As I’ve been reflecting upon the NNS in abundance as of late, my attention has been drawn to the Neuron Fund, as I’ve noticed many “design flaws” and “attack vectors” within it.
This proposal sets out with the objective & intent to signify the removal of the Neuron Fund, until solutions are thought out, discussed, proposed, and imposed, before reenacting the Fund. I am hopeful this will also inspire further conversation regarding the validity of these concerns, solutions, and the best path forward given the scenario we’ve put ourselves in.
The primary “Attack Vectors”, or, “Design Flaws”, that I see within the Neuron Fund, are as follows, in no particular order;
- Liquidity Availability
- Proportional Contribution
- Tax Evasion
- Portrayed as Investment Opportunity
- Participants Inability to make Robust Decisions
Alone, each of these projects present formidable challenges, but the conglomerate create a major vulnerability for not only the SNS projects utilizing the framework, but the NNS itself.
The remainder of this proposal aims to address how exactly these attack vectors & design flaws are perceived as such, offering an in-depth explanation for each of the listed concerns.
Front-running of Neuron Fund Selloffs
Currently, when it comes time for the Neuron Fund to sell their allocation, it is done through a proposal.
Meaning; when the Neuron Fund participants have decided they’d like to sell their positions, they have to create a proposal, to the entirety of the NNS; which undergoes a 4 day voting period, assuming it does not pass with an absolute majority (has not happened aside from proposals DFINITY votes for).
With this being said, upon the proposal being submit to the NNS - the intentions of the Neuron Fund are immediately made transparent - and invite front-running over the 4 day voting period.
Front-running occurs when someone with prior knowledge of a transaction takes advantage of that information to execute their own transactions for personal gain. In the context of the Neuron Fund, individuals can exploit the transparency of the proposal to anticipate the actions of the fund and engage in front-running during the voting period.
As such, this inherently jeopardizes the Neuron Funds profitability & security - as it includes important information that must be accurate, to ensure the correct distribution of Maturity after a selloff.
Lack of Liquidity for Neuron Fund Selloffs
A crucial step in the Neuron Fund is the sell-off of acquired Assets.
This is currently done by market-selling to a DEX upon the successful execution of the NNS Proposal that enables the Neuron Fund to sell its treasury.
Something that isn’t considered within this model however, is that this scenario requires more liquidity to be within the DEX liquidity pool, or in order books, than input to the Treasury.
If we look at examples of past Neuron Fund Contributions, it can be denoted that ~333k ICP was contributed within Openchat’s SNS sale, while ~250k ICP was contributed within Kinic’s SNS Sale.
Contrast to the vast ICP contributions from the Neuron Fund, there is no liquidity pools for either of these tokens.
Both are completely reliant on a supply & demand order-book based market maker.
$CHAT for example, has seen ~585k ICP Volume since its genesis, with only 6 of 17 weekly candles showcasing an influx of volume, rather than an outflow.
On the other hand, $KINIC has seen roughly ~3K ICP volume since Genesis, with both weekly candles showcasing an outflow of volume.
Alternatively, if we look at Liquidity Pool based DEXs within the network, it can be noted that there is a grand total of ~300k USD in liquidity.
With this being said, when the Neuron Fund does in fact go to sell its treasury, it will decimate liquidity through sheer slippage - as there is simply not enough liquidity to acquire such a position size in the manner the Neuron Fund has been designed. It may be stated that this isn’t a concern now, however, I’d disagree, as proactive measure needs to be taken before we put ourselves in an irreversible scenario.
This again, results in direct unprofitability to participants, and opens vulnerabilities within the SNS DAO being sold off, as a 51% attack on voting power become much more viable within this scenario, due to forced price action.
Proportional Contributions by the Neuron Fund
Currently, when the Neuron Fund Contributes to a sale, it allocates the entirety of the maximum allocation contribution to the sale the moment it’s generated.
This is flawed due to the fact that SNS Sales have a minimum, and maximum threshold - meaning the maximum threshold is assuming the absolute best case scenario.
As the Neuron Fund contributes in respect to the maximum allocation, rather than the minimum contribution, this creates a scenario in which, a proposal may not pass due to community contribution - but solely for the fact that the Neuron Fund contributed its maximum allocation, rather than its minimum.
This was showcased within Kinic’s decentralization sale, in which the Neuron Fund contributed 50% (~250k ICP) of the minimum contribution of 500k ICP, under the assumption the that the sale would reach its maximum contribution - to then only collect ~510k ICP total.
Meaning, if the Neuron Fund had contributed proportionately to the sale in respect to the minimum allocation, Kinic would have only only raised ~380k ICP, leaving them short ~120k ICP, in turn resulting in the failure to earn approval of an SNS DAO generation.
This again opens up vulnerabilities to Neuron Fund participants, and the general participants of the SNS Sale itself - as the minimum contribution threshold represents the final barrier & vote of confidence to successfully generate an SNS Sale.
The Evasion of Taxable Events
While it may not have been intended, this mechanism directly evades taxable events.
This is due to the fact that the Neuron Fund can only draw from liquid Maturity, that could be spawned, but instead is utilized under the guise of “Maturity” - which is conveniently not tracked within either Blockchain Explorer (ICScan or IC Dashboard), or the NNS itself.
The lack of transparency presents two issues - being the inability gauge how much maturity was used in the sale, and how much is received from off-loading the position. Which in turn leaves all maturity to fall under the umbrella of a singular taxable event, being the spawning of staking rewards.
Utilizing the USA as the example jurisdiction (however, many jurisdictions apply similar laws), given the abundance of open court cases against DFINITY within the region, the following taxable events are directly evaded;
- Spawning of ICP Rewards
- Conversion of $ICP to Token
- Spawning of rewards from SNS Tokens
- Conversion from Token to ICP
I’d also be willing to make the arguement that Maturity Modulation only exists to avoid Switzerlands “Wealth Tax”, but that is another topic.
The Portrayal of an Investment Opportunity
As of present, not only the SNS, but the Neuron Fund are presented as investment opportunities, within DFINITY-published documentation.
Given the SEC has been pursuing DFINITY & ICP regarding unregistered securities, promising any form of profit or investment on behalf of the work of others, should obviously be a red flag.
The screenshots below represent the state of documentation, of which can also be found in “Resources”.
Participants Inability to make Robust Decisions
Given Neuron Fund Proposals are voted on by the entirety of the NNS, rather than specifically the neurons who have contributed to the Neuron Fund - it creates a gatekeeping aspect, in which the entirety of the NNS gets to decide when an acceptable time for Neuron Fund participants get to offload there position, or participate in a sale.
This is inherently flawed, as the responsibility of the entirety of the treasury, is then entrusted within the hands of entities who, for lack of better words, may have “no skin in the game” in regards to the Fund itself.
In conclusion, to be quite frank, I think the best route here is simply removing the Neuron Fund, whether it is temporary or indefinitely, until valid solutions for all proposed consequences are imposed & enacted, but I’d love some feedback & other opinions.
Written by accumulating.icp