use NEAR to stake and vote-lock to veNEAR — Smart contract call: stakeAndVoteLock function with NEAR tokens. 

b. Use NEAR to vote-lock to veNEAR without staking, foregoing staking rewards — Smart contract call: voteLock function with NEAR tokens.

c. Use stNEAR or liNEAR to vote-lock to veNEAR — Smart contract call: voteLock function with stNEAR/liNEAR. 

Note: Users previously staking in contracts without liquid staking tokens (LSTs) will need to withdraw their NEAR from these staking contracts. Once they have their NEAR tokens, they can choose any of the three options mentioned above.

4.2.2 Token Compatibility (NEAR, stNEAR, liNEAR, etc.)

• Users can deposit NEAR, stNEAR, or liNEAR into veNEAR contracts. For the purposes and simplicity of this document, when we mention NEAR, we are referring to NEAR and all Liquid Staking Tokens (LSTs) related to NEAR.
• Users receive veNEAR, which is a non-transferable token into the user's wallet. 
• NEAR, stNEAR, and liNEAR holders comprise 536M NEAR of the target token audience, with the remaining 506M of the target token audience in legacy staking contracts.
  • We recommend making efforts to convert the remaining users (mainly legacy stakers) by implementing incentive programs that encourage migration to veNEAR. This is an area we can comment on in the future.

4.2.3 veNEAR Premium Calculation

Mechanism of Calculation:

Voting power, represented by veNEAR tokens, is calculated based on a relationship with the staked duration. This model is designed to reward longer staking commitments with higher voting power.

Formula: While it can vary depending on which approach we take for time lock (mentioned in section 4.2.4), a common form could be expressed as:

\[ v(t) = v_0 \left( 1 + \frac{2T_L}{T_{Max}} \right) \]

Where:

• \( v(t) \): total veNEAR
• \( T_{Max} \): max lockup in years i.e. 4 years
• \( v_0 \): the initial amount of NEAR deposited
• \( T_L \): value in years (0,4)

Based on this formula, voting power increases with the duration of the token lockup, rewarding users who commit their tokens for extended periods.

4.2.4 veNEAR Time Lock

In consideration of implementing a successful vote-locked token that considers the unique aspects of NEAR, we propose two potential locking mechanisms below for community consideration.

4.2.4.1 Approach 1: Fixed Lock 

Minimum Lockup Duration: Users can lock their NEAR tokens in the escrow contract for at least three months. This shorter duration is suited for users seeking minimal commitment and lower voting power augmentation.

Maximum Lockup Duration: The maximum lockup duration is four years, targeting users willing to commit to long-term ecosystem support and governance. This extended period offers the highest increase in voting power, reflecting significant trust and contribution to the network’s stability and governance.

When performing a vote-lock, users specify the lock-up duration. Based on the number of tokens deposited and the lock-up duration, veNEAR is calculated:

Pros: 

• The locking mechanism is similar to other veTokens, creating a sense of familiarity.

Cons: 

• Derivative products are more challenging to create due to complications in converting a fixed-duration token to a liquid perpetuity token.
• Users may face liquidity issues due to over-commitment or miss rewards due to under-commitment.  

4.2.4.2 Approach 2: Rolling Lock 

The Rolling Lock approach allows users to lock NEAR in exchange for veNEAR at an initial 1:1 conversion rate, which increases linearly over time up to a maximum of 3:1. Unlike other protocols, users do not need to specify a lockup period initially. Instead, they specify the unlock duration, which is three months from the time they decide to unlock.

• Lock Premium Calculation: The conversion from NEAR to veNEAR starts at 1:1 and increases linearly to 3:1 over time. This increase occurs automatically without requiring users to specify a lock period initially. The veNEAR increase will occur for a maximum duration of four years, with no additional increase beyond this period.
• Default Unlock Duration: Upon deciding to unlock their stake, a default period of three-month wait and a linear decay begins. This approach eliminates the need for repeated token looping and provides rewards that can be claimed periodically.

Pros: 

• Flexibility: Users can exit the program anytime with a three-month wait without penalties. 
• With a minimal wait time of just three months to exit veNEAR, it's a more flexible user experience as there is less concern about over/under-commitment of veNEAR.
• A more suitable mechanism for future liquid derivatives.

Cons: 

• Novel Approach: To our knowledge, no protocol has implemented such an approach to date.

4.2.4.3 Comparison Between the Fixed Lock and Rolling Lock  Approach

Let's take an example to explain the differences in approach. Assume there is a user who wants to deposit 1 NEAR into veNEAR Contracts.

