Ideation snapshot is live here: https://snapshot.org/#/shapeshiftdao.eth/proposal/0x77592df657847fa7decf621de9a9bbdcc1982aeff1e54c269e4a2bdf745257e3
This proposal outlines the scope and budget for the next two quarters of the Tokenomics Workstream, from January 1st, 2023 through June 30th, 2023.
Q3/Q4 PERFORMANCE REVIEW:
In this section I’ll take a look at our stated goals from the prior proposal (Q3/Q4) and evaluate our performance.
Prior goal #1: Preserve and extend our runway
The DAO currently has 11 months of runway, through November 2023. This figure is slightly more than the 10-11 months of runway that existed when the prior Tokenomics proposal was written in June 2022.
The preservation of the runway is primarily due to two factors: ongoing diversification into stablecoins via bonds, and DAO-wide budget austerity.
The Olympus Pro program–and more recently the Bond Protocol program–have proven remarkably effective tools for diversification. The latter has also allowed the DAO to reduce its reliance on USDC (a more centralized stablecoin variant) by accumulating LUSD (a less centralized variant that is not subject to blacklisting risk). These initial efforts have been successful; 11% of the DAO’s stablecoin treasury is now denominated in LUSD.
DAO-wide budget reductions undertaken by Workstream leaders in the middle of 2022 have had a runway-preserving impact as well. Monthly spend has been slashed from over 550k/month to roughly 205K/month. Most recently, in Q4, both the FOX Chain and Customer Support Workstreams ceased taking funds from the DAO.
Another positive development was the resolution of the DAO’s TRIBE liquidity-as-a-service position. This contract held 15.3M FOX, and as FEI/TRIBE wound down operations, it was unclear what would happen to these tokens. Under a worst-case scenario, these tokens could be bought at a discount by a single party and then quickly unloaded on the open market. The potential “death spiral” created by a resulting lack of liquidity led to a tentative proposal by Tokenomics to shore up that Uniswap liquidity in the event such a disbursement happened.
Fortunately, that’s not how it played out. After a good amount of governance debate in the TRIBE community, it was decided to offer token redemptions on a pro-rata basis. In other words, TRIBE holders can redeem their tokens and receive a proportional amount of other ERC-20’s held in the project’s treasury–including FOX. This has led to a gradual distribution; now there are only 8.1M FOX remaining in the contract. While these redemptions arguably might add slight pressure to FOX, their gradual nature suggests that’s probably not the case. Additionally, it’s likely that some of these tokens will never be redeemed. In that case, the contract will act as a liquidity sink where an appreciable amount of FOX is effectively frozen.
So in terms of LaaS, the DAO lucked out! This could have been a much worse situation; the fate of 15.3M FOX was out of the DAO’s control. The lesson here is that, moving forward, ShapeShift should be extremely cautious about entering these types of arrangements. LaaS may have seemed less risky when it was entered in late-Q4 2021. However, as we’ve seen, risks can emerge when prior assumptions (like those about market conditions) fail to hold water.
Another positive factor emerged just as 2022 drew to a close: the full payoff of the DAO’s Rari Pool 7 loan. Debt service costs, which were previously a pernicious force working against the DAO’s finances, have now disappeared. Additionally, the 80M FOX that was held in the Pool 7 smart contract is now back in the DAO treasury. This also meant that 80M was “credited” back to the governance-authorized TDMC allocation.
So - the DAO has unequivocally preserved its runway, even as it paid off stubborn debt, and even slightly extended it. Extending the runway beyond 11 months proved to be unfeasible in the face of those debt service costs, and also factoring in the community’s hesitance to increase bond emissions. Whether the DAO should seek to expand its runway, or merely sustain it, (or even start to eat into the runway without additional accumulation efforts) is a broader strategic question that will need to be addressed in the coming weeks and months.
In terms of scenario planning, the runway base case (the first tab in the spreadsheet) continues to reflect the “worst-case,” whereby no additional stablecoin diversification is happening, and no revenue is offsetting expenses. In Q4, additional tabs were added, factoring in gross revenue, and the total value of the DAO’s treasury. (Similar modeling around ongoing stablecoin allocation will be added shortly, which can help the DAO assess its approach to extended bond offerings).
Prior goal #2: Continue to increase awareness of the DAO.
Opportunities to expand DAO awareness via articles, interviews, and other avenues were limited by a lack of resources in the (old) Marketing Workstream. In lieu of pursuing this goal, I focused more heavily on internal education via ShapeShift Labs, which is my fun little name for the Tokenomics Workstream’s research efforts.
