JIP-7: Node Consensus Network (NCN) Grants Program

[0xNallok]

Category

Treasury

Abstract

This proposal requests 2 million JTO from the Jito DAO to manage a grants program specifically aimed at incentivizing developers of Node Consensus Networks (NCNs, roughly analogous to AVSs) to utilize the forthcoming Jito (Re)staking product.

The funds will be custodied by a multi-sig Grants Committee consisting of Jito Foundation members and Jito DAO delegates. Decision markets will be used to decide whether to approve grants. The Committee holds veto power over the decision markets.

Motivation

The forthcoming Jito (Re)staking product has the potential to become a core part of the Jito Network’s offering, driving the protocol forward in terms of both TVL and fees generated. The codebase for Jito (Re)staking is public and is currently finalizing audits. Details regarding Jito (Re)staking’s functionality can be found here.

Once live, there are several constituent communities that will populate the Jito (Re)staking ecosystem, including: node operators, stakers/restakers, Vault Receipt Token issuers (VRTs being roughly analogous to LRTs), vault managers, and NCN developers.

Based on the Jito Network’s position in the liquid staking landscape and the success of initial business development outreach from the Jito Foundation, Jito (Re)staking is in prime position to capture a dominant share of all component ecosystem stakeholders, many of whom already participate in the Jito Network in some form and are eager to utilize the restaking product. This will help establish Jito (Re)staking as not just the leading restaking solution on Solana, but also across the broader crypto ecosystem.

However, NCN developers arguably serve as the engine for any staking or restaking system, and at the moment appear to be the scarcest type of participant. While other restaking projects have proven to be extremely successful in attracting gaudy total value locked (TVL) sums, perhaps a stronger measure of success for a staking/restaking system should be the amount of economic value it generates – specifically, the amount of value it manages to distribute to node operators, VRT issuers, and restakers for their services. NCNs are the participants that ultimately drive this value.

The Jito Foundation has held conversations with a number of current and potential NCN developers, including existing Solana protocols as well as forthcoming projects. Many have expressed interest in Jito (Re)staking, but may have other development priorities or competing offers from other solutions. This grants program will be essential in incentivizing developers to focus on building out their NCN systems and rewarding NCNs that drive economic value, as well as serving to create a repository of examples of open-source NCNs, which will in turn drive future development

It is difficult to model an economic system that does not yet exist, and indeed has never existed. There is as yet no fully live restaking platform that features a fully-functional AVS/NCN with staking, slashing, and rewards being paid out.

As such, this grants program proposal makes significant assumptions as to what shape the Jito (Re)staking NCN ecosystem might take, as well as assumptions regarding the economic value generated by hypothetical NCNs.

This program, leaning entirely on Futarchy-based decision making, is best thought of as a trial targeting the first 10 NCN development teams, and future proposals may expand the scope of the program. Additionally, there may have to be significant alterations made to the program in future governance proposals in order to achieve the goal of encouraging economic value flow.

Ultimately, Jito Foundation and MetaDAO views this grants program as the first push that sets the Jito (Re)staking flywheel in motion, ensuring that it becomes a hub of economic activity rather than a dead weight of unproductive TVL.

Key Terms

Jito (Re)staking:

Jito (Re)staking is a multi-asset staking protocol for Node Consensus Networks.

The protocol tokenizes staked assets as Vault Receipt Tokens for enhanced liquidity and composability.

Node consensus networks can use Jito (Re)staking to easily customize staking parameters, slashing conditions, and economic incentives to tailor their security and tokenomics.

(Re)staking:

The Jito Foundation’s lightly branded term for what is frequently referred to as “restaking” without the parentheticals. Because Jito (Re)staking can support both staked assets, such as JitoSOL, or any non-staked SPL token, Jito (Re)staking’s name emphasizes that the product can function either as a staking platform or a restaking platform.

NCN:

An acronym for Node Consensus Network, a term for a discrete economy of restakers, node operators, and delegation/vault managers that require economic security, incentives, or node operator infrastructure to reach consensus regarding the performance of a blockchain-based service.

VRT:

Deposits into Jito (Re)staking vaults are tracked with vault receipt tokens. Not all VRTs will be liquid, but many will function as either liquid staked tokens or liquid restaked tokens.

Economic activity:

The measure of yield that a NCN provides to node operators, stakers/restakers, and VRT issuers/managers.

Economic value:

The amount of fees awarded to node operators, LRT issuers, and restakers by an NCN system in dollar terms, measured at the time of transaction.

(Re)stakers:

Users willing to stake or restake their assets in a NCN system.