Approach 1, Fixed Lock:

• The user specifies they would like to deposit 1 NEAR for three years.
• veNEAR smart contracts calculate veNEAR based on the \( v(t) \) formula given above.
• veNEAR decays linearly until the three years are up, and the user can unlock their NEAR after this period.

The figure above illustrates how NEAR is converted to veNEAR (blue) and how it decays over the given lock duration (red).

Approach 2, Rolling Lock:

• The user deposits 1 NEAR without specifying a lock duration.
• veNEAR smart contracts calculate and distribute veNEAR periodically (at every epoch).
• veNEAR accumulates until the user specifies the unlock period. After three years, the user chooses to unlock with a three-month wait.
• For the next three months, veNEAR decays linearly to zero, allowing users to withdraw their NEAR tokens after this period.

The figure above illustrates the accumulation and unlock phases of veNEAR for a user who has deposited 1 NEAR. At year three, the user specifies their intent to unlock their tokens and chooses a three-month unlock duration.

• The blue line represents the veNEAR accumulation over time, starting at a 1:1 conversion rate and increasing linearly to 2.5:1 over three years.
• The green dashed line marks the point where a lock period is specified, indicating the user’s decision to begin the unlock process.
• The red line shows the unlock duration, highlighting the decay of veNEAR value once the unlock period is specified.

Summary: 

These figures demonstrate how veNEAR value accumulates and decays, providing a comprehensive understanding of the veNEAR premium mechanism for both approaches. 

4.2.5 Incentives to veNEAR holders 

Before vote-locking their tokens, rational st/li/NEAR token holders would weigh alternative sources of on-chain yield. The most attractive sources of yield are provided by looping their holdings, as depicted in the above flow. Currently, the opportunity cost, or implicit cost of capital, to veNEAR holders is incurred by not participating in the leveraged staking operations detailed below:

• supply stNEAR/liNEAR into a lending protocol,
• Borrow NEAR,
• Purchase stNEAR with borrowed NEAR, and
• Achieve additional APY (Staking APY - Borrow APY = 8.8% - 3.0% as per current market terms).

To attract and maintain veNEAR holders, vote-locking incentives should be competitive with alternative on-chain sources of yield, but not exceed existing staking yields. With these boundaries in mind, it is recommended to set \(\text{veNEAR}_{\text{rewardsApy}}\) to satisfy the inequality below:

Leveraged Staking APY (5.8%) < veNEAR APY < Staking APY (8.8%)

• When veNEAR APY < Leveraged Staking APY, rational stakers have no additional incentive to vote-lock their tokens and will keep looping to seek higher yields beyond veNEAR. 
• When Staking APY < veNEAR APY, some stakers could bypass the staking mechanism, compromising the network's security.

The above inequality is essential as a mental model, not a strict equation. It is okay if veNEAR APY is slightly higher than Staking APY for higher lockup users for a brief period. However, as part of their roles and responsibilities, the Screening Committee is required to regularly perform this check and ensure an appropriate balance is maintained. For a comprehensive overview of the Screening Committee's roles and responsibilities, please refer to section 5.1.1.

4.2.5.1 Rewards Distribution

Given the cost of capital assumptions detailed above, the formula to calculate the annual total NEAR rewards paid to veNEAR holders is as follows:

\[\text{NEAR}_{\text{rewards}} = \text{NEAR}_{\text{locked}} \times \text{veNEAR}_{\text{rewardsApy}}\]

• \(\text{veNEAR}_{\text{rewardsApy}}\) will be set by the Screening Committee. 
• The above formula assumes the distribution of \(\text{NEAR}_{\text{rewards}}\) to be annual.

Given the above estimate for \(\text{NEAR}_{\text{rewards}}\) in a given month/epoch, a given user is awarded based on their veNEAR holdings as a ratio to \(\text{veNEAR}_{\text{supply}}\)

\[\text{NEAR}_{\text{userA}} = \text{NEAR}_{\text{rewards}} \times \dfrac{\text{veNEAR}_{\text{userA}}}{\text{veNEAR}_{\text{supply}}}\]

• Users need to claim rewards based on their percentage ownership of the veNEAR supply, as per the above formula. 

Based on the current capital cost (5.8%), the annual spending on NEAR rewards will be as per the table below.

The rewards can be funded from multiple sources, where Treasury and 0.5% annual token inflation are the main sources of funds. 

Budget Constraints and Future Considerations

As shown in the table above, as the total NEAR locked in veNEAR contracts increase, the minimum required annual NEAR rewards paid to veNEAR holders will also increase to maintain parity with other on-chain sources of yield. It is important to note that as veNEAR gets fully adopted, budget constraints will be a challenge the community must address in the future. As the veNEAR supply grows, the required annual spend to fund veNEAR rewards will also increase.

