Extend DXD Buyback Program for another $1m [Draft Proposal]

Below is draft text for a $1m extension of the buyback program. Some discussion points in the next reply. This will be a topic on Wednesday’s governance discussion.

Background

The DXD Buyback Program was passed by REP holders in May of this year. Since then, 5,230 DXD have been purchased on mainnet and xDai for an average price of 0.144 ETH/DXD. Using the USD price at the time of purchase, $1.9m of DXD has been purchased. This is just over 10% of the DXD circulating supply.

The buyback program was updated in June to increase the slippage tolerance of trades as well as clarify the accounting measures. The buyback program was then extended for another $1m. The total amount of DXD purchased is quickly approaching the limit placed on it by the previous proposal and soft community consensus has demonstrated support for another $1m extension.

Accounting for the 5,230 DXD repurchased, the outstanding DXD represents a market cap of $24.1m - still comfortably below the $46m in ETH in the DXdao treasury and the $8m in the buyback reserve. The buyback program is intended to address this discrepancy and acquire an undervalued asset.

The proposed DXD token model that has been embraced by the community intends to upgrade the DXD bonding curve and shift to a different buyback method for DXD. While the community moves toward a new model, the methods outlined in the DXD Buyback Program and purchases through the GP Relayer on xDai and Mainnet enable DXdao to drive value to DXD holders now.

Details

This proposal extends the DXD Buyback Program for another $1m to $3m total under the same conditions outlined in the original Buyback Program signal proposal, the parameter update and the first extension. This proposal further stipulates that DXD or xDXD in the GP Relayer does not contribute to the count of DXD circulating supply.

These and other DXD purchases through the Buyback Program have contributed to the community’s intention to use the buyback reserve to purchase DXD. ETH from DXdao’s general treasury can be used in lieu of the buyback reserve until the DXD token contract is upgraded and that ETH is recovered. In total, the buyback reserve has 2,499 ETH and so far, 756 ETH has been used to purchase the 5,230 DXD purchased through the buyback program.

Risks and considerations

The program will take place on xDai, a sidechain with less security properties than Ethereum. The Buyback Program has been running for four months with few problems; the GP Relayer has worked to complete the purchases at the market price. There is a concern that Gnosis Protocol v1 on xDai will have limited support, but DXdao community members are striving to maintain the network of solvers.

DXdao has already spent almost $2m repurchasing DXD. This has increased the price of DXD relative to ETH but it still falls below the book value of ETH in the treasury.

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Some items to discuss:

  • This proposal text extends the program and also explicitly states that the previous purchases should be counted towards the use of the buyback reserve to purchase DXD. This would further signal DXdao’s intention to purchase DXD and pave the way for a new DXD token model. Feedback on the language? It could be more/less explicit.
  • This proposal does not alter the buyback size limit to 25% of Average Daily Trading Volume. We did compile additional on-chain data - specifically 1inch limit orders - which provides a small boost to the daily volume. Changing the 25% is open to discussion but not clear how much increasing the % would make a difference vs. increasing the daily volume
  • We could extend it for more than $1m? The last extension passed on August 2, so an additional $2m might reduce some governance overhead. On the other hand, the $$$ limit presents an opportunity to adjust or clarify the program.
  • We should start to think about (not in this proposal):
    • Further defining the ‘book value of the treasury’. SWPR token? What about xDai base and Swapr LP tokens?
    • Automated the purchases under certain conditions. A bit heavier lift, but is there a way to automate the buyback mechanism. Perhaps this could come when the token contract is upgraded, but it would be good to start thinking of the conditions the spur a DXD buyback (product revenue, as well as the value of the treasury)
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This has been submitted and boosted on xDai:

and Mainnet:

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My only concern is that we need more clarity on what this means.

If the ETH is going to be recovered from the buyback reserve to the general treasury, then the DXD purchased under the buyback program would therefore not belong directly to the DAO’s general treasury, but to DXD holders specifically, right? As it’s been purchased using ‘their’ buyback reserve.

If the buybacks were done from the DAO’s general treasury without the view to recovering the ETH from the DXD holders’ buyback reserve, then it’s clean enough and the DAO now owns the DXD to do with as it pleases, and the DXD holders still own the 2499 ETH.

If the DAO recovers the ETH from the buyback reserve, then the buyback reserve now owns DXD instead. We’d then need to come up with a way to distribute this DXD to current holders, as it’s effectively theirs and not the DAO’s.