Node operators:

Entities that accept delegated stake from users and perform operations within a NCN in exchange for economic value.

Delegation/vault managers:

Providers of Vault Receipt Tokens (VRTs) that analyze NCN’s, node operators, and attempt to manage risk for stakers and/or restakers.

Specifications

This proposal will send 2 million JTO to a 4-of-6 multisig controlled by three Jito Foundation members and three Jito DAO delegates to manage the potential payouts related to the NCN grants program.

These grants, for up to 300,000 JTO, are designed to cover the initial costs of NCN development, incentivize NCNs that generate economic activity, and/or to incentivize existing protocols to prioritize NCN deployment.

These grants will be distributed to projects based on decision market assessments of proposals. Proposals will be evaluated primarily on the basis of estimated potential future economic value driven to the Jito (Re)staking ecosystem. Grant applicants will undergo a KYC and vetting process, and a full application, modeled after the Arbitrum STIP application, can be viewed here.

Grants will be divided into three tiers: 75,000 JTO, 150,000 JTO, and 300,000 JTO. Decision markets will determine whether grants are approved. Participants in the market will bet on whether the NCN will generate more than a benchmark amount of economic value, depending on the grant tier a project applies for.

The amount of economic value for each grant tier is detailed below:

If a project is deemed 50% or more likely to generate more than $250k, $500k, or $1m in economic value, depending on grant tier, an initial payment of ½ the total value of the grant will be approved. If not, the grant will be rejected. From there, if the market resolves in the affirmative (meaning the project has generated the economic value threshold for their grant tier), the second half of the grant will be paid out.

At a lower-level, this is how that will work:

• Prospective recipients will fill out their application and KYC with the Jito Foundation and MetaDAO. Both parties have the right to reject any applications that are deemed illegitimate, such as memecoins who don’t intend to use Jito (Re)staking for its intended purpose.
• For recipients that have gone through KYC, MetaDAO will create a market for “Would {recipient NCN} drive more than ${threshold} in economic value through Jito (Re)staking by {six months from date}?”
• Market participants will have five days to trade these conditional prediction markets. If the implied probability–the time-weighted average price of YES shares multiplied by 100%–is greater than 50%, the grant will be approved. If not, the grant will be rejected.
• If the grant is approved, {half the grant amount} JTO will be immediately transferred to the recipient NCN. The remaining JTO will be transferred once the NCN has reached the economic value threshold of the relevant grant tier. The markets will be left open for trading until they resolve.
• If the initial half grant is rejected, all trades in the prediction market will be reverted and all traders will receive their original money back.

Markets can be settled before expiration if the NCN generates {threshold} in economic value before the six months is up. Markets will be settled early – YES will pay out $0 and NO will pay out $1 – if the committee rescinds due to project abandonment or maliciously attacking the network.

An example project progressing through the grants process:

SuperSolana is a hypothetical SVM L2 that intends to use an NCN of multiple provers to ensure the correctness of its blocks. SuperSolana utilizes both JitoSOL and its native token, SUPER for economic security, and pays rewards in SUPER.

SuperSolana prepares a grant application and undergoes KYC with MetaDAO and Jito Foundation. SuperSolana applies for a Grant Tier 1, and the initial 5-day market settles >50%. After receiving a 300,000 JTO grant, SuperSolana is immediately awarded 150,000 JTO and utilizes the funds for development costs. Two months later, after deploying its NCN to mainnet with four node operators and attaining $10m in TVL/economic security, SuperSolana is live.

After five months, SuperSolana hits a major milestone: $1,000,000 in economic value generated. This concludes the market, with YES holders being paid out $1 per share and NO holders being paid out $0 per share, and SuperSolana recieves the second 150,000 JTO grant payment.

Projects which wish to receive Grants will be responsible for tracking their economic value generated via native token or other incentives, and will submit their accounting to the Grants Committee and to MetaDAO for verification prior to receiving their second award distribution and market settlement. Additionally, recipients will be responsible for disclosing to the DAO their awards in the forums.

The Grants Committee will have arbitrary and subjective discretion to decline initiating markets for projects it deems either predatory or unsustainable – for instance, an NCN that provides no service and merely inflates the circulating supply of a memecoin to stakers.

Additionally, the Jito Foundation has a number of NCNs in development internally. None of these funds will be directed to NCNs developed by any Jito entity, including the Foundation or Jito Labs.