Specifically, we had many sessions around the theme of Ethereum-based rollups. It’s my long-standing thesis that rollups will garner relatively more liquidity and transactions relative to “alt L1’s” as the industry moves out of the current bear market. This focus can inform product roadmap and prioritization discussions, as well as potentially help uncover new L2-based treasury management tools for the DAO.
Prior goal #3: Build upon the existing DAOshboards
Our DAOshboards remain best-in-class; the transparency of the DAO’s finances are second to none. (Thanks, as always, to Darwin for his stellar work on these).
Initial research into visualization tools was discussed in Q3/Q4. However, in this budget-conscious environment these were not pursued. On the other hand, the Tokenomics Workstream worked directly with Credora–an institutional credit-rating platform–in an effort to meld the DAO’s dashboards into their more TradFi-oriented offering. These initial efforts could pave the way for the DAO to secure a credit worthiness rating, thus potentially improving its borrowing terms for future loans.
THE BIG PICTURE
Upon taking on the role of Tokenomics Workstream Leader in December 2021, my number-one goal was to a.) the convince the DAO community that the treasury was woefully undiversified, and b.) help find ways to make that diversification happen. This sense of urgency continued in early-Q1 as FOX briefly topped $0.60. While many DAO contributors (and crypto people in general) were continuing in full degen mode, and perhaps in denial of the fact that we could be entering a bear market, I adopted a highly cautious market and macro view beginning in January/February. This resulted in a continued sense of urgency trying to impress upon the community the importance of stacking stables in the DAO’s treasury–and shortly thereafter, the importance of reducing the DAO’s monthly spend.
FOX is currently near all-time lows and down more than 97% from its 2022 highs. The market has vindicated this cautious and conservative approach–one that should continue to serve us well moving forward into (what appears to be) another year of bear market pricing.
Of course, not all efforts have proven successful. What’s gone wrong? Well, some of the DAO’s experiments with DeFi have arguably done more harm than good. The Rari Loans, for instance, resulted in total debt service costs exceeding $4 million. 80M FOX were locked in the Rari Pool 7 smart contract alone, exposing the DAO to substantial smart contract risk; we’re fortunate that the two FOX-related pools were never exploited like other Rari pools.
<IMPORTANT REVISION: After reviewing the on-chain data, the DAO paid a total of 3,980,872 FEI toward the Pool 7 and 79 loans, while making 356,456 FEI in interest payments. This actually sounds more reasonable, rather than the initial perception that we had paid more than $4 million strictly in debt service costs. I apologize for the confusion. In light of this, the Rari loan doesn’t seem like such a negative for the DAO. Still, high-interest loans should be avoided in the future.>
OneFOX was a problem looking for a solution; its value proposition of each project having its own native stablecoin was never proven out. ICHI’s AngelVaults turned out to be a distraction and were costly to wind down; although arguably these would have performed better if the DAO hadn’t been issuing Olympus bonds during the same time period.
We should keep these lessons in mind moving forward. Simply holding crypto is a highly risky endeavor. The DAO should be extremely selective about the tools and projects it chooses to use, only moving forward after carefully vetting the project, team, and code, and considering the risks in the event FOX continues to trade lower (Bond Protocol and Arbor provide good examples of how this can be done successfully).
Meanwhile, the temptation to take on high-interest debt or ape into DeFi projects with tenuous value propositions and/or poor risk/reward profiles should be avoided like the plague.
PRIMARY GOAL FOR THE FIRST HALF OF 2023:
In the most recent proposal, I opined that “…the paramount, number-one goal of Tokenomics in Q3/Q4 is to help ensure that the DAO remains financially solvent for as long as possible.” This remains as true as ever.
The DAO has proven tools to accomplish this diversification, from Bond Protocol to the more-recently validated Arbor long-term bond offerings. Additionally, the planned Arkeo airdrops could provide added value to the ShapeShift treasury as this chain begins to accrue value. (“Could” is the operative word here, as this is very much an early-stage project.)
Additional budget austerity, of course, provides another way to extend the stablecoin runway. However, this appears to be a complete non-starter for Q1/Q2. The unanimous consensus among Workstream leaders (having queried them about this subject at the DAO retreat) is that while they are all operating efficiently and productively as smaller teams, further cuts would be highly detrimental. While selective and surgical cost-optimizations (for instance, in finding better pricing for software the DAO uses) might be beneficial, the shared feeling is that personnel reductions would likely cause more harm than good.
Of course, further spending cuts would be an unavoidable choice if the DAO was running out of funds. Hence the importance of preserving that runway!
With respect to modeling various revenue scenarios and how they might impact the runway, the super-detailed User Projections & Revenue Projections spreadsheet maintained by PTT and other contributors should offer fertile ground for making non-worst-case projections.
