DXD Buyback using ETH from the Treasury

[Powers]

Like the rest of the world and crypto, DXD has had a wild 2020.

Background

In May, DXdao launched the DXD bonding curve, which mints new DXD with ETH deposits at an increasing linear ETH/DXD price. DXD can be burned in return for ETH from the bonding curve’s buyback reserve. At the moment, it costs 1.0203 ETH to mint 1 new DXD and 1 DXD can be redeemed (or burned) for 0.0335 ETH. Of course, the secondary market price has traded in between these and sits at 0.175 ETH/DXD at the time of writing.

There has been ample discussion on the bonding curve and a signal proposal passed last month to halt the bonding curve. While the community works to implement this, it won’t change the current predicament: the $ value of ETH in the treasury has skyrocketed, but this has not been reflected in the price of DXD. The treasury is intended to fund development, but at the end of the day the treasury’s financial value should be reflected in DXdao’s liquid financial token: DXD.

Swapr’s DXD/ETH pool

Simultaneously, DXdao is launching Swapr and plans to use its treasury to seed liquidity in Swapr pools to help drive volume and revenue, which should accrue value to DXD holders (through a new bonding curve or another mechanism). The AMM market is competitive as a whole, but the emergence of aggregators and arbitrage bots means that individual pairs can be targeted as long as Swapr has the deepest liquidity for that pair.

We have discussed several strategies to attract liquidity in a host of pairs, particularly with DXdao partnerships and redirecting liquidity from Mesa IDOs, but there is one pair that DXdao can and should own: DXD/ETH.

Across Uniswap & the two Balancer pools, DXD/ETH averaged ~$250k in daily volume from 11/7 - 12/4. If this volume occurred on Swapr, it would generate $65 in on-chain revenue a day for DXdao (assuming 1/10th of 0.25% swap fee).

Still, even though 20k of the DXD premint has vested, the community has been reticent to use the premint at a price lower than the bonding curve. The reasoning being, how could DXdao market make DXD at a price 1/5th of what it recently sold DXD to investors?

To me, 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.

Currently, there is 624 DXD in the DXD/ETH Uniswap pool, 1,290 DXD in the 80/20 DXD/ETH Balancer pool, and 1,478 DXD in the 50/50 DXD/ETH Balancer pool.

To ‘win’, imo Swapr will need at least 1,000 DXD as it won’t have as much as the organic trade flow that Uniswap (yet) but it will have significantly lower fees than Balancer.

It’s not clear that all of this needs to be supplied by DXdao, but I think a DXD buyback would better align interests of DXD holders and make Swapr the home of the DXD/ETH pair.

How? And How much?

Here is where my knowledge wanes. Some extremely back-of-the-envelope calculations (checking 1inch), shows that with the current liquidity pools, 400 ETH would purchase ~1000 DXD. This would represent just over 2% of the ETH in the treasury and about 2% of the current DXD circulating supply.

A 400 ETH <> 1000 DXD purchase would be more than double the current ETH/DXD ratio, and although a buyback of this size will surely increase the price significantly, I imagine there could be a more efficient way to purchase, and there are additional complications given any buyback would need to go through the proposal process.

Luckily, @nico has built a Gnosis Protocol Relayer to address this and allow for trades from proposals to use the market price at the time of execution and define the oracle to reference. He created this sample flow:

More details in his excellent post, although I wonder if there needs to be any extra precautions considering how illiquid DXD is and that the price could easily be manipulated.

So, to me the next steps/questions are:

1. Do we want to do a buyback of DXD?
2. If so, how can we technically accomplish this?
3. How much DXD to buyback?

Given the progress we are making on the multi-call scheme, a DXD buyback seems possible in the next month?

Thoughts/comments/feedback?

Disclosure: I (Caney Fork) hold DXD.

[madmax]

Very well put @Powers.

1000 DXD seems like a great target for the Swapr pool, so as such also a good target for the buyback that seeds it. Hugely in favor of both (or the combo, rather) as discussed in other posts and summarised very well above. So that answers #1 and #3 for me.