Proposed Solutions:

The community can use several solutions to mitigate this issue. Gauntlet lists four potential high-level solutions below to kick off the discussion and can provide deeper analysis and detailed recommendations in follow-up reports. By proactively planning and adjusting funding mechanisms, the community can ensure sustainable governance and continued incentivization of participants. The final solution may involve optimizing the current reward structure, identifying new revenue streams, and adjusting the tokenomics to ensure sustainability. We touch upon some of these solutions below to initiate community discourse early, with a separate decision to be made at a later date: 

1. A bigger portion of NEAR Token Inflation for veNEAR
   • Currently, the Treasury receives 10% of annual token inflation. This can be increased to 15%-25% and used to incentivize veNEAR holders. The tokens can be sent directly to veNEAR Rewards Pool instead of the Treasury but the key change is reallocating these tokens from validators to veNEAR holders.
2. Share part of NEAR Revenues with veNEAR Holders
   • Most veTokens, such as veCRV, veBAL, and veYFI, allocate protocol revenues with their holders. NEAR could follow the same direction and direct a certain percentage of the network fee revenues to veNEAR holders. 
3. Ecosystem Contribution or Token Airdrop from Grant Recipients
   • Many protocols or users who have received grants from the Near ecosystem have achieved significant project success. To further incentivize and engage veNEAR holders, we propose an ecosystem contribution model. Under this model, a portion of the revenue or token claims generated by these successful projects would be shared with veNEAR holders.
   • Implementation strategy: Grant recipients are encouraged to detail how they plan to give back to the ecosystem in their proposals. This can be through:
     • Revenue Sharing: Recipients can specify the percentage of their future revenues that will be shared with veNEAR holders. This gesture shows appreciation for the ecosystem's support and helps maintain veNEAR holders' active participation.
     • Token Airdrops: Alternatively, recipients can commit to distributing some of their project's tokens to veNEAR holders. The proposal should clearly outline the timing, amount, and conditions of the airdrop.
   • While it is not mandatory for all grant recipients to share their revenues or tokens, it could be recommended that they do so to ensure veNEAR's continued health and network growth but not more than 10% of their expected annual cash flows.‍
   • Consideration for veNEAR Holders: veNEAR holders should view this revenue sharing as a gesture of goodwill from grant recipients, not an obligation. The recipients are encouraged to share their success only if their projects achieve significant milestones. This approach fosters a positive and supportive ecosystem where contributions are made out of appreciation rather than obligation.
4. Dynamic Allocation of \(\text{veNEAR}_{\text{rewardsApy}}\)
   • When veNEAR starts to scale, dynamically allocate \(\text{veNEAR}_{\text{rewards}}\) instead of requiring the Screening Committee to change this value every time. The below logic can be followed to make sure that \(\text{veNEAR}_{\text{rewardsApy}}\) is dynamic and transparent to the community.
   • As \(\text{veNEAR}_{\text{supply}}\) increases, \(\text{veNEAR}_{\text{rewardsApy}}\) starts to taper off based on the below equation. The term 198 is a constant used so that NEAR Rewards can range between 1.7M to 3.5 M at full-scale.

\[\text{veNEAR}_{\text{rewardsApy}} = \frac{198}{\sqrt{\text{veNEAR}_{\text{supply}}}}\]

4.2.6 Why veTokenomics for NEAR

• Most veTokens are mainly used for voting, but the structure of rewards, penalties, and token lock-up periods vary widely. Our solution tries to fit our needs in the best possible manner, which means the NEAR to veNEAR conversion and incentive mechanism is unique to NEAR   
• veNEAR token will be used to identify and incentivize key stakeholders interested in the NEAR network's governance process.
• By locking their tokens, veNEAR holders signal that they will be the key decision-makers in the community. 
• NEAR can use the Screening Committee to monitor grant proposals and pre-screen them so no bad actors can exploit the system. We have incorporated this into our proposal, detailed in Section 5 below.

5. Governance Architecture

• Simple Majority: If the Screening Committee pre-screens and approves the proposal, then at least a 51% majority vote is required.‍
• Super Majority: If the Screening Committee does not approve the proposal during pre-screening, at least a 75% majority vote is required.

