DXD Token Working Group

Tldr: draft proposal for a DXD Token Working Group. Feedback appreciated and please share with anyone from DAO/DeFi community that may be interested in participating!

Background

The DXD token was launched by DXdao just over two years ago in May 2020, using a novel bonding curve contract. In the original design, revenue from DXdao products - in the form of ETH - would be deposited into the bonding curve contract. At any time, DXD could be deposited into the bonding curve contract in exchange for ETH. The price at which the bonding curve “buys” DXD is determined by the amount of ETH in the buyback reserve of the bonding curve contract. In this design, revenue from products would support the market price of ETH.

This is not how things played out. The bonding curve was very successful at launching DXD and providing DXdao the resources to build products, but it has not been a successful value accrual method for DXD.

Instead, DXdao enacted a buyback program in May of 2021 to purchase DXD off the open market as it was trading significantly below the NAV of the treasury. So far, 14,500 DXD has been purchased, which is more than 25% of the DXD that was minted from the bonding curve.

The buyback program has driven value to DXD, but it is not a sustainable model - it is capital inefficient, requires manual submission and does not scale to other forms of non-ETH revenue. This has long been discussed in the community with differing opinions on how to move forward, but the discussion lacks the rigor and analysis needed to find consensus.

A dedicated DXD Token Working Group (WG) would give this issue the attention it deserves with the goal of finding a sustainable model that can then be built and implemented. The overall process should be similar to the Governance 2.0 Working Group, which took place 18 months ago. The Gov 2.0 WG consisted of full-time DXdao contributors, engaged REP and DXD holders, and other DeFi and DAO groups (Delphi Digital, DAOstack).

Details

An on-chain proposal is needed to initiate the DXD Token Working Group, which can also serve as an open invitation to the DXdao community for feedback and suggestions on a new design. The WG will take the form of calls, forum discussions, research & modeling, and ultimately another on-chain proposal to ratify its findings.

Scope of WG:

Identify shortcomings in bonding curve and buyback models and present solution(s) that address these and create a long-term sustainable value accrual method for DXD.

DXdao governance needs to approve a new DXD token model accomplishes these goals:

  1. Translates revenue/profit/assets of DXdao into DXD

  2. Can be staked to participate in governance

  3. Clearly communicated and attractive to new token holders

Perhaps the solution should also address a multichain world. The WG might also consider the overall liquidity of DXD and DXdao-provided liquidity.

Participants:

All members of the DXdao community are invited to participate. DXdao contributors that are active participants in governance are expected to follow along and provide feedback. DXD holders are especially encouraged to be actively involved and the WG should make an effort to actively seek out their input.

DXdao community members should also reach out to those outside of the community to bring ideas for a new token model. There are a lot of token prognosticators on Twitter. The DXD Token Working Group is a great opportunity to put these ideas into a usable model that can be implemented by a large and existing DAO. Anyone interested in participating can reach out to @ Powers

Output:

A specification document, signed off by DXD Token WG, that provides solutions that can be executed on by the DXdao community. It will be up to the WG to decide if the final document includes a single-agreed-upon plan or one that can be voted on by DXdao governance.

Resources:

  • The WG will take up a considerable amount of Governance squad resources over the three month period. Estimated to be 20% of squad time
  • WG participants can earn mainnet REP for their contributions (if not receiving REP as a contributor)
  • Outside research may enhance WG’s understanding and may require paid consultation. WG may request up to $15,000 in for research or model building.

Schedule & Timeline:

The WG will need to report back its findings as well as provide updates during the process. Currently proposing bi-weekly calls on Thursday at 16:30 UTC. Below is suggested timeline:

  • Late July/Early August - discuss Working Group structure, submit and pass proposal
  • August 25 - Kickoff & welcome call. Identify key problems with current model and review a history of DXD
  • September 8 - Competitive overview of token models; successes/failures & lessons learned from other projects
  • September 22 - Draft token model presentations from community
  • October - DXretreat DXD Token Workshop Colombia will present an opportunity for a half-way check-in & presentation to broader DXdao community on the Working Group’s findings
  • November 3 - Reach consensus on general token model and present initial draft proposal. Post proposal in the forum
  • November 17 - Finalize proposal text and present findings to DXdao community
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Isn’t the intent to deliver value to DXD already clear, and the task at hand to implement an automated way in which this can happen? Perhaps there is some question as to whether the model should be to deliver fees to DXD or to buy back and burn DXD, but I am afraid creating another working group will only serve to generate “more talk” when the thing that is most sorely needed for DXD holders is products generating fees. More to come regarding product strategy in another post.