#2 is a bit more technical, so hopefully someone smarter than me can jump in on how we might be able to achieve the best result given there is a transparent voting etc. process (and the actual act of buying). Concept could be as simple as 20x purchases on 1INCH for 50 DXD each or 50 purchases of 20 each or whatever to avoid losing too much too slippage and allow the market to sell into the buy so we can also use it to shake out unhappy DDXD holders like a functioning bond curve with a realistic buyback would have done. We can also add a cap in ETH, so we don’t buy over a certain level?

Let’s ty to keep this simple and executable. Please.

[JohnKelleher]

@madmax

#2 is a bit more technical, so hopefully someone smarter than me can jump in on how we might be able to achieve the best result given there is a transparent voting etc. process (and the actual act of buying). Concept could be as simple as 20x purchases on 1INCH for 50 DXD each or 50 purchases of 20 each or whatever to avoid losing too much too slippage and allow the market to sell into the buy so we can also use it to shake out unhappy DDXD holders like a functioning bond curve with a realistic buyback would have done. We can also add a cap in ETH, so we don’t buy over a certain level?

The multi-call installation which is just about ready is connecting DXdao to a “Gnosis Protocol Relayer” which will enable DXdao to put in limit orders on Gnosis Protocol. That’s the simple answer and how I would expect DXdao to execute on this proposal. Happy to go into more detail.

[thibauld]

I personally think that buying back DXD with ETH is a slippery slope and would set a dangerous precedent. Personally, I would be against it. The reason is that it opens the door to many different market manipulation schemes which would cast a shadow of doubt and allow detractors to spread FUD regarding the integrity of dxDAO members.

If dxDAO does decide to move forward with this proposal officially, then, the first ones to know will immediately start buying DXD as they know 400 ETH worth of value will be coming after their purchase, driving the price up. Some of you may say that DXD not being a regulated financial instrument, it’s fine to do it… but at what cost? The cost of trust and credibility.

I understand where the proposal is coming from and I know it is well intentioned but I urge you to reconsider doing anything that would de-facto manipulate the market. It won’t end well.

My 2 cents

[madmax]

I personally believe that while it is a legitimate position to take, it will also not end well if REP holders show no regard for DXD holders biggest concerns, input and feedback (as a normal shareholder at least I have voting rights). And please don’t palm it off with “we’re working on that” part.
I was on the calls with Delphi in the summer… it’s now January… we’re still working on it. Fact is to everyone else it simply seems like a cosy club with a giant stash of cash they can pay out to themselves. We even found time to build stuff to compensate us for voting… just to illustrate the vibe.

If we mean business, then what do we do? People are very very tired of the current situation. For heaven sake, the DAO is sitting on almost 30m USD now and each DXD investor would be 2-3x better off if we simply dissolved. That to me is a highly unsustainable position to be in for such a prolonged period without at least demonstrating real urgency and willingness to address it with action (see an example and example pretty close to heart on this). Potential legal action from DXD holders is certainly also a risk (and growing possibility I fear). Just read the telegraph or forums for an hour to get a reality check about what the community currently are really saying about the members and what is brewing. Don’t pander to short term price of course, but please don’t do the opposite either with vagueness like a “slippery slope”. There is a mile between those two extremes. We’re suggesting this for the benefit of the DAO (Its to seed the damn Swapr pool with…) not just as a buy back and burn. The DAO will still own this DXD and can use it again at a more favourable time to either raise funds, grow or whatever. You’re talking like we’re planning to throw the money out the window at the public.

Lose trust and credibility…? Let’s try to do a poll in Telegram about current trust and credibility?

In some ways you can say that no DXD holder would ever argue against the DAO taking a deliberate action (as represented by a REP vote) in order to directly benefit DXD holders. Everything we do is with that in mind, yeah? Why would they? And while the voting is ongoing people can speculate in the outcome and subsequent price - not a problem. It is all transparent and done according to the DAO’s protocol, voting mechanism etc. so I struggle to see the philosophical problem.