5.1 Functional Bodies 

5.1.1 Screening Committee  

Roles & responsibilities 

1. Initiate and Complete the Call for Delegates Procedure
   • Announce the need for delegates and outline the qualifications and responsibilities expected of them to ensure that governance remains dynamic and responsive to the evolving needs of the network.
   • Gauntlet will advise on and provide a template and framework for identifying delegates, but the Screening Committee will be responsible for executing the Call for Delegates externally.
2. Fine-tune the Delegate Incentive Funding framework once HoS proposal is passed/implemented.
3. Pre-screen grant proposals (at least 4/7 for votes) to ensure safe and effective governance by signaling whether proposals align with the community’s objectives.
   • Once the House of Stake proposal is set up, a proposal template will be shared and pinned to this document.  
4. Ensure delegates abide by the Call for Delegate’s Code of Conduct and act in the community's best interest. If a delegate deviates, ensure the community and delegators are aware of the infraction.
5. The foundation initially forms this body, but once the Call for Delegates is complete, elections will be held every year, and the delegates will vote for the Screening Committee.
6. The Screening Committee gets to modify \(\text{veNEAR}_{\text{rewardsApy}}\) so that the rewards incentives are competitive in the market.

5.1.2 Endorsed Delegates

Gauntlet will provide a follow-up Call for Delegates document that specifies the exact requirements and details of the operations of endorsed and unendorsed delegates. 

Roles and Responsibilities 

1. Submit the Endorsed Delegate application as per the template provided.
2. Voting participation needs to be > 80%.
3. Delegates need to submit their rationale for their votes.
4. Stay updated with the current proposals by directly participating in votes or posting their rationale/support/no-support for proposals.

5.1.2.1 Call for Delegates Procedure 

1. The Call for Delegates will be publicly announced through official channels to reach a broad audience of potential candidates.
2. Application Submission: Interested parties must submit an application detailing their qualifications, experience, and vision for their delegate role. Details will be announced soon. 
3. Review Process: Applications are reviewed based on predefined criteria to ensure candidates meet the necessary standards and alignment with the protocol’s objectives.
4. Endorsed Delegate Selection.
5. These delegates will be promoted to the entire network and include a delegate profile so other veNEAR holders can review them and delegate their tokens as needed.
6. Endorsed Delegates, along with other voters, will participate in voting. 

5.1.2.2 Path to Decentralization 

The Screening Committee plays a pivotal role in regulating Endorsed Delegates through two main functions:

Selection and Monitoring of Delegates:

• Initial Endorsed Delegates Selection: The Screening Committee selects the initial group of Endorsed Delegates.
• Ongoing Monitoring of Grant Proposals: Throughout the grant proposal process, the Screening Committee monitors the voting behavior of the Delegates. Based on the code of conduct, If discrepancies or issues are identified, the Screening Committee can withdraw its pre-screen approval of the grant proposal, requiring it to pass an onchain vote with a Super Majority.

Management and Adjustment:

• Performance Review: The Screening Committee periodically reviews the overall process and may adjust its criteria and approach based on the Delegates' performance and effectiveness.
• These steps ensure the process remains fair, balanced, and aligned with the initiative's goals.

Once this system is stable and enough iterations are complete, the Screening Committee will let the House of Delegates handle the selection process of Endorsed Delegates.

5.1.3 Security Council

After researching similar successful governance structures, we propose a tiered approach, where there are two layers inside the Security Council.

Core Members: Members that are foundational and remain constant.

Key Members: Independent bodies that have a strong relationship with NEAR.

These bodies evolve over time.

Based on this understanding, we propose that one representative of each of the Near Foundation, Near One, and Pagoda be on the Security Council to be the Security Council. 

Roles & responsibilities 

1. Initiate Emergency Implementation to stop any potential security issues.
   • Make a community post within 7 days of implementation explaining the need for the change and why there was a need for intervention.
2. Ensuring that the system/network is not being attacked/manipulated by any one person or a group of individuals.
3. Relay the information to the Screening Committee of any potential issues they see with a specific proposal.
4. The Security Council is accountable for protocol upgrades.
5. Coordinating with developers, validators, and other key stakeholders during protocol upgrades and security threats.

5.1.4 Evaluation and Removal of Bad Actors

Community members can raise concerns about a delegate or a delegate’s actions that have harmed the community. An on-chain voting process will be used to address these concerns. If the vote passes, the implicated member will be blacklisted from participating in the voting process. 

1. If the implicated member is a delegate, then delegators will need to re-delegate their tokens to another delegate.
2. If the implicated member is from The Screening Committee, a 7-member body will now become 6, but it still needs 4 votes for approval (4/6 instead of 4/7).

6. Funding types

In evaluating the allocation of funds, we will introduce vertical guardrails prioritizing projects and activities that directly contribute to the strategic growth and security of the NEAR Ecosystem. Specific details and criteria for these funding programs will be elaborated in a dedicated, in-depth document to ensure thorough evaluation and alignment with our long-term objectives. 