I don’t think it makes sense for more money to be spent here. Also, in terms of the Governance Squad resources, I think more should be devoted to budgeting and treasury management. DXdao still holds $819K worth of RAI, and the Annual Redemption Rate stands at negative 13.5 percent. What’s much worse though, is that upon inspection of current staffing and rates of expenditure, I have found the current runway in stable assets stands a just shy of 3.1 years, significantly less than your estimate in this post of 3.7 years, and this is without budgeting for things such as DevX overhead, increases in contributor levels, additional contributors, DXventures, establishment of a risk buffer, or investment in new products, not to mention potential continued loss in value of RAI. More to come regarding budget in a separate post.

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With the buyback in place, conducted safely and quite successfully with the big help of DAO contributors and wider community members, the need to revisit tokenomics hasn’t been pressing in recent months.
Even with a clear path forward, the dev work and audits would take a while and require dev and financial resource.
Nonetheless, we should definitely be having conversations. We could perhaps take the discussion initially to the strategy or biz dev calls, and then decide how to proceed.

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I thought this would best fit in this thread, although there are quite a few currently running that it could apply to.

Comments taken from discussion on Discord & elaborated:

The market’s reaction to the recent discussions surrounding the buyback (DXDETH now at 0.29) clearly show that the desire to hold DXD has waned with forward expectation of reduced ‘liquidity on demand’ (selling into the buybacks for sell-side liquidity), and also reduced upward pressure. I’m disappointed that this is the case, but it makes sense on a logical level. It has sparked the thought that we might end up ‘a few steps back’, with the goal being to trade above NAV, and looking like DXDETH will retrace significantly, despite the broader market looking healthier. If, hypothetically, we were to retrace back down to 0.1E (unlikely, but to illustrate a point), then effectively the buyback to date would have served as exit liquidity for benefit of the least committed/high conviction holders (to be fair - I don’t think anyone intended this at all, so not implying that).

What if we were to flip things here, with the understanding that our long term end goal is that we want product revenues to sustainably provide a return on capital to DXD holders, while also growing the treasury.

If we take the average fee-sharing APY across DeFi (10%?), and we say ‘If you stake your DXD for a 1yr lockup, then you will receive 10% APY, with the %age calculated @ NAV’. We use product revenues to pay this APY, and while revenues are lower than this amount, use the treasury to ‘top up’ the difference.

Implications:

Most importantly, the drawdown of the treasury from this would be 10% * %age of circulating supply of DXD staked, so what, like 5% per year maybe? I don’t think that’s too bad a subsidy until product revenues can sustain it, given obviously the goal here is to get to a cashflow positive position asap & recent threads highlighting the importance of sustainability etc. This is also a predictable amount, so helps with budgeting.

The DAO isn’t the one doing the buying, which decentralizes supply: Maybe the DAO could step in if DXD dropped much too low, such that it was a no brainer again, but the main buying pressure for DXD would be from outside participants seeking reliable, safe yield. If DXD traded at 50% of NAV, the APY on offer would be 20% instead of 10%. Thus, the current price of DXD wouldn’t be such a pressing concern to longer term holders - they lock for a predictable absolute amount of ETH over a year, rather than for the appreciation, which would ultimately come as people learn about DXdao.

Also, the 1yr lock ensures only those aligned with the DAO’s long term vision benefit, as well as reducing float & encouraging more of a push up to NAV organically over time.

@JohnKelleher also suggested that DXDETH LP could be eligible for a much lower APY, in exchange for a shorter/no lock period. This makes sense, as the prime candidates for this campaign would be shorter term holders, and their DXD would then be ‘up for sale’ as part of the liquidity pool. This provides new, long term entrants with higher liquidity, and over time ‘takes DXD away’ from those with a shorter term mindset, towards those with longer term alignment with the DAO.