At least don’t say one route has risk but the status quo is risk free. Simply not true. The damage is being done as we speak…

[madmax]

@thibauld, maybe worth adding here that my suggestion for the specific vote would be to acquire x DXD or spend x ETH acquiring DXD with the purpose of seeding the Swapr liquidity pool on the pair and become the deepest pool on any AMM. The benefits of this move has been outlined many places but could be grouped like this;

DxDao:

• We buy DXD at way below book value
• We seed the DXD-ETH pool as an LP in order to make yield for the DAO
• This begins to make Swapr increasingly interesting for aggregators and arbitrage bots
• We prove to other projects that they can benefit from owning / being a big LP in their own launch on Swapr due to the core product benefits (lower fees, better customisation & governance etc.)

DXD holders;

• We show some action to address their concerns, the issue of excess liquidity and the potential risk of a growing demand for dissolving the DAO and thereby loosing everything we worked for. In short, do so to mitigate existential risk while we build up products and revenue.

I am honestly struggling to see how this is “opens the door to many different market manipulation schemes which would cast a shadow of doubt and allow detractors to spread FUD regarding the integrity of dxDAO members”.

My best guess is that if we roll-out governance 2 and give DXD members voting rights we’ll be discussing the exact same thing in the context of an actual proposal. Then the dilemma for REP holders is more obvious. Give DXD holders real influence and thereby risk they decide to raise proposals for buy backs or in worst case move/advocate for dissolving the DAO or keep the power and thereby break the manifesto?

[thibauld]

@madmax I agree with you in that the status quo is not ideal either but the solution (easier said than done of course) is, imho, for dxDAO to level up its ambitions.

Right now, it seems to me that the team working actively on dxDAO is incredibly under-sized. I’ll take an example: if Swapr is a priority in the strategy of revenue generation of the dxDAO then it should have a full fledge team working on it: @AugustoL is doing a great job on the technical side but I am pretty sure he would welcome some help on the design / frontend / tests . We should also have people dedicated to preparing marketing content / copy, outreach to LPs / crypto projects etc… etc…

Right now it feels like dxDAO function a bit like it was functioning when there was no money and I think this leads to investors frustration more than anything else. Investors are happy when they see things moving, if possible fast, and in a direction they approve because they see that their money is being put to good use.

Resorting to buying back ETH is (imho) bad for the reasons I exposed above but also because it’s - at best - at short term tactic whose effect will vanish as soon as the purchase is done. The result will be 400 ETH less for the dxDAO and everything else will remain the same. Obviously, it’s my personal opinion… I could be totally mistaken, would not be the first or the last time

[JohnKelleher]

@thibauld

Right now, it seems to me that the team working actively on dxDAO is incredibly under-sized. I’ll take an example: if Swapr is a priority in the strategy of revenue generation of the dxDAO then it should have a full fledge team working on it: @AugustoL is doing a great job on the technical side but I am pretty sure he would welcome some help on the design / frontend / tests . We should also have people dedicated to preparing marketing content / copy, outreach to LPs / crypto projects etc… etc…

@thibauld These comments are uninformed. Swapr in fact does have a full fledged team working on it now, albeit a pretty new one. There is a product manager / designer, two full time devs, and a few others providing support for Swapr amongst their other responsibilities. A few audits have also been commissioned. @AugustoL is actually working on a voting interface alternative to Alchemy.

DXdao has been and will continue to grow its workforce to support its product goals. Under these market conditions however the treasury has grown drastically and now represents over 12 years of runway even with some workforce growth built in. The value appreciation of the treasury should benefit DXD holders and I think buying up DXD in order to support liquidity in Swapr is a great idea. Putting the treasury to work generating yield I think is another good idea, and perhaps that yield could go to the bonding curve.

Also @thibauld, when it comes to slippery slopes, I think you might have of a conflict of interest here. The Fairmint contracts used for the bonding curve have a “buyback reserve” and therefore the DXdao deciding to buy DXD up by another means might be counter to the interests of Fairmint in the sense that DXdao is doing the “job” of the bonding curve by another means.

