Catalyst Expense Review

Background

Smart Contract Audit Tokenwas funded in Project Catalyst’s Fund 6 for the category “Improve and Grow Auditability”. The purpose of this category is to make the auditing process of funded proposals efficient, distributed, and transparent. We created our proposed audit strategy that addressed the biggest risk we perceive, how we plan to mitigate that risk, and what changes we would need to implement in Catalyst to execute this. There are several risks related to Project Catalyst funding that require audit, and there are several teams that are focusing on each of those risks. For Smart Contract Audit Token, we chose to focus on financial risk, (e.g. proposers accepting Catalyst funds and pocketing the money or spending it on personal items instead of business expenses).

Initial Plan

In our opinion, we can eliminate practically all potential financial fraud in Project Catalyst through periodic expense monitoring. This would mean periodically collecting the expense support from each team, physically reviewing it to ensure that the money spent was on valid business expenses, and ensuring that it reconciles to the activity in the teams spending wallet (i.e. all outflows of ADA should have corresponding receipts an explanations on what the money was spent on. 

We felt that this made sense for several reasons. First, teams who never intended to build something will not want to waste money on business expenses, they would want to just keep the money. So if we go through and verify that money is being spent on server space, employees, web development, or other things for their business, that is good evidence that they are not simply pocketing the money. We would also be able to differentiate and identify if teams are spending money on personal expenses instead of business expenses that will advance their product or service. Finally, it would allow us to identify and expose if teams are simply sending ADA to a personal wallet instead of building their product or service. As Catalyst funding is paid monthly, if we were able to identify teams spending money on personal expenses, hoarding ADA in a personal wallet, or not incurring expenses at all, we can recommend that funding be halted to those teams.

To do this we wanted to implement some changes into Catalyst that required all funded teams to submit their expense support quarterly and we would audit it. This is not something that we would be able to implement on our own without the authority of Catalyst. As it stands, we cannot compel anyone to provide us with their expense data and unless something like this is applicable to all teams it is not very impactful. The main things we would be checking is to determine:

1: Expense support appears legitimate.

2: Expenses are in line with budget from Catalyst proposal.

3: Expenses are in line with timeline from Catalyst proposal.

We have been informed by Catalyst that this is not something they would like to implement and make mandatory for all teams. We understand their position on it and do not hold any negative opinions about them for it. At the end of the day they can choose to do whatever they feel is best for the organization and I feel that they are doing this. But we still were funded in Fund 6 to improve audibility so are now adjusting the plan to work with the constraints we have.

New Plan

We have built CatalystAudit.com as a place where people can go for information on Catalyst and share their thoughts or concerns. We would also like to use it as a place where funded projects can self report their expenses to the community. They can simply submit and display them for the community to review, or if they like we can audit them and review the support they provide and provide an opinion of its legitimacy. We feel that there are many projects out there that would like to be transparent with how they are spending their catalyst funds and by sharing this data it gives the community faith to continue supporting them and voting to fund their proposals. This website provides them with a vehicle to do this.  

Risks With New Plan

As mentioned, we initially intended that all teams would be subjected to expense review. Now that we are only going to do it for teams that choose to do it willingly, the chances of it weeding out any bad actors are small. Any team that is misappropriating Catalyst funds would likely not submit their expenses and support for review if they do not have to. So while this approach will not provide us with any assurance that bad actors are being discovered, it is still worthwhile. Not in reducing misappropriation but in highlighting teams that are transparent, spending community funds responsibly, and building trust within the community.

Conclusion

We believe that the vast majority of teams who are awarded Catalyst funding are doing it with the right intentions, and will use it to build excellent products and services that bring true value and utility to the Cardano network. But when awarding millions of dollars in funding, this always creates a risk that teams will submit proposals as a way to earn some quick cash and never intend to actually build something. By providing a vehicle for teams to share their expense support and have it reviewed if they choose it demonstrates that the money is going to where it will create value for the community. Over time it also normalizes the practice of teams being transparent with their funding so that hopefully the majority of teams will choose to do it.