DXD Buyback update and next steps (July 2022)

Background

The DXD Buyback Program has been in operation for more than 15 months and is approaching an important milestone. Currently, there is 109 WETH in the GP relayer to carry out buybacks as outlined through the Buyback Extension Proposal #7. That proposal also clarified accounting practices between DXD purchased from the general treasury and DXD purchased from the buyback reserve.

The 109 WETH in the GP Relayer will deplete in ~15 days depending on pace of orders & price of ETH. Once that depletes, there will be 107 ETH left in buyback reserve to purchase DXD under previous conditions (assuming it’s extended). After that, the previous proposal committed to continuing “at up to 70% of NAV, so long as this calculation accounts for runway and future funding for product development.”

The buyback program was intended to communicate a commitment to DXD from DXdao governance. Originally, some thought that just putting a couple orders in would convey this message, and then investors would bid DXD to NAV value. Instead, DXdao has purchased 14,000 DXD; REP holders have clearly signaled their commitment, even as the development for Gov 2.0 continues.

DXD market cap and treasury value

Currently, DXD is trading at $542 on Swapr. Accounting for the buybacks, which contract circulating supply, and DXD issuance to contributors or Swapr LPs, which expand circulating supply, DXD has an estimated circulating supply of 38,517 DXD, which gives DXD a circulating market cap of $20.9m. The current value of ETH, staked ETH, stablecoins & Swapr LPs is $32.8m. So, colloquially, DXD is 64% of NAV.

To note: the market has moved considerably over the two months, since the last Buyback Extension was submitted in May, ETH and BTC are down ~40% and projects have begun bracing for “crypto winter”. DXD, meanwhile, outperformed both ETH and BTC and DXdao is well prepared for the bear market with its diversified treasury.

While a long-term value accrual model for DXD is high priority, we should be mindful of competing priorities. Considering where the DXD token is compared with competing projects and with the increasing price of DXD in ETH terms, it is no longer an obvious choice. The Buyback Program also centralizes DXD to an extent. More in the coming days on long-term value accrual.

Three suggestions to move forward:

  • Extend for the last 107 ETH to be purchased from the Buyback Reserve. This could come from mainnet, or it could come from WETH on Gnosis chain.
  • Burn the DXD acquired from the Buyback Reserve (when finished, should be around 11,500 DXD)
  • Provide $1m of DXD/ETH liquidity on mainnet, plus raise the LP fee to 0.4%. Now that DXD/ETH price has recovered, providing liquidity is less risky. It could also allow DXdao to earn fees, while executing the buyback now comes with a ~3% fee for slippage. This could stabilize the market until a suitable mechanism is put in place, such as the 70% NAV from the General treasury as mentioned in the previous extension.

These would be three separate proposals and the DXD burn could only be done after the Buyback Reserve was depleted (to know the amount to burn).

Thoughts? Maybe something to chew on while in Paris?

5 Likes

Providing liquidity is my favorite out of the three. Not only it helps DXD/ETH liquidity and collects fees for DxDao, it helps deepen Swapr volume as well.

2 Likes

This seems sensible and I’m in support. I think including unissued DXD in the outstanding DXD figure is a little contentious; it’s vested (and a long vest at that) for a reason, and other projects don’t include vested contributor supply as circulating. But on the other hand, it’s expensed in the month that it’s earned I guess. Maybe a 50% weighting is more appropriate, which brings us to around 60% of NAV, so a little further off the 70% benchmark.

I think the biggest point I’d make, though, would be on stabilizing the market while a suitable mechanism is put in place. I agree on adding liquidity, but more pressing would be laying out:

  • A timeline/some public facing info on the working group that will solidify this longer term solution, well in advance of taking any action to stop the buybacks, to give ample confidence that they don’t need to frontrun a retrace in DXD/ETH.
  • A price trigger that would restart the buybacks in the meantime without another proposal, so as to not cause a panic sell-off once liquidity is added (60% of NAV?) - this is very important IMO, otherwise we may well just end up taking steps back in the pursuit to trade above NAV (valuing DXdao’s products & innovation positively). Sure, it would mean cheaper DXD for the DAO, but as mentioned above, even more centralizing, and may cause longer term damage to market confidence in the DXD token if that scenario were to play out.

Moreover, even buying at 70% of NAV (our ‘hardline’ stop) is a near 50% return on capital, so while I understand and agree with the caution wrt competing priorities, I don’t think we should understate the risks of undoing a lot of the energy, time, and capital, that’s gone into giving market participants confidence in DXD’s value accrual.

TL;DR: I think we’re in a unique position here, and while it’s extremely positive that we’ve outperformed much of the market during the downturn, I think the key to managing this transition period is extremely confident signalling, high levels of comms well in advance of any action, etc.

7 Likes

Quick Notes

First of all agree completely with the need for a solid communication plan.

Secondly, regarding liquidity, it’s a balancing act, with the pros of providing liquidity being that people can move in and out of the asset more readily, which is important for attracting new buyers. And with the cons being that providing liquidity makes the price stickier and more buying power is required to move price up to NAV and beyond.

While it’s all vesting DXD, and agree with Connor that vesting DXD should not be considered part of circulating supply until it’s vested, it would be useful to account for the DXD allocated for REP holders as part of the Governance 2.0 construct.

Buyback Framing

While I understand the thinking around buying back DXD when circulating market cap is at some percentage of NAV, I think this is the wrong framing. This basically enables the DXD market to draw down the DXdao treasury. I believe we should consider priorities for the treasury and frame the buyback around that.

DXdao is an organization which builds and owns DeFi products, which should create returns for DXD holders. Priorities for DXdao Treasury:

  1. Secure runway to support building (and generate returns for DXD holders).

  2. Provide direct returns to DXD holders.

It is important for the market to have confidence in DXdao’s ability and plans to build, and also important for the market to have confidence that DXdao governance will responsibly leverage all gains of the treasury for DXD holders. We need a clearly communicated plan around runway for building. And also a clearly communicated plan how the treasury performance will be conveyed to DXD holders.

Regarding the failure of the buyback program to bring DXD market price even close to NAV, I think the community should be asking why the market is valuing DXD this way. The fact that circulating marketcap is at 60% of NAV means that the market expects DXdao to generate negative value with its product efforts, It’s like saying the suite of DXdao products and its organization are valued at negative 12 million. Why is this, and what can be done to fix it? Via the buyback DXdao has demonstrated that the treasury is being responsibly handled with the benefit of DXD in mind. And thus we can be more confident the market does indeed value DXdao products negatively, and once we solidify plans and comms around 1 and 2 above, the focus should be on improving DXdao’s products and operations and communicating the progress. I have initiated a separate thread concerning the product plans as I think it makes most sense for this thread to remain focused on DXD specifically.

2 Likes

This is a great confidence vote, well deserved.

This will make it easier for more traders to enter the market.

This is so true. Unfortunately, the community has a strong focus on building, and more widespread communication regarding development around tokens has not been highlighted not to be mistaken for investment advice, though there are ways to go about it decently. It would also be great to see more traders enlighten their fellows on social media.

DXdao’s open source products have served as public goods and benefited the ecosystem for years, it deserves more attention. There is potential for some good revenue streams within the current stack, with a few further developments. The DAO will certainly benefit from clearly presenting and actively communicating those.

2 Likes