[thibauld]

@JohnKelleher I did not know about the team around Swapr, it makes me happy to be wrong here! So indeed, my comments on this are 100% void and I apologize for not having taken the time to investigate more before making them My intention was not to spread FUD and it seems that I did and for that I am sorry.

Regarding the potential “conflict of interest” you’re mentioning, I am a bit surprised by this strong accusation I can assure you I have none. I completely don’t care how the Fairmint contract is used, it’s open source, people are free to do whatever they want to it and use it however they want. I hadn’t even thought about it when writing my first comment. Also, this topic does not affect Fairmint in any way, especially since we’re 100% focused on the CAFE (which follows a different model).

That being said, the comparison is interesting. On the one hand, you have a permission-less smart-contract with predefined rules that everyone knows and that treats everyone at the exact same level. On the other hand, you have an exceptional financial operation involving a lot of manual process and human decisions, that will create many information asymmetries between participants. So I maintain that organizing a DXD buyback program by the dxDAO is dangerous, but that’s only my opinion, agree to disagree here.

I don’t know if there are US securities lawyers following the forum but, if not, I’d strongly recommend you ask for a lawyer’s opinion on this. I am pretty certain they would strongly recommend against organizing a DXD buyback as it could increase liability if things were to turn sour and if, like @madmax was saying, some investors were to take legal action against the dxDAO (needless to say that I hope this will never happen).

[AugustoL]

After reading everything looks like we are “missing” the goal of the discussion again, even the problem that we are trying to solve and if it is a real problem is still not very clear to me.

@Powers the problem is that we have to get our hands in DXD tokens to fund the DXD/ETH liquidity pool?

Possible solutions:

• Buy DXD from the market, using mesa relayer sending ETH to mesa and receiving DXD, clear.
• Use pre-minted tokens, we have 20k DXD tokens in DXdao treasury, so in short it would be use this for the liquidity pool.
• Buy DXD from the curve at a high price (right now 1 ETH/DXD) and leave everything in the curve. This is an interesting option, where the DXdao can drive the buy price of DXD from the curve at a higher price, making it extremely unlikely that someone will buy/mint DXD from the curve since the buy price cant go lower). We can for example buy 500 DXD for 500 ETH right now.

WE DONT NEED TO CHOOSE ONE, why spent time discussing on the best choice if we can do all of them.

So maybe lets do the three of them? We will have the multicall scheme so we can do all of them if we want, we buy 500 DXD from the curve and leave everything in the ETH buy back reserve of te curve (that belongs to DXD holders), we use 250 DXD from the pre-mint tokens and we do a 250 DXD sale on mesa.

Even so we can do it in rounds, starting with a round of 200 DXD and if all goes well we repeat it.

[Frankyr]

Hi Augustol, I’m new around here. I like the ideas you presented above. However on point #3, didn’t we agree to halt the bonding curve? This mean the DXD buying on the curve may not be done. Please CMIIW, thank you.

[kobello]

Hi all,

I just watched the latest DXdao weekly meeting, and I thought I would chime in as a DXD holder and put my support around Sky’s alternative idea for the DXD buyback: Calling on the community to provide the DXD in return for ETH. I’d like to propose that we could couple this with a small REP raise not dissimilar to the beginnings of DXdao. This would be time permitting because I don’t know if this is workable from a development time perspective.

One of the major concerns with providing DXD liquidity to Swapr (spiritually known to me as Aqua) was that it was going to be at a considerable discount to what a majority of buyers purchased their DXD holdings at. This obviously provides resistance to move back up to what I (most?) would consider being ‘fair value’. After watching the meeting today, it appears the issue of providing liquidity at a considerable discount will not be alleviated, and DXdao will pool liquidity at current market value (currently 0.16 - 0.20 ETH per DXD). Yes, I understand there is the difference of DXdao not spending treasury holdings and instead are buying off the market, but to me it doesn’t really change the crux of the situation.