The 0.5% annual inflation will be used for the below initiatives

6.1 Incentives to veNEAR holders (Based on veNEAR Stake)

Recall the formula to calculate the annual total NEAR rewards paid to veNEAR holders:

\[\text{NEAR}_{\text{rewards}} = \text{NEAR}_{\text{locked}} \times \text{veNEAR}_{\text{rewardsAPY}}\]

The table below is calculated based on the current opportunity cost of 5.8% discussed in Section 4..2.5.

We expect at least 10Mn veNEAR supply in the first 6 months, which would require 580,000 NEAR to be allocated to make veNEAR APY competitive with other sources of onchain yield.

6.2 Incentive to Delegates (Based on Voting Participation)

Delegates need to meet the criteria below to be eligible for incentives. 

Pre-requisites

1. 0.5% of veNEAR Supply: Delegates must hold at least 0.5% of the veNEAR supply to be eligible for rewards.
2. KYC/KYB: Delegates must complete the Know Your Customer (KYC) and Know Your Business (KYB) processes, as applicable.
3. Quarterly Forum Posts: Delegates must post on the forum every quarter, explaining their voting rationale.
4. Voter Participation: Voting Participation needs to be at least 80%
5. Conflict of Interest: No evidence of material conflict of interest involving delegates and grant proposers.

Rewards per delegate are distributed according to the logic below:

\[ R_i = N \cdot \frac{ \left( \frac{v_i}{V} \cdot \frac{t_i}{T} \right) }{ \sum_{i=1}^{n} \left( \frac{v_i}{V} \cdot \frac{t_i}{T} \right) } \]

Variables

- \( N \): Total rewards to be distributed. (Framework on how to decide this will be on a separate post)

- \( V \): Total number of voting events.

- \( v_i \): Number of voting events participated in by delegate \( i \).

- \( T \): Total tokens held by all participating delegates.

- \( t_i \): Tokens held by delegate \( i \).

6.3 Grant Proposal Requests (Remaining Funds) 

The remaining funds in the Treasury wallet (after accounting for incentives for veNEAR holders and Delegates) will be granted to proposals accepted by the community. Any grant spending in addition to veNEAR and delegate rewards needs to be rationalized against the annual token inflation received by the treasury, currently estimated at 5M NEAR per year from 0.5% inflation.

7. Sequencing and Next Steps

1. The House of Stake proposal will be posted and discussed with the community via the forums. At least 14 days of feedback time will be allotted for sufficient community discussion and feedback. 
2. Should the proposal get approved, the Screening Committee will be formed.
3. A Call for Delegates will be posted. Interested individuals or teams can apply using a template proposed by Gauntlet.
4. Endorsed Delegates will be selected by the Screening Committee.
5. Endorsed Delegates will be announced.
6. The next Steps on the front end for the on-chain voting system and NEAR to veNEAR conversion will be proposed.
7. Once the above procedure is agreed upon, Smart Contract Development will start ASAP.

8. Conclusion

This proposal presents a comprehensive framework for transitioning NEAR to a stake-weighted governance model by implementing the House of Stake. The proposed system emphasizes transparency, accountability, and efficiency, ensuring that NEAR holders can actively participate in governance while promoting sustainable ecosystem growth.

Key elements of the proposal include the introduction of veNEAR governance tokens, an on-chain voting mechanism, and a clearly defined structure for the Screening Committee and Security Council. By leveraging the 0.5% annual inflation, we aim to fund governance initiatives and incentivize meaningful participation, driving the NEAR Ecosystem toward a decentralized and robust future.

The transition to the House of Stake addresses current governance challenges by replacing one-person-one-vote with stake-weighted voting rights, enhancing the alignment of incentives, and fostering greater community engagement. This proposal lays out the next steps for implementation, including the formation of the Screening Committee, the Call for Delegates, and the initiation of smart contract development.

By adopting this proposal, NEAR will be better positioned to achieve effective, equitable, and sustainable governance, ensuring the long-term health and prosperity of the ecosystem. We encourage the community to support this transition and actively participate in shaping the future of NEAR governance.

- Authored by the Gauntlet Applied Research Team in collaboration with the NEAR Community

We are grateful to Illia Polosukhin, co-founder of NEAR, who initially inspired the House of Stake approach, Chris Donovan, COO of Near Foundation, who provided early feedback on this vision, Evgeny Kuzyakov of FASTNEAR, who was instrumental in our technical approach, and various other contributors.

Updated: August 7, 2024