Proposal to upgrade the DXD Token Model

dxDAO
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Below is a draft proposal that is the output of the DXD Token Working Group. The proposal draft will be a discussion topic on Wednesday’s Governance call and will be open for comments and feedback for a week before being submitted on-chain to both DXD holders & REP holders

Tldr: The DXD Token Working Group proposes a new token model, where “DXD gets its value from DXdao’s treasury, which grows from product revenue and its investments into decentralized technologies.”

Background

The DXD Bonding Curve was launched in May of 2020 by DXdao. The bonding curve was an effective fundraising tool but the mint/burn functions of the contract were never able to create a liquid market for DXD. In May 2021, DXdao launched the DXD Buyback program which purchased DXD off the open market using ETH from the general treasury as well as from the buyback reserve. The program bought over 15,000 DXD (30% of circulating supply), but it was never viewed as a sustainable long-term model for DXD value accrual.

Since the bonding curve launched, DXdao has built and managed several DeFi and governance products, diversified its treasury into $10m+ of stablecoins, and has a team of 20+ full-time contributors focused on building and growing the DXdao ecosystem. The DXD token is at the center of this ecosystem, but there has not been a formal link between the value that DXdao creates and the DXD token. This creates uncertainty for DXD holders, especially as DXD has traded at a significant discount to book value.

In August 2022, DXdao launched the DXD Token Working Group to draft a long-term model for DXD. The below signal proposal is an output from the Working Group.

The proposal commits DXdao to:

  • Introduce four tools in the DXD Monetary Policy Framework that would enable a fair and liquid market for DXD
  • Establish a DXD Monetary Policy Committee
  • Funding product development and other initiatives that further DXdao’s core mission to enable community freedom

To further simplify and answer the question, “Why is DXD valuable?”, the WG affirms: DXD gets its value from DXdao’s treasury, which grows from product revenue and its investments into decentralized technologies.

Details

DXD Monetary Policy Framework
This proposal establishes four tools to be used by DXdao governance under guidance from the DXD Monetary Policy Committee. These are:

  • DXD Floor Price Guarantee - DXdao commits to buying any amount of DXD on the open market
  • Inverse bonds - smart contracts where DXD can be deposited for a defined period of time in return for a certain % of DXdao treasury assets
  • New DXD minted - allow DXD to be minted in exchange for assets at full NAV
  • Protocol-owned liquidity for DXD

DXD Monetary Policy Committee
Management of these tools requires close tracking of the DXD market as well as DXdao’s treasury. The committee should be at least three individuals and also include full-time contributors. This work should be compensated in vested DXD. The committee is tasked with:

  • Providing quarterly reports on general general direction and outlook of DXD
  • Issue monthly recommendations on inverse bond issuance and protocol-owned liquidity
  • Work with DXdao governance and treasury on managing redemptions

Product development funding
DXdao’s mission is to enable community freedom. It was launched in 2019 as a radical experiment in decentralization. The DXD fundraiser was intended to raise funds for product development in line with this vision. The new token model represents a new social contract between REP & DXD holders. The DXD Token WG affirms DXdao’s commitment to building and funding decentralized products that enable community freedom by committing at least 6% of DXdao’s treasury to fund DXdao’s product & operations for a year.

This % can be changed at any time by governance and represents an overall budget suggestion for DXdao and is not a mandate to spend that amount, nor a maximum amount . This incentivizes the community to grow the size of the treasury.

Implementation

This signal proposal is the output of the DXD Token Working Group, and if passed by REP & DXD holders, should be implemented by DXdao. Some of the elements will require significant development work before they can be put into practice. In the DXD Monetary Policy Framework, the DXD Floor Price Guarantee and the protocol-owned liquidity can be implemented using DXdao’s existing governance tools.

This proposal commits to implement:

  • DXD Floor Price Guarantee priced at 70% of the current DXD-NAV Ratio (DXD’s circulating market cap to Treasury NAV)
  • Provide $250k in DXD/ETH on mainnet once DXD price hits 60% of Treasury NAV, another $250k deposit at 65%, and a $500k deposit when it hits 70% of NAV
  • When ready, DXdao governance commits to issuing:
    • $500k in DXD inverse bonds with 85% payout after 6 months will be issued, along with
    • $500k in DXD inverse bonds with 90% of NAV payout after one year, and
    • $1m in DXD Inverse bonds with 100% NAV payout after two years
  • The current DXD token contract should be upgraded and the funds returned to the general treasury