So, can we make the situation any better? I think it would be novel to have another minor REP raise (or maybe even a snapshot for a future Swapr token!) for those who supply DXD liquidity to DXdao at a fixed ETH ratio that works for all. Maybe I am making a mountain out of a molehill and this isn’t an issue for any other DXD holder, but I liked Sky’s idea enough to think that we can make the buyback interesting and more community orientated.

Happy to hear anyone’s thoughts here whether in support or not.

[madmax]

Also listened in to the call. Great discussion;

Overall the buy back purchase for me is to seed Swapr, so that’s my reference for this post.

My evaluation is

• Transparency on the legal aspect is great (how we go about it, how much, guidelines etc.)
• I like the morals and best practice angle anyway, even if we are not directly enforceable
• We’re definitely a bit unique, and so is our situation (we don’t buy to destroy, but to seed our own business = Swapr). Adding ETH to the buy back curve won’t achieve what we want here as it burns the tokens (at least in its current form?). So the multi-scheme seems best approach for this process, but I’d need someone smarter to me to answer how/if we could achieve something like the below?

As a result I think the best approach is

• Buy volume can be determined at x% of avg. daily volume (24h volume is 2m USD, so we’re fine here). We can literally announce it in advance and in a fully transparent way.
• Approach that is most fair for me is to announce or structure the buy back process so we buy in market over a period of time (and post liquidity to swapr at regular intervals too, during this time).

E.g.
We want to buy 500 ETH worth of DXD (3,333 DXD if bought effectively on current market rate with no spill - we will obviously not end up with quite that much in reality, but important to define in ETH I think). So, say that we decide we will buy that over a period of 30 days. You simply structure the 500 ETH / 30 days = and then there is surely a way to just execute continuous x.x ETH market buys via 1Inch or something at a random frequency over those days to reach the 500 ETH goal (+ gas costs). We could then also announce at what milestones we will be posting this to Swapr (as that influences market). Waiting to the end to post it all may not be the best solution (ideal for the DAO to average into the pool)

I think it is important that we move on this, so also very happy to hear other versions. One alternative is a set price as Sky mentioned which could also be cool, and if announced in advance and done transparently (it’s not a “buy back” as such, it is the dao acquiring DXD in market to seed a product with and hence it is done in collaboration/with the DXD community). We could say we’re happy to buy DXD at 0.2 ETH up to 500 ETH, and it will release x ETH per day. This requires a lot more thought though. How do we avoid someone buying up and selling it all in one go. How do we in essence make it fair (see: every NFT launch etc. where people end up not managing to sell/buy etc. and gets pissed). There are so many potential attack vectors here that I fear it ends up being a big “tech” project. And we need the liquidity in Swapr sooner rather than later. We already need to wait for proposal phase etc.

For this reason I am leaning towards the first option as the better way in this particular case. We’re buying it for the business, so we’re simply aiming to buy it at the best price available in the market over an average period of time at average volume - and then stick it in our product for x, y, z good reasons.

This by the way does not rule out @kobello’s idea to think about a novel way to have another minor REP raise (or maybe even a snapshot for a future Swapr token) for providing liquidity to Swapr for x period of time etc to make the pool even bigger. However, for me we can’t provide liquidity at a level the market isn’t at, it will just immediately get arbitraged and the DAO loses.

[pulpmachina]

With our growing treasury, it seems time to invest in DXD through a buyback. The best way to do this would likely be a buy and burn approach where a percentage of circulating DXD is taken off of the market and either burned or held in a vesting contract. The point being to reduce the overall market circulation of DXD in order to create value for DXD holders.

In order to accomplish this goal, the best steps for DXdao to take is to be as transparent as possible about our financials, related product strategies, and relationships. Fortunately, the DXdao community has been dedicated to making all work publicly available through its various community channels.

Regardless, for DXD holders it could be helpful to make a sort of ‘transparency statement’ through a post on DAOtalk leading up to the buyback. The Transparency Statement would include a basic round-up of our past and projected budgets (burn rates, related breakdowns, etc.), strategy decisions, and partnerships. This shouldn’t be hard to put together since it’s all pretty much available now, albeit a bit scattered.