On the one hand, doing it immediately via snapshot would likely cause a lot of selling pressure due to the airdrop effect, and leave us back where we started. On the other hand, is it fair to impose restrictions on how DXD holders access this value?

I don’t really have answers, but just wanted to highlight that if we have a soft consensus that it’s the buyback reserve doing the repurchasing in the end once all is said and done, then the purchased DXD does belong to DXD holders and not the DAO’s general treasury, which creates an issue of how to allow DXD holders to realise that value.

Note: I’m not advocating that this is a reason to stop or vote against this proposal; I think the buybacks should go ahead, I think everyone is pretty much in agreement there. Just that we need to start thinking about this, and really clarify who is doing the buying, and next steps given that.

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That is an interesting suggestion, however as you pointed out, distributing DXD to holders is effectively bringing it back in circulation, which invalidates the buyback. DXD is a utility token, and it is intended to play a central part in the DAO governance v2 framework that is about to be implemented. The token is not a sercurity and the DAO cannot pay dividents in any form. Whether the ETH came from the treasury or the buyback reserve is the same, as the buyback reserve was never intended to distribute tokens after buyback, just reduce circulating supply. There are probably other interesting takes as well, and it is always nice to consider them all. Community members are welcome and should fee free to share any.

My issue comes in that it’s been communicated before that the 2,499 ETH reserve is directly owned by DXD holders, and not the DAO’s general treasury. Whereas the general treasury is owned by REP holders for the benefit of DXD holders, much like a trust would operate.

So, if the reserve is being used to buy back DXD right now for the pure motive of reducing circulating supply, then we can assume that it will remain out of circulation, untouchable by the DAO (as it is not the DAO’s, it belongs to DXD holders directly), i.e. burned, whether sent to the burn address or not, unless for whatever reason DXD holders wanted to reintroduce it.

If there’s then a large token mint as proposed in the new Gov 2 plan (which I’m not opposed to in principle, but is useful as an example of how the buyback’s effects are diminished for a current DXD holder), then from a DXD holder’s POV, they’ve spent their buyback reserve reducing the supply, only for a significant portion of that to be re-minted and handed to REP holders. i.e. the circulating supply, once all is said and done, won’t have really reduced that much. Instead, DXD holders are indirectly transferring (a significant portion of) the only asset they truly have a claim to (2,499 ETH), to REP holders in exchange for Gov 2 voting rights.

I was originally under the impression that the buybacks were happening from the general treasury with no view to touch the funds in the DXD contract for this purpose, and that the DAO was just buying an undervalued asset off its own back. If it’s in fact the circulating DXD holders doing the buybacks, then it makes much less sense in my view. As you said, dividends aren’t possible, so the buybacks benefit DXD currently minted only as much as unminted DXD; in other words, the actual benefit is diluted for current holders and will mean-revert as new supply is minted.

Also, wouldn’t a vote among solely DXD holders be required to commit these funds to some use? Unless I’m mistaken and the buyback reserve is also owned by REP holders for the benefit of DXD holders?

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Hi @hughsconnor,

Really interesting points. To my recollection, the buyback was first viewed just as you describe it here:

Then in subsequent meetings and conversations, the buyback reserve was raised as a possible source for.the funds. The funds are referred to as the “Buyback Reserve,” after all. I’d like to see what documentation the DXdao community can locate as to the initial intent of the Buyback Reserve when the bonding curve was initiated. That would add some clarity on the purpose(s) of those funds and how they should be used.

If not for the buyback, based on the reasons you raised, what would be a good purpose? If there are already ideas on this, we should solidify them.

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I think the core of the argument in using the 2499 ETH in the bonding curve’s buyback reserve revolves around a change in the token model. The bonding curve is programmed to provide a sell price for DXD based on how much ETH is in its buyback reserve. As currently programmed in the bonding curve, this ETH is not claimable by DXD holders, i.e. it can’t be distributed out to existing DXD holders. Its only purpose is to provide a place to sell DXD into, i.e. providing a price floor. I think a way to describe this model would be a “passive buyback” model, where if the market price of DXD drops below the sell price of the bonding curve, then it would profitable to sell DXD into the curve. With the initiation of the DXD buyback program, which I would think of as an “active buyback” model, the question was raised as to what should happen to the ETH in the bonding curve’s buyback reserve. If switching to an active buyback model I think it follows that the ETH in the buyback reserve should then be used to actively buyback DXD from the open market. Now, to keep consistent with the intent of the bonding curve, the DXD bought should probably be burned, as that is what would have happened to any DXD sold into the bonding curve.

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