Definition and clarifications

  • Treasury NAV - ultimately defined by governance through guidance from the DXD Monetary Policy Committee. This proposal affirms treasury NAV includes all stablecoins, ETH (including staked ETH and other derivatives), Swapr LPs or other liquidity provisioning instruments. It incorporates the value of other treasury assets (like SWPR, ENS, etc) with a pre-defined liquidity discount. The DXD-NAV ratio is the DXD circulating market cap (as defined in the last DXD buyback proposal) divided by the Treasury NAV. This will be calculated at least bi-weekly.
  • Inverse bonds - these will be individually launched according to specific parameters (duration, dividend stream, etc). The bonds should payout the % of NAV when they are due, not the NAV when the bond is issued or the DXD deposited. Bonds will need to have a redemption currency of either ETH or Dai/USDC.
  • DXD Monetary Policy Committee is meant to involve engaged DXD holders in the formation of policy, but report preparation will need to be completed by DXdao contributors. Details of this will be further provided in the upcoming budget presentations by DXdao governance.
  • DXdao may implement other tools to the DXD Monetary Policy Framework in addition to the four listed above. The goal is to incentivize an organic fair market for DXD with minimal open market operations and minimal changes to the underlying liquidity for the treasury.
  • Execution of the price floor guarantee will occur on-chain through various trustless models. Previous DXD purchases were in smaller amounts, so executing on a larger scale will require more coordination.

Meeting Links:

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in full support & will be voting for this proposal on the DXD snapshot side once it’s ready. Well done, thanks, & congrats to all that have been a part of the WG process!

7 Likes
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I can support this proposal.

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Curious to hear if there is any other comments and discussion. The one area where I think there is still some flexibility is on the commitment to inverse bonds. A larger commitment will be a strong signal to hold DXD into the future, but the commitment could restrain DXdao’s finances.

There are two things I wanted to highlight assuming this passes.

  1. What this will do to DXD and the treasury
  2. How the Price floor can be defended.

First, if the proposal passes then a lot of DXD holders will likely sell to DXdao at the price floor (70% above). It’s hard to know how much or how the market will shake out, but to run through one scenario.

Screen Shot 2022-11-23 at 8.58.16 AM
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So if 14k DXD was sold at 70%, the treasury value would be reduced to $22m, but this would be good news for DXD holders as the $$ value of 1 DXD’s share of the treasury would increase by ~20%.

Second, if the proposal passes, there will need to be even more buybacks at higher amounts than DXdao has done. We’ve already switched to Cow protocol for buybacks. This can take the form of a limit order but is kill or fill. It also takes a long time to go through governance (16 days). This does not apply on Gnosis Chain. The good news is Cowswap can access 1inch limit orders so if a DXD holder wanted to sell a large amount to DXdao, they could put the limit order on 1inch and then DXdao could just do a big buy to fill it. This will likely require some coordination with DXD holders looking to sell into the price floor.

These are likely short-term ways of implementing the proposal. Long-term (or perhaps medium-term?), we should come up with a more scalable solution. Yearn has developed a pretty good solution but would take some time to implement.

Anyway, just wanted to highlight these two items as the community considers the proposal.

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Thank you for putting together this proposal that I will support.

I think there are 2 options for inverse bonds:

  • Option 1 — inverse bonds with 100% of NAV value, but with a very long maturity, so these resources can be exploited to generate revenue in the time between.
  • Option 2 — inverse bonds with 85-95% of NAV value, with a short maturity, so that the impact on the treasury isn’t too significant

There should be no restriction on the budget for inverse bonds, otherwise, this would endanger the long-term DXD token model.

Now, coming back to the price floor defense, I wanted to suggest how this could be managed in a practical way without requiring any ad-hoc development:

  • NAV: NAV should be calculated on a weekly basis, by a trusted member of the DAO that will update the treasury NAV and report it to the person responsible for pushing the limit order on 1inch.
  • Limit order: 1inch limit order feature allows to set up a 1-week limit order, this would be the most appropriate minimum-viable solution.

I would advise against using Cowswap to access 1inch limit orders from DXD holders, because this will incur fees and bots arbitrage which is pure waste. 1inch p2p feature is better suited for this purpose, because there would be no slippage, no fees and a very easy set up.

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I made the following changes to the proposal above (edited original post):

  • Various link replacements
  • Added biweekly NAV calculation
  • Added a $1m 2 year set of inverse bonds at 100% of NAV as suggested by @Molotov. This seems like the appropriate signal for long-term DXD holders.
  • Adjusted the numbers on the DXdao liquidity section
  • Added another bullet point in the Definition and clarifications section regarding execution of the price floor guarantee.