Aside from making a transparency statement, it could also be useful to consider a daily volume quota of ETH that we intend to spend for the buyback. A best practice that has been used in traditional markets is to purchase no more than 25% of ADTV (average daily trading volume) each day. The purpose here being to not have DXdao dominate the market by purchasing a large amount of DXD relative to independent sales and purchases.

Taking a quick look at the most reliable DXD/ETH pools (Uniswap and Balancer), I’m seeing a combined 24h trading volume of $192,103. 25% of which would be $48,025 or approx 37 ETH a day. At this volume rate, a buyback expending 500 ETH could be done in about 13-14 days depending on daily price fluctuations. I’m curious what markets the relayer / oracle bases its pricing on ? Any info on this?

My hesitation with a daily volume quota is that it seems we would need a separate on-chain alchemy proposal for each day of the buyback to initiate the relayer (correct me if I’m wrong). This could be costly in gas and have other coordination issues.

Just for reference / if others are curious, another best practice is that we use the highest previous independent price for the buyback. Luckily our relayer accomplishes this goal. Other best practices from traditional finance, e.g. time / broker requirements, don’t adequately apply in this space and are largely resolved through the mechanics of DeFi.

[madmax]

Hi @pulpmachina,

I was of the understanding that the buy back would be used to seed Swapr liquidity, in which case the DXDao would still hold/own the DXD and could put it to use again in future vote. The aim from my perspective at least was to avoid the DAO putting new DXD into circulation by taking DXD from the treasury where it is otherwise not circulating, it was to not simply burn the DXD we’ve bought.

Would that change anything legally? Companies could buy shares back to award to future employees as an example, right?

I appreciate the input on the others - as I tried to argue, however we can best embrace transparency, fairness and also marry that intention with the technical requirements (relayer, gas costs etc.) Hopefully the specific proposal will address this in further detail.

[pulpmachina]

Hi @madmax, That’s also been my understanding of how the buyback would be used. It’s just that, from what I’ve researched in both crypto and traditional markets, a buyback’s main purpose is to reduce circulating supply of a token as a way to reward token holders. This is a personal observation, and I’d welcome any other examples that contradict this for comparison.

Using a buyback with the purpose of pushing the price to a level where it’s comfortable to seed a DXD Swapr pool is a novel approach. The main concern with any buyback is to limit market manipulation where possible. That would be my concern.

[madmax]

Yeah I totally get that, and I much appreciated the research you’d done in the area already. Maybe the wording of “buy back” is even a bit tainted. In my head we want to seed Swapr’s DXD and ETH pool, and due to the current price we don’t want to put more DXD from the treasury into active circulation. Hence the best solution is to buy the necessary DXD in the market.

Is it likely to support/increase price, probably, but we will put that DXD into Swapr which also gives the token more liquidity allowing people to exit their DXD if they want too. So the price could come down again pretty quickly, but at least it speeds up the process of finding a market equilibrium.

As a DXD holder it would be nice with a buy back purely for financial reasons, but if that’s our best reason to spend the treasury I think that raises bigger questions for me. And we can do both here.

[cmagan]

I support buying DXD from the open market with the purpose of using them to fund swapr liquidity.
More than that, i think active buying of tokens from the market, disbursing eth to dxd holders etc, are all legit tools in DXdao’s disposal.

The fact that currently DXD is priced deeply below its fair book value, shows low confidence among DXD investors that the DXdao can use the treasury efficiently to drive value back to DXD.
Or in other words, investors are willing to take a deep discount just to be out of their DXD position.
So basically a buy back is a way to help DXD holders that don’t believe in the dao’s success, get out of DXdao and their DXD positions

[cmagan]

I personally believe in the success of DXdao.
But As @madmax mentioned, I do believe that a widening gap between book value and DXD price has the inevitable end of DXD holders pushing for dissolution

Book Value of Equity Per Share (BVPS) Definition

[mike]

The treasury value is nearly even with the fully diluted market cap of DXdao.

Due to the (relative) uncertainty surrounding the bonding curve parameters and the remaining supply, DXD is probably at fair value at the moment.