Proposal To Reduce Cardano Treasury Tax Floated, How Will ADA Prices React?

There is a proposal to reduce the Cardano treasury tax from the current 20% to the initial 5%. Taking to X, a user @SmaugPool, who claims to be a builder and developer on Cardano, said. However, the proposal must first be passed through the community for voting, the effective treasury tax currently stands at nearly 33%.

Accordingly, based on the developer’s estimation, every month, approximately 30 million ADA is added to the treasury, pushing the total to around 1.39 billion as of November 7. 

Proposal To Reduce The Cardano Treasury Rate Floated

The Cardano treasury is a source of funding for the development and maintenance of the broader ecosystem. Additionally, funds accrued can support community-led projects via initiatives like Project Catalyst. The Cardano Foundation, a non-profit organization, manages the treasury.

The Protocol Change Proposal (PCP) to drop the treasury rate by 25% to 5% was laid out by Earn Coin Pool, a stake pool operator (SPO) on Cardano, in late October. Usually, the PCP can be floated to change one of the many parameters underpinning the Cardano network, including the treasury rate. Even so, since the blockchain is public, the PCP must be approved before implementation.

The PCP aims to change the treasury tax rate to 5% or lower the rate. At the same time, the proposal seeks to understand factors used to determine the “tau” parameter and the frequency at which it can be changed. 

This proposal might encourage more SPOs to deploy. Cardano is a proof-of-stake blockchain that depends on SPOs to verify and secure the network. 

More SPOs Expected, But Will ADA Prices Rally?

These entities run specialized software that verifies transactions and adds them to the longest blockchain. They are rewarded for their work with ADA either through the fixed fee set by the pool at 340 ADA or an additional variable fee, which is a percentage of the block rewards that the pool earns. 

There are over 3,100 SPOs who can be randomly assigned to validate a block of transactions and receive block rewards. Notably, in Cardano, anyone can become an SPO since there is no minimum stake requirement.

Presently, the Cardano treasury tax is at 20%, meaning that 20% of all transaction fees are deposited into the treasury. The remainder, 80%, is distributed to SPOs who validated transactions in a given epoch. 

So far, in Epoch 446, there are over 1.39 billion ADA in the Cardano treasury, which continues to rise as the network processes more transactions. From Epoch 443 to 431, the treasury added 5 million ADA every epoch.

ADA is firm when writing, trading around July 2023 highs but below $0.40. Even though the uptrend remains, only time will tell if ADA’s demand will increase if the community votes to reduce the treasury rate, encouraging more users to transact on-chain.

Feature image from Canva, chart from TradingView