Current DXD Token Model
DXdao issued DXD using a bonding curve based on Fairmint’s code. The “curve” is actually two different straight lines, one that binds the issuance price to the supply of curve-issued DXD, and one that binds the sell price to the total supply of DXD. 48,976.8760 DXD were issued by the bonding curve, raising 25,000 ETH. 90% of the ETH raised was directed to the DXdao treasury while 10% of the ETH raised was retained in the buyback reserve of the bonding curve, supporting the sell price. 100K DXD were also minted to a lockup contract and are in the process of being released to the DXdao treasury over three years; thus the total supply of DXD is 148,976.8760.
DXdao voted to pause minting from the curve and on April 8th, 2021 the curve was paused. Selling is still possible, though the sell price is lower than market. The supply is now fixed at 148,976.8760. About 49K DXD is circulating and about 1.5K DXD have been issued to contributors in 2 year vesting contracts with a 1 year cliff. The treasury is in control of the remaining 98.5K, which is over 65% of the total supply.
DXD currently has no voting rights but is entitled to a portion of fees generated by DXdao. The evolution of DXdao began with the initial REP holders being established in mid-2019. Since DXdao had no capital at the time, this nascent community of REP holders decided to raise capital for DXdao, and did so by launching DXD in the spring of 2020. The REP holders at the time were well aware that DXD was not properly aligned with REP at the technical level but lacked the resources to redesign the governance system. Indeed, Fairmint’s system was chosen to issue DXD in part because it had already been built and audited, and DXdao only had to implement a front-end. The Governance 2.0 working group established a plan to properly align DXD and REP. Development of this system is slated to start later in the year.
Problems with the Bonding Curve
There are several problems with the bonding curve.
- The Fairmint model is overly complicated for DXdao’s purposes. Very few people in the DXdao community understand its full capabilities or how it was designed to work.
- Since the potentially unlimited minting was unpopular, the curve has been paused. On the other hand the sell price is below market. Thus the curve is not serving any purpose.
- The buyback reserve contains 2499 ETH, valued at $7.3 million at time of writing, and this capital is lying idle, not providing any benefit to DXD holders. While the mint and burn model is elegant, the buyback reserve seems inefficient.
- Directing a portion of fees to the bonding curve’s buyback reserve on Ethereum mainnet becomes a complex process when fees are collected on other chains or L2s.
Proposed DXD Token Model
The bonding curve served DXdao well. Before its launch, DXdao had no capital and the ability to utilize Fairmint’s code which had already been audited was a boon to the community. There were lots of ideas and aspirations on how bonding curves were a promising fundraising tool. Fairmint’s model is fascinating and exciting in many ways.
At this point, with the problems outlined in the previous section, it has become clear DXdao is ready to move on from the bonding curve. Here I propose a plan on how to transition away from the bonding curve while keeping the elegance of the mint and burn model.
The bonding curve will be retired and replaced with a buyback model. DXdao will use a portion of the protocol fees derived from its products and from yield on the treasury to periodically buy back DXD from the open market. This can be done via mechanisms already being put into play with the proposed DXD buyback. The ability to buyback DXD will shortly be enabled on both mainnet and xDai. Buying back DXD on the chain where fees are collected will be more manageable than directing everything to the bonding curve on mainnet in the form of ETH.
The existing curve should be replaced with a standard token contract, and the buyback reserve, totaling 2499 ETH, should be used to buy back DXD off of the open market. It is a significant amount of funds, worth more than half of the current circulating marketcap of DXD, so the buying should be spread out over time and subject to parameters addressed in the current buyback proposal. Updating the bonding curve will involve dev work, testing, and auditing, and because developer resources are being fully consumed in the pursuit of product development, I propose that the update itself should not be a near term priority. However, the expanded buyback can begin as soon as possible using funds from the DXdao treasury. These funds will later be replenished with the funds from the buyback reserve once the curve is replaced.
DXdao is moving in the direction of having tokens for each of its products. The tokens will improve the calibration of resource allocation by project, improve brand awareness for each product, and allow better price discovery as it enables the flexibility of being able to purchase individual DXdao product tokens OR the whole bundle in the form of DXD. It’s important to note that all DXdao products serve to benefit DXD and that the issuance of new tokens would only be done with the aim of increasing overall value. In a purely hypothetical example, DXdao could issue a token for product X, airdrop 10% of the supply, commit 20% of the supply to liquidity incentives, and retain the other 70% of supply. Product token holders could then vote to govern the protocol fees.
I propose that a portion of the protocol fee be sent to a staking contract where owners of the product tokens can stake their token to claim their portion of the collected fees. The fee that accrues to the product tokens retained by DXdao for the benefit of DXD will be used towards the periodic DXD buyback described in the previous section.