I’ve been wanting to formalise a discussion on a few topics related to the buyback for a while, but haven’t got round to writing out a DAOtalk post, so I’m glad I’ve found the time to do so!
I want to start a discussion surrounding the future of the DXD buyback, given we are approaching the 2,500 ETH bonding curve balance in buybacks, without coming to any real consensus surrounding buybacks beyond this. I believe this to be an important discussion to have, given it looks extremely unlikely that we will reach the goal of market capitalization >= treasury value before the remainder of the ETH is spent, given the current limit orders placed across 1inch and Mesa on various chains.
I will attempt to lay out a summarized history of the buyback program, with the key questions I believe we need to answer.
With around 1,600 ETH so far spent on acquiring DXD under the DXD buyback program, we are getting closer to approaching the 2,500 ETH referenced in the majority of the buyback discussions. This 2,500 ETH represents the amount of Ether that is currently in the DXD token contract (the buyback reserve) on Ethereum.
The original buyback proposal from @Powers made no reference to using funds from the buyback reserve, only that DXdao would be buying back DXD due to the discrepancy between the market capitalization and the treasury.
An updated DXD token model proposal from @JohnKelleher a few days later then made reference to extending the buyback program to 2,500 ETH in $1m chunks, but using the general treasury’s ETH to make purchases until the DXD token contract was upgraded, when the general treasury would then be reimbursed.
We have since rebought around 9,750 DXD (around 20% of the circulating supply) at an average price of 0.16282 ETH per DXD.
Meanwhile, DXD is now trading at 0.185 ETH/DXD, or $556 (a market capitalization of $22,236,000), while the treasury value (excluding DXD, SWPR, DMG, and PNK) is sitting at $60,038,000 currently. In other words, DXD is still trading at just 37% of book value.
Note: I’m not highlighting this point to be negative at all, I think the buyback program has improved drastically in its execution over the weeks and months, and I think buying back such a high percentage of the DXD supply is much better than large spikes up to NAV that are sold into and essentially waste our treasury. I do, however, think it’s important to highlight just how far we are from book value to stress that it looks like we won’t reach this target within the remaining 900 ETH earmarked, and that these discussions are important to have now.
Issues to clarify
Who owns the bought back DXD?
I believe we need to clarify definitively whether the bought back DXD has been using the buyback reserve, or the DAO’s general treasury, or some mix of both.
If we are to say that the 2,500 Ether from the buyback reserve has been the source of funds (to be reimbursed later), then should the acquired DXD be burned, for the exclusive benefit of DXD holders?
To me, this seems logical given that the original DAT contract looks like it burns DXD sold into the bonding curve, and this has the greatest economic benefit for DXD holders by permanently reducing the maximum supply of DXD. There has been some pushback to this idea in some of the Discord chats, mentioning the possibility of LPing with bought-back DXD among other possible uses, but given the intention of the original DAT contract, to me this seems a more appropriate use for DXD bought back by the general treasury rather than for DXD bought back by the funds from the buyback reserve (hence my desire to have these things clarified and separated ASAP, not leaving it to ‘it’s just accounting that we can figure out later’).
What happens when the 2,500 ETH is exhausted?
Unfortunately, it looks at this point that the 2,500 ETH buyback reserve will be exhausted before we reach a state of market capitalization >= treasury value. I think many of us, myself included, believed 2,500 ETH would be sufficient to get us at least fairly close to this goal, and therefore there wasn’t much discussion surrounding what contingencies should be put in place if it wasn’t enough. Where do we go from here?
The ‘new’ DXD token model seems to only go as far as to say that beyond the 2,500 ETH buyback reserve, revenues from DXdao products would be used to add to the buyback program.
The fee that accrues to the product tokens retained by DXdao for the benefit of DXD will be used towards the periodic DXD buyback described in the previous section.
A quick glance over the Swapr Fee Receivers on Gnosis Chain, Arbitrum, and Ethereum, indicates that around $10,000 of fees have been generated thus far. I’m not sure if this is the extent of ALL DXdao revenues since inception, but I think it’s safe to say that it’s insignificant compared to the capital required to get DXD back to its book value (and beyond!).
My own personal thoughts
I think it makes sense to burn the DXD bought back by the first 2,500 ETH of the buyback program, to then continue the buyback program with general treasury funds, but to leave that DXD in the general treasury for LPing, future fundraising, and other uses deemed appropriate by the DAO. I also think that these DXD should only be allowed to be used by the DAO when DXD is trading above net asset value.
I have huge respect for the ethos of DXdao, its contributors, and their persistence in sticking to a noble set of principles in the face of, for want of better words, a clown market that rewards the opposite of these qualities. However, if the $10,000 of revenues since inception stated above is correct, for an organization that has run through multiple $millions in contributor payments, and runs through $320k+ per month, isn’t good enough for the way DXD as a token currently functions. I don’t think there can be much argument there, I expect that a majority of investors would hold this view of any organization with the same figures, it’s not a ‘crypto investors demand too much too soon’ situation. I therefore think DXdao’s treasury as an investment vehicle should also contribute towards DXD token value as a core part of the DXD token model, in the same way it has been proposed that revenues will. This is what the buyback program is doing at the moment (so we’re already doing it!), but the nature of the program, which requires periodic $1m extensions, makes it seem like a temporary measure with an uncertain future beyond the 2,500 ETH. I would like to push towards a proposal that signals commitment for buybacks to continue to occur below treasury value as a core tenet of the DXD token model.
In the event that the above point is contentious and does not reach consensus, then I think it would be fair to request that contributors’ vested DXD be paid using DXD at treasury value, rather than market value. The reason for this stance being that, if the above point is denied and DXD holders shouldn’t definitively benefit from passive increases in the DAO’s treasury value, then neither should contributors - the benefit in that case should only be based on value added to the organization above and beyond passive treasury growth.
Note: Before I get pitchforks from contributors on ‘wanting to cut their vested DXD in 1/3s’ , to clarify… I think the preferable route for all is that the DAO continues buybacks beyond the 2,500 ETH and retains them in the treasury (but burning the first 2,500 ETH worth as explained above), and contributors continue to receive vested DXD at market price rather than treasury value. However, my point is to illustrate that if not, then there would seem to be a disconnect where contributors would definitively benefit from appreciation of the DAO’s treasury in a codified way that DXD holders wouldn’t; they’d be relying on the uncertain possibility of another buyback extension.
I’m keen to hear others’ thoughts, and really looking forward to getting these points ironed out in plenty of time that there’s no pause in our goal of reaching treasury value!