Benefits/Risks

Benefits:

Incentives and grants will help establish Jito (Re)staking at a crucial time in the development of the restaking space. There is a possibility that Jito’s product will be the first to market with full functionality, providing an avenue for Jito to become the leading staking and restaking provider not just on Solana, but across the crypto ecosystem.

Additionally, having examples of open-source NCN code available will significantly reduce the development time for future node consensus networks. While

The benefits of using decision markets include:

• Cost-effectiveness: Jito Foundation solicited a number of quotes to determine how much it would cost to retain a research firm to run the grants committee. The numbers quoted were deemed to be relatively high. Here, MetaDAO would be fronting all liquidity, so the monetary cost to Jito DAO is 0 for the first six grants.
• Better decision-making: there is lots of evidence that suggests that markets are better at aggregating information than experts. Importantly, companies like HP, Google, and Eli Lilly have run internal prediction markets on a variety of topics including future printer sales and drug sales, and those prediction markets almost always beat the expert forecasts. (1,2,3,4)
• Decentralization: because the market is open and permissionless, decisions wouldn’t be made by a central authority. This is consistent with Jito’s long-term goal of decentralization.
• Supporting the Solana ecosystem: MetaDAO is a new and innovative project that has driven mindshare to the Solana ecosystem, and we would greatly appreciate Jito’s support. (5)

Risks:

• It is not a certainty that incentivizing NCNs will help grow economic activity on a long-term basis
• The Grants Committee will have significant discretion
• Malicious actors may evade the Committee’s oversight and develop schemes to obtain grants with no intention of creating long-term economic value
• Applicants may attempt to manipulate the markets, although doing so would create an incentive for other traders to correct the mispricing

Outcomes

The passing of this proposal will result in 2 million JTO being sent to a multisig with the purpose of being issued as grants over a period of two years. If there are unspent funds at the end of one year they will be returned to the DAO.

Considerations/Follow Up

1. As the proposer, my (Nallok’s) JTO allocation as a delegate will be excluded from the voting process.
2. MetaDAO will provide initial liquidity for up to six concurrent proposals with $15k liquidity each. The Jito Foundation will provide liquidity for proposal markets after the initial six proposals.
3. MetaDAO will not assess fees on markets, other than earning 1% LP fees as one of the liquidity providers in these markets. The liquidity is subject to IL.

I’m happy to respond to any questions or considerations in this forum.

You can contact me directly with any questions:

• Telegram @kollan_house
• Twitter @metanallok
• Discord 0xnallok
• Smoke signals viewable from 37.799407, -122.419908

[Ian]

Great to see innovative ideas like this potentially coming to fruition. I’m truly excited to see how the market-based grants for NCN developers compare, in both the short and long term, to other grant programs.

I think this market-based decision model is also a good way to keep a variety of different stakeholders engaged in the grant process, while considering the economic viability of various NCN business models and Jito (Re)Staking at large.

This proposal reasonably lays out the associated risks, and there seem to be enough checks in place to ensure that teams potentially receiving the second half of their grant won’t be “gaming the system.” While this might not play out perfectly, I believe it’s an experiment worth trying at the DAO level, as it could lead to far more efficient processes in the future. The DAO will, of course, learn in real time from how these grants play out, and adjust accordingly.

Additionally, this initiative fully aligns with my original delegate proposal of “creating a system robust enough to replace myself.” I believe this is a critical step forward not only for Jito, but hopefully for the broader crypto ecosystem when assessing the quantifiable success of DAO behavior through market-based decision-making.

The long-term future of DAO governance cannot be filled with arbitrary committees that encourage bureaucratic and rent-seeking behavior.

For these reasons, I will be voting Yes on this proposal.

Futardio

[cryptopeterb]

I think it’s a mistake to use Futarchy in this situation. The mechanism is fundamentally broken when applied to valuable tokens (like JTO) and in situations that aren’t extremely important (like the big block wars in Bitcoin). I explained this in a tweet thread with Metaprophet here: x.com

In short - in order to vote IN FAVOR of someone receiving a grant in this case, you would need to sell a “FAIL” version of your tokens (presumably JTO) and buy a “FAIL” version of a stablecoin (presumably USDC). If the measure does in fact fail, your JTO tokens are gone and you’re left with USDC. So you sold your JTO tokens because you thought the grants was a good idea and others disagreed. That sucks - I don’t want to sell my JTO tokens, but I would like to vote on potential recipients.

Perhaps more importantly though - the market mechanics will cause unnecessary sell pressure on JTO for good proposals. Here’s why:

If lots of people agree with a proposal, they sell “FAIL” version of JTO, driving down the price of “FAIL” JTO. Someone can then profit from the price dislocation between native JTO and “FAIL” JTO - i.e., they can short native JTO and buy lots of “FAIL” JTO, and if the measure fails, they profit from the difference.

