DXD Buyback Program Adjustments and Clarification

[Powers]

Tldr: this post is meant to center discussion and reach consensus on issues that have discussed frequently on the calls and in the Discord, as well as a previous post on the future of the DXD buyback program.

The DXD Buyback Program was passed by REP holders almost a year ago. Since then, almost 13,000 DXD has been purchased. DXD has come a long way! But there are a lot of questions that need to be answered. With the current Buyback Extension set to expire in 3-4 weeks, there is an opportunity to find consensus on what can be answered now and also a plan on how to answer the longer-term questions.

In my view, there are five issues:

1. When does the buyback reserve deplete? What happens to the DXD that’s been purchased?
2. After the buyback reserve is depleted, what support should the general treasury give to DXD?
3. DXdao-supplied liquidity
4. Updated calculation for NAV
5. Long-term reason to hold DXD

In my view, #1 & #2 can be answered in the next couple of weeks (and maybe 3/4), but #5 would require a more focused effort, maybe something similar to the Governance 2.0 Working Group.

1. Buyback Reserve & Purchased DXD

Borrowing from my a reference to an early discussion on the DXD buyback in reply to Connor’s post:

@Powers

One of the original motivations for the first DXD buyback program signal proposal was to seed a DXD/ETH liquidity pool on Swapr:

the solution seems clear : given the appreciation of ETH in the treasury and DXD’s current low market price, DXdao should purchase DXD on the open market using ETH from the treasury and then use this DXD to seed a Swapr liquidity pool.

This was important to coming up with the initial size of the program.

I think it’s clear that the first $1m in purchases were from the general treasury, whereas all subsequent purchases were from the Buyback Reserve as all extension proposals included text referencing the buyback reserve.

So with this interpretation, ~ 1700 ETH has been used to purchase DXD from the buyback reserve, with another 250 ETH already in the GP Relayer on Gnosis Chain. So even after those funds are depleted, there would still be ~550 ETH from the buyback reserve that could purchase DXD along the same conditions as all of the Buyback Extensions. Depending on the price of ETH, this could be another $2m in DXD purchases.

In terms of what to do with the DXD, I recommend that the DXD purchased with funds from the Buyback Reserve should be burned (~9,400 DXD) and the DXD purchased with funds from the general treasury (3,500 DXD) should remain in the general treasury.

Thoughts/objections?

2. Support from the general treasury

After the buyback reserve is depleted, governance would presumably need a new Buyback Program authorization, or something that lays out the conditions for DXD purchases through the general treasury. DXD is still an undervalued asset, so in my opinion, it still makes strategic sense for DXdao to purchase DXD on the open market, but the argument weakens as DXD approaches NAV.

If DXdao committed to buying back DXD as long as its below book value, this could drain a lot of ETH from the treasury, especially as investors that bought below NAV look to realize their gains. In general, guaranteeing a 1:1 redemption for the treasury is risk and capital inefficient, opening up the peg to constant arbitrage.

Long-term, there could be a mechanism where you could get instant redemption at a discount, but one could stake DXD for a certain amount of time to be able to redeem at book value in the future.

Until a more robust system can be implemented, I recommend authorizing DXD purchases from the general treasury as long as DXD is below ~70% of the treasury’s NAV.

3. DXdao-supplied liquidity, 4. Updated Calculation for NAV, 5. Long-term reason to hold DXD

These are important issues, but just writing them out makes me realize that there are a lot of moving parts to these that likely require more attention/focus. There have been discussions before about DXdao LPing on Swapr for DXD/ETH and that argument gets strong the closer we approach NAV. We may be able to find some consensus on this in the coming weeks.

An updated calculation for NAV and an autonomous system that creates incentives for DXD to be held/staked are much taller tasks. Should SWPR be included in NAV calculations? And if so, at what price? And what about future tokens received from DXventures investments?

And then there needs to be a way to automate and scale this system with smart contracts, so it’s not such a drain on governance. Perhaps each token in the treasury has a “NAV factor” of 1-100% for how much it should contribute to calculating NAV, which is based on its market liquidity and determined by governance. And maybe, the longer you stake your DXD the closer to NAV you can redeem it at (70% immediately, 80% if you stake for 3 months….90% for 6 months, etc).

Anyway, just some ideas that have been floated around that need a lot more thinking.

Takeways
To conclude, I think it’s important that we find consensus on #1 & #2 over the coming weeks and pass an extension that features the clarifications, and then we should create a dedicated working group to research and find solutions for #3-#5.