This mechanism is also a natural progression towards the end goal of product revenues sustaining the DAO on their own. As product revenues increase, the portion of the APY made up of a treasury subsidy decreases, until the point at which it’s all made up of product revenues.

Lastly, I think @spreek made a good point in the Discord discussions - that even if such a mechanism were to be put in place, there should still be some hard floor at which the DAO steps in and buys back DXD. Not only for the fact that it provides confidence to the market & stops the panic-driven selling we’ve seen in the last week or so, but it’s also beneficial for the remaining DXD holders in that their share of the token supply & claim on future performance (product revenues, treasury performance, etc.) increases by a much larger proportion than the associated spend.

I’d like to put this post out as a sounding board for actionable discussion on a few points:

The APY subsidy

  • Is this a suitable mechanism for providing value accrual to DXD in a way that benefits long term aligned holders rather than those looking to exit, with the added benefit that there is a predictable, fixed cost to the treasury over time?

  • What percentage APY is suitable here? IMO, 10% is conservative, attractive, and sensible, given that it would be based on DXD trading at NAV, and that we are trying to encourage excess buyers that decentralize the holder base.

  • What length lock-up would be sensible to dissuade long term holders from reaping the benefits, while also not being too extreme (even those aligned with the DAO’s long term goals likely wouldn’t lock for 10 years)? IMO, 1 year is a nice balance, but as with all these points, open to discussion.

The ‘line in the sand’ buyback price

  • Should we have a %age of NAV number that is too good to pass up for the DAO?

  • What should this be? IMO, 60% is still an excellent ROC, but could see the arguments that making this 50% along with the above APY mechanism would be a robust combination.

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Something that I think needs clarifying . . is 10% the target APY for staked DXD, or is it the percentage of NAV which it released every year to DXD holders?

My initial thoughts about this is that committing to a percentage of NAV being released per year, alongside a spending budget that also represents some percentage of NAV, puts DXdao on a “clock.” For example, if 10% of NAV is allocated to operational costs and 10% of NAV is allocated to staked DXD yield, that’s 20% of NAV every year. .8^5 = .33 meaning after 5 years, disregarding appreciation of treasury and potential product fees, there would be 33% of the NAV remaining in the treasury. This simplistic model, assuming fixed treasury value, also results in a shrinking budget for both. Is this desired? Another way to approach it would be 20% of current assets, which sets the clock to 5 years.

What’s an appropriate “clock” to set? I think a sense of urgency for the DAO is good, and 4-5 years seems reasonable for any old startup. But if you take a more precious view of DXdao, and I’m biased here, then maybe you want to set a longer clock. A crypto founder friend recently suggested, in internet terms, crypto is “in 1980.” While I’d probably suggest a later year, I agree with the idea that even the infrastructure needed for crypto/web3 is still not mature. In this case, a lot can and will change and should DXdao, with its uniquely established governance, be thinking even longer term than 5 years? More questions than answers, but I think it makes sense to project out the budgets for this program alongside operational budget. This plan needs to hold up in the eyes of the market as well as contributors.

What I like about the APY approach is that it favors long term holders and has a predictable impact on assets held, as you have mentioned. What I don’t like about buybacks according to NAV, is that neither of those things are true, and it can be subject to the whims of the market. Personally, if the current circulating marketcap is at 60% of NAV, then that feels too high for a “line in the sand.” I would probably want something much lower, but I think my recommendation would be to first implement the yield program before addressing this.

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In my head it was something in between the two - it would be the target APY for staked DXD, assuming that DXD was at NAV. i.e., if NAV was at 0.5E, then 0.05E would be released per DXD staked per year, no matter how many DXD are staked. This way, there’s a maximum cap on the expense (assume all DXD is staked & locked), but also, if less DXD ends up staking, the DAO doesn’t spend as much of its resources.