Please leave any other comments/feedback below or DM me. I plan to submit the signal proposal with the text above on Wednesday afternoon

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Hi all -

Thank you @Powers for putting this proposal together.

I resonate with all of @Molotov’s comments / recommendations.

  • 1inch would be a much more effective tool rather than cowswap

  • Should be no budget on inverse bonds

are the two I did not see added to the proposal - would love to have further discussions on these two points

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Hey @Cmande3

  • 1inch does not work because the DAO cannot sign a transaction, which is required for P2P trades. Regardless, the proposal doesn’t stipulate the method that is executed. Mesa is also an option, but will require someone to run the solvers. Yearn’s buyback model is also a possibility. These need to be further investigated but I’d rather not let that stop the proposal from passing, nor prevent DXdao from executing on the purchases. DXdao has purchased 15,000 DXD in 18 months, and it can continue to do so while it ramps up ways to scale the purchases to larger amounts.
  • There is no budget for inverse bonds. The text in this proposal is a commitment to launch these certain bonds. The DXD Monetary Policy Committee may decide to issue more, but I’d rather let that committee determine the specifics once they’ve had time to get established and further research inverse bonds. Including them in the text here is to send a signal to DXD holders about the benefits of holding DXD for higher NAV purchases. The amounts can only increase in the future.

And then just one more thing that I thought about. In the post above, I ran some numbers on how this might affect the treasury, and assumed that 14,000 DXD might be sold at 70% once the proposal passes. This used 70% of the current DXD/NAV ratio, but this will change when DXD is purchased. Selling 3,000 DXD at 70% of NAV would raise the DXD share of NAV to $915 (up from current $889), which means DXdao would be paying more from it’s treasury for this later DXD purchased, because every DXD purchases below book value raises the DXD/NAV ratio, which is another reason to hold your DXD until others have sold. Numbers crunched here for this on Actual Dashboard sheet.

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Yeah cowswap makes the more sense for the moment even with drawbacks vs 1inch. Please sir, no more Mesa…

But my understanding is the model built by Yearn would be a much better option and should be easy to implement quickly (a reasonably straight forward fork?). Is that the preferred option or cowswap? If so would it be possible to have it ready to go once we go head with this, or would it be a matter of days/weeks/months to switch over to yearn mechanic?

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Regarding the Yearn buyback:

  • It uses Chainlink for YFI price
  • It’s in Vyper
  • Requires a front-end

DXD doesn’t have a Chainlink oracle - moreover we want to buy at the calculation of 70% of NAV - so we’d likely need a custom oracle which calculates that.

I believe DXdao has never deployed a Vyper contract - although I don’t believe that should be a bottleneck.

Yearn provides the smart contracts, which means we’d still need to implement a UI for it.

I also think using anything that requires the multicall2 is not an efficient way to execute these buys. i.e. passing an order on cowswap through multicall2 on mainnet take 16 days - and moreover requires a human being to submit these orders regularly. Perhaps it’s an option for the initial stages, but this should all be automated long-term. Would be great to get some input from more technical peeps.

In any case, for an automated solution we’d require an off-chain price feed that provides the current DXD NAV price at 70% - but that’s easy to do.

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My vote would be to use Mesa for now, even if it’s on Gnosis Chain instead of mainnet to mitigate solver gas costs (or use mainnet but only run solvers once per day/three days?). Only consideration with GC would be risks of bridging over a large(r) portion of assets than we have done previously; however, this could be done in batches? But either way, it seems like the method that makes the most sense here for now in the interim.

  • It’s not fill or kill
  • It’s got a front end already
  • We’ve used it before so schemes are all set up and fine to use
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Note: just made another edit to properly define DXD-NAV ratio in the Implementation section and also in the definitions & clarifications section:

Also, I think the discussion on the execution are important and should continue to take place, but I don’t think they need to be decided before the proposal is submitted/voted on. It will take 8 days for the proposal to be voted on.

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Okay, this proposal to upgrade the DXD Token Model has been submitted and staked on mainnet (will be ready to vote on in 24 hours):

Submitted on a DXD Snapshot (voting ends 8 days from now):
https://snapshot.org/#/dxdsnapshot.eth/proposal/0x5dc442df936c24b11703790e28785371159fd1a8b17e1472d895511ba1372822

Having trouble getting it submitted on Gnosis Chain but it’s only 5 days, so can do tomorrow.

Go out and vote!

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Thank you for this proposal. Is there now more clarity about the execution of the floor price support?
When can we expect this proposal to go live after the conclusion of the vote tomorrow?