That makes no sense to me - there’s no reason why we should give arbs the opportunity to profit from “FAIL” JTO being worth less than native JTO. But that’s exactly how it works, and it’s inherent in the “put” option you write when you sell “FAIL” JTO - you’re saying “I’m willing to sell my JTO if this measure fails.”

Metaprophet disagrees this is a mechanism design problem, and that this is just efficient markets at work. I disagree - when I’m being forced to write a put option on a token I like and want to continue to own, just to express a view about whether something is a good idea or bad idea, I think that’s flawed. And I think the free lunch this mechanism gives to arbs to short native JTO and buy “FAIL” JTO is not “efficient” in any way, it’s just a spillover effect of the forced put option many people must write to vote.

I will respectfully be voting against the use of futarchy here, and am very happy that I will not be forced to sell my JTO as a result of the rest of the community voting in favor of this. If this was a futarchy market, I just wouldn’t vote (for fear of being forced to sell), and that seems like a bad system design to me.

[metaproph3t]

In short - in order to vote IN FAVOR of someone receiving a grant in this case, you would need to sell a “FAIL” version of your tokens (presumably JTO) and buy a “FAIL” version of a stablecoin (presumably USDC). If the measure does in fact fail, your JTO tokens are gone and you’re left with USDC. So you sold your JTO tokens because you thought the grants was a good idea and others disagreed. That sucks - I don’t want to sell my JTO tokens, but I would like to vote on potential recipients.

This proposal is to have people trade “would {grant recipient} earn more than {threshold} in economic value?” in prediction markets. So there will be no buying or selling of JTO in them.

[cryptopeterb]

@0xNallok

This program, leaning entirely on Futarchy-based decision making, is best thought of as a trial

Hmm that’s confusing, since earlier it says “This program, leaning entirely on Futarchy-based decision making, is best thought of as a trial…”

I thought essential to that was the creation of a market with “fail JTO” and “pass JTO” tokens, in order to place bets/predictions - is it not? Would be useful then to know exactly how the proposed prediction market would work then - more like Polymarket (just buy yes/no outcome with whatever currency you like)?

[metaproph3t]

Futarchy means governance by markets. One possible objective function is token value, but there are others - in this case we’re using economic value through Jito (Re)staking.

As for how the proposed market will work, it’s all laid out in the specifications section.

[cryptopeterb]

@0xNallok

Market participants will have five days to trade these conditional prediction markets. If the implied probability–the time-weighted average price of YES shares multiplied by 100%–is greater than 50%, the grant will be approved. If not, the grant will be rejected.

This is what I don’t view as clear, even in light of your responses above - “conditional prediction markets” is not defined nor explained. How are the “conditional prediction markets” structured? I could envision a simple “Yes”/“No” “Buy”/“Sell” mechanism, like what Polymarket uses, but there’s also the “mint” tokens model I described (though maybe you wouldn’t describe that as a prediction market).

In any case, if the proposed “prediction market” is similar to those seen on Polymarket, I still don’t think that is necessarily a better system design than the one we’re already using for JIP’s. Instead of using JTO holders (which already have a strong incentive to approve good things and reject bad things) as decision makers, you outsource to whoever shows up to predict/gamble on a niche event market. There are much more interesting markets on Polymarket with 0 liquidity already, and I doubt such a niche market as this one is likely to attract much capital to it. If the answer was easy to predict, sure, it’s free money I suppose, but the reality will almost certainly be a very thin market.

[metaproph3t]

They work just like normal prediction markets, except all trades are reverted (all users receive their money back) in the case the grant isn’t given.

I agree that these markets are likely to have less volume than more contentious ones. Over the long-term, this can be addressed by additional liquidity incentives (i.e., instead of paying $x to a grant committee, you pay $x/2 to the market). In the context of this proposal, we will be spending our time reviewing these grants and trading these markets and anyone who disagrees with our asessments will be able to make money by trading against us.

[gauntlet]

After discussing JIP 7 with stakeholders and other delegates, Gauntlet voted in favor of the NCN Grants Program. While we’d prefer a smaller grant size for such innovative experiments, we understand that many stakeholders are interested in funding the MetaDAO process. We do not want to impede progress and understand the DAO’s wishes for conducting this experiment.

That said, there are some concerns regarding the accountability features, including self-reporting (regardless of market sentiment, the data will be invaluable for future programs) and, more broadly, the efficacy of the futarchy model and the incentive design, as presented in JIP 7. In particular, we are unsure of a few mechanics, including the economic dynamics for voting against grants in early phases.