I agree that we should account for the fact that we’re in a nascent industry, especially DXdao’s niche of it, so 5 years may not quite be appropriate, but am also mindful that DXdao has been around for 3 years already. In that time, DXD as a token has failed to gain as much traction as many other tokens in the market, and so I think it’s appropriate to be more aggressive than if we were just starting out today. I think this is partially an oversight on the market’s behalf, so again I’m not trying to assign blame, just work with the facts at hand. Maybe a 7yr ‘clock’ from this point, to take it to a round 10 years since inception, might be suitable?

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I’d be supportive of a working group to build out a long term value proposition for DXD and would want to participate.

However I’d be pretty strongly opposed to removing or altering the buyback from the commitment previously made to buyback up to 70% NAV once the reserve is finished. That commitment was made in April and again in July, and has yet to be put in place. It’s pretty poor “Fedspeak” to have made those commitments and then just as they’re about to come due start discussing alternatives and watering down the target % from 70% to 60% or 50%.

I’d argue that a large part of the reason why DXD has fallen in the last two weeks is because there already was uncertainty about whether that commitment would be acted upon as the reserve starts running low. Letting the reserve run out and then continuing the buyback up to 70% would restore that confidence quite quickly. That and there’s been only a single buyback in the last 10 days since most of the contributors were at ETHCC, which was another oversight and led to DXD retracing.

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Of course I agree that DXdao should be following its commitments. The last Buy Back proposal was this one: Alchemy | DAOstack
and I believe the relevant clause is this

  1. If and when the DXD Buyback Program depletes the buyback reserve, funds from the DXdao treasury can be used to purchase DXD on the open market at up to 70% of NAV, so long as this calculation accounts for runway and future funding for product development.

I have no problem with a 70% of NAV target per se, but what I would like to understand is what are the limits on this? If I am thinking about this correctly, I think in theory the DXD market could induce the treasury to be completely drained if this target was adhered to without limits. Please correct me if I’m missing something. Though I think this could be prevented simply by putting limits on how much of the treasury can be used.

I would be interested to understand what it is that you think needs clarification? Is it the “how DXdao generates fees” or is it the “how fees are directed to DXD.” While I think the latter needs to be solidified, in my opinion the former is the bigger question.

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I’m open to hearing suggestions for what limits would strike a compromise between treasury and maintaining meaningful buyback support.

But there’s 3years of runway in the treasury that’s already set aside and not being used in the buyback funds. There’s also revenue / future revenue from DXdao products. I don’t think it’s realistic that the treasury would be drained by continuing the buyback at a (minimum) 30% discount to NAV.

I think if we wanted to consider halting or significantly limiting the buybacks at some stage, then that conversation should be had after Gov 2.0 is implemented. That way DXD holders can have a meaningful say.

There’s 3 years of runway available. Last I heard we were expecting Gov 2.0 within about a year if I’m not wrong. Maintain the buybacks up to 70% DXD and at a consistent pace. Then within a year when Gov 2.0 is live, reassess the impact on the treasury and the runway / burn rate and reopen the discussion.

I think this is true because of the lack of definition of NAV & the concern is definitely valid - if the circulating supply keeps decreasing, then NAV keeps increasing (as does 70% of NAV), so eventually you actually just keep buying indefinitely with the illusion that the discount is still there. FWIW, I don’t think we’ve got close to the point at which we’ve been doing this yet, so I don’t think this has harmed us up to this point.

Although of course we’ve been discussing an alternative model above, I think a sensible addendum for the buyback continuation option is that once the current 200E is depleted, we then calculate the circulating supply at that point, and call that the ‘supply-for-purposes-of-buybacking’ :laughing: e.g. if the circulating supply at that point is 30,000, and the original 70% target was maintained, then buybacks would continue until Price = Treasury * 0.7 / 30,000, regardless of whether the DAO has bought back another 29,000 DXD. This way, you don’t get the same possibility for infinite drain.

Something like that, if the buyback continuation were to be considered at all. I think this is what you mean by the complete draining of the treasury @JohnKelleher ? Maybe I’m misinterpreting.

I do think @0xSpicySoup has a point about the Fedspeak angle; the proposal to continue to 70% was ratified on-chain, and people may have made decisions based on this passed proposal. However, I think recent discussions have all still been in good faith, things can change rapidly in this industry, and I hope we can reach a beneficial outcome for all involved, especially the longevity of the DAO.

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