The other exciting thing is if we find consensus on #1, there might be some burn DXD proposals, which would be the first time DXdao has interacted with the bonding curve since it was “shut down”

[hughesconnor]

fully onboard with the most immediate points on this proposal (1&2). I think the extension proposals have eluded to how the first $1M became part of the buyback reserve initiative retrospectively (didn’t differentiate and used wording such as ‘X has been spent from the buyback reserve’, or to that effect), so the other middle-ground option might be to split out $1M at average price paid across all DXD bought back, rather than the general treasury ‘having’ by far the cheapest of the DXD bought, but not something I’m going to fight tooth and nail over, I’m not sure how much difference it really makes as the general treasury won’t be selling it anyway.

Agree on burning whatever amount is allocated to the buyback reserve’s purchases.

70% is a good, conservative starting point, & can always be adjusted later on - I doubt we’ll reach 70% in the very short term, so the working group will likely have some time to think about this number & play around with different mechanisms that you eluded to like staking for a higher %age.

Also agree with a ‘NAV factor’ approach, although unsure at this stage what those numbers should be for each asset. Stables, BTC, ETH, and all LP pairs that consist of those assets should all be 100% IMO, and then probably lower for others. But as you say, these points that fall under 3,4,5 are longer term questions, and can be discussed and worked on over time.

[sky]

I generally support the recommendations of both @Powers and @hughesconnor

I will re-iterate my view that an implementation of Governance 2.0 is critical to this situation. Without it implemented (and with only the expectation of it) I don’t feel connecting DXD price to treasury NAV is a fair connection, largely because DXD does not have claim on the treasury.

With Governance 2.0 implemented, I think 3,4 and 5 become easier to solve.

@Powers

The other exciting thing is if we find consensus on #1, there might be some burn DXD proposals, which would be the first time DXdao has interacted with the bonding curve since it was “shut down”

Would burning DXD involve interacting with the bonding curve, or would burning DXD and separately upgrading DXD token while capturing the reserve be separate actions?

[spreek]

1. I think burning makes sense, considering that the treasury already holds so much DXD. I think having an FDV that reflects a total supply that has a realistic chance of becoming circulating is important for people initially looking into the coin. To me it is not nearly as pressing as #2, and in an certain sense is just a cosmetic change, but I would support it.

2. Continuing the buyback in some form makes sense, I agree that it may not make sense at some sizeable fraction of NAV (depending on how much ETH is remaining). 70% doesn’t seem unreasonable, It could probably go a bit higher without really jeopardizing runway. But I think the priority now should be ensuring continuity of the buyback program and we could always choose to buyback at higher prices in the future if it makes sense.

3. I think DAO supplied liquidity makes sense once we are near NAV (even 70-80% I would be ok with it). One barrier to new investors seems to be the perception that DXD is illiquid and that they wont be able to enter or exit a position without incurring huge slippage. Given that DXD currently seems to not be highly volatile in its ETH pair, it seems like it would also be reasonably profitable (or at least, not heavily loss inducing) to LP.

4. I tend to think that only highly liquid tokens that we are willing/able to sell should be included (for purposes of buyback). What you wouldn’t want obviously is for the NAV to get artificially inflated and lead to most of the liquid tokens being spent on buybacks at a high number, while the treasury is left with only illiquid, possibly overvalued tokens. What may make sense is to have one liquid NAV used for buyback purposes and one NAV that tries to back out fair market value of all holdings for investor reference.

[0xSpicySoup]

Also fully in support of points #1 and #2, with the same caveat @hughesconnor made, that the first $1m was the most profitable of the buybacks and wasn’t 100% clear at the time which was treasury and which was reserve (hence why we’re still having to settle it now). Averaging out seems fair.Even averaging out against the the first few buybacks only, if not the full amount bought back so far.

I’d be in favour of a staking mechanism longer term, provided there’s a discount and we’re not opening up the treasury to 1:1 redemptions. In the meantime buybacks to below a stated % of NAV make sense. 70% is reasonable in the immediate term. I would think 75% or 80% are reasonably safe too. Maybe @Powers you can share how 70% was landed on?

No issue with NAV factor for some assets in the treasury. ETH, staked ETH (much more of this please and soon!), and stables at full value. Big discount for DxDao products both due to illiquidity and since we clearly don’t want to be divesting from them. ENS with a small discount since though it’s very liquid we’ve been given a stake in order to get involved in governance, so not looking to exit any time soon. And can we dump DMM soon? Not happy holding it, but there’s some value to be earned selling it.

On #5, to some degree the long term value proposition should be better established as Gov 2.0 is launched, right? The sooner the better. Great to see we have @CarlB joining Ross to help out on that front and with a bit of luck it might bring Gov 2.0 launch forward a bit.

[ross]

On #5 absolutely, Gov 2.0 is core to a lot of this discussion. The DXgov squad has the resources, so far we are on target for the first half of this year’s roadmap so things are looking good.