The community appears excited about this experiment, and we look forward to seeing how the futarchy model performs—even if conducting such an experiment potentially requires greater capital and a longer time frame than we’d prefer.

[BlockworksResearch]

All in all, we support this experimentation (we recently wrote a Flashnote about MetaDAO for our platform), and look forward to the outcomes of this program, and are happy to leverage our platform/team to assist with any of the below.

However, given the size of the program and individual grants, we are cautiously in favor of this experimentation and would also like to contribute our general feedback from our experience with grants programs.

1. Grants programs are easily gameable. There are developers whose full time endeavor involves hacking projects to receive grants funding, after which they move onto other grants programs or hackathons (and presumably sell proceeds). We think it’s possible futarchy can defend against such recipients, however, it also possibly shifts these games toward sophisticated traders (away from sophisticated developers). Assuming liquidity in conditional markets is not sufficient, we suspect the grants committee is most responsible for filtering such parties.

That said, to increase the program’s defense against recipients that have the size and skills to trade their desired outcomes, we’ve outlined recommendations below that we think could make this kind of attack more costly.

2. We’ve found that grants are oftentimes more successful when needs and outcomes are specific. Otherwise, grants programs get flooded with applicants requesting grants to fund generic research or products and also require more administrative attention. If the foundation or DAO has specific requests for NCNs, we recommend stating them to narrow the focus for what is actually needed.

3. Most of the work for positive grants outcomes is administrative. This involves having a clear understanding for what the DAO needs and why, outlining a clear scope of specific products, tools, or research, if possible, and vetting the applicant’s ability to deliver what is outlined. This point is related to point 2, and we presume the grant’s committee will take this responsibility.

We are optimistic that futarchy can (1) mitigate attacks against sophisticated developers and also sophisticated traders (2) reduce administrative burden by enabling the market to vet applicants and their ability to deliver, and (3) possibly produce a framework that can yield positive grants outcomes or achieve KPIs–so long as markets are efficient and liquid.

Recommendations

In order to foster efficient, defensible futarchic markets, we recommend considering the following adjustments to the program, in no particular order.

1. Requiring regular progress updates from recipients, akin to quarterly reports. And if possible, this holds recipients accountable and will enable futarchic markets to adjust expectations and trade ongoing developments accordingly. A further question (next section) this raises is, will futarchic markets be traded on a continuous basis? If so, markets can approve/disprove subsequent JTO unlocks given the grantee’s progress, rather than unlock 50% at the start and end of the program.

2. Increasing the amount of trading days to 7 days. Five days seems like a short amount of time for markets to resolve proposals that entail distributing 75k-300k JTO (currently about $150k-$600k) based on six plus month revenue projections (especially if a market is started on Friday in which case we’d expect most participants won’t trade over the weekend).

3. Changing initial payment to the amount that is required as specified in the application, from 50% of the whole grant amount. We want to caution against unlocking 50% of the total amount in the first payment regardless of the application, especially given the size of grants.

4. Facilitating frequent marketing/communications. We suggest setting up a scheduled grants program call, or Twitter space, perhaps every two months. This might also involve recording podcasts about what grantees are building and regularly communicating progress when available. While we don’t want to introduce too much additional burden to grantees, based on our work with Arbitrum, the more content, the better–it keeps the community and grantees engaged and generally produces more positive outcomes.

Some remaining questions we have:

How did you arrive at the specifications of the futarchic markets? E.g. 5 days of trading, the three thresholds for deeming approval, the 6 month timeline for results, unlocking half for the initial payment, etc.

Assuming futarchic markets can trade on a continuous basis throughout the term of the grants program, an alternative approach could entail maintaining the same three tiers (75k, 150k and 300k JTO), except, for approving unlocks, only unlocking what is specified in the application and thereafter only unlocking what is requested on an ongoing basis.

Initially the market would assess the likelihood of a grantee’s ability to return $x and only unlock an amount that is specified in the application, instead of 50%. From there, the market remains open and trades on an ongoing basis. Recipients would request further JTO unlocks to fund development, and traders would assess progress updates from recipients to justify unlocking subsequent funds. That way, the market can effectively hold grant recipients accountable throughout the entirety of the program. In this scenario, if a recipient is not aligned for the entirety of the program, they will not have received 50% up front. Instead, they will have only received what the market was willing to approve throughout the program given their progress. This framework could also be utilized for incentives once NCNs are live.