Continue leading strategic discussions
One actionable takeaway from the DAO retreat was for myself to continue to facilitate strategic discussions. Our Strategy session was detailed, in-depth, nuanced, and brought forth several interesting ideas via a bear market SWOT Analysis. Alongside other Workstream leaders who volunteered to carry various aspects out of the retreat, I’m happy to own the strategic discussion piece moving forward. We need to stay focused on the high-level elements to ensure we’re on the right track, working on the right things, pursuing our mission, and avoiding the things that can distract us from our goals; a consistent focus on strategy will help make sure that’s the case.
While it has implications beyond tokenomics, value accrual is another high-level strategy component that touches directly on what tokenomics is all about: more on this below.
Continue to conduct and present research, with a focus on Ethereum scalability
The internal educational efforts of ShapeShift Labs have been well-received. The DAO in general doesn’t have many contributors focused on the technological trends and improvements that could make a big impact on our strategic direction. I’m happy to continue providing that insight as part of my broader strategic focus. 2023 is likely to be a pivotal year for Ethereum-based rollups, as the protocol itself is making an upgrade (proto-danksharding) that will make these scalability solutions cheaper to use. I’ll ensure that the community stays informed about these developments, and what they might mean for the DAO.
Workstream Leader Compensation
This proposal continues with the approach laid out in Q3/Q4 2022, whereby the Tokenomics Workstream Leader receives $14,000 worth of FOX each month. The reasons for doing so were spelled out in the prior proposal, and I’ll echo them here:
“This will help to reduce our monthly stablecoin spend. Additionally, by going “Full FOX” I want to signal my own deeply-held belief that we’ll survive this bear market, find a lasting product-market fit, and wind up in a much stronger position than we currently are. It’s my sincere belief that WAGMI.”
That sincere belief has only been intensified by the past half-year. During that time period, the DAO has made massive strides in terms of sustainability and operational efficiency. Waste has been cut. The remaining core team of contributors is dedicated, passionate, works amazingly well together, and has the right skills and knowledge, IMHO, to help the community thrive. Meanwhile, important strides have also been made towards finding a lasting product/market fit.
As before, this proposal entails that these monthly salary payments would be made via Boosted FOX Hedgies, with a 12-month timelock. Per the Boosted FOX proposal, this option provides an extra 20% of FOX following the end of the timelock period. (In the unlikely event that there’s a technical issue preventing Boosted FOX payments from being made, payment will default to regular, non-timelocked FOX.)
Operating Budget: funding for bounties, audits, and other expenses
In Q3/Q4, the Tokenomics Workstream spent a total of 42,500 USDC–40,000 of which was spent on the Yieldies code bounty. Additionally, 1500 USDC was spent on adding contract-limit guardrails to Yieldies, and 1000 USDC was spent on code audits for Arbor and Hourglass. (Workstream finances and spending are visible in Colony).
The Workstream currently has 2,067 USDC. This proposal calls for a one-time transfer of 17,933 USDC which will provide a 20,000 USDC operating budget for the next half-year. These funds may be spent on additional code bounties and audits. Other possible uses include conference travel expenses for research or potential Tokenomics-related talks on behalf of the DAO, and ancillary costs around ETHDENVER (I’m a co-organizer) or other events where there may be an opportunity to further the Workstream’s goals and improve the DAO’s visibility.
IMPORTANT TOKENOMICS-RELATED QUESTIONS FOR THE COMMUNITY TO DELIBERATE ON
I pose the following questions not in an attempt to answer them (that’s beyond the scope of this proposal) or trigger a debate in this forum post, but to help focus our attention moving forward. For my part, I’ll ensure that these discussions are regularly part of our Tokenomics agenda, and that all community perspectives have an opportunity to be considered.
1.) What’s the near-term to intermediate-term strategy for diversifying into stablecoins?
The timing of this proposal is interesting, as it comes just after the DAO has finally completed paying off its Rari loan. The consensus view of the TDMC has been that upon the payoff of said loan, it would pause the Bond Protocol LUSD offering and assess how to move forward. There are a variety of opinions about whether the DAO should continue to issue discounted FOX via these methods. 0xean has made a case that ongoing discounted bond offerings are unsustainable. The Bond Protocol team will be presenting data shortly that offers a contrary perspective.
Broadly speaking, there are three options for moving forward:
- a.) Stop diversifying into stablecoins and rely on our existing runway for the time being.
- b.) Resume the Bond Protocol offering after a certain amount of time.
- c.) Turn to other methods–long-term bond offerings such as Arbor are one example–for stablecoin diversification.
The Tokenomics Workstream (rightly) does not have the ability to unilaterally decide how to move forward. Instead, its role is to facilitate these discussions, provide perspectives and insights, and help ensure that both the TMDC and broader DAO community have the necessary data and context to make a well-informed decision.
2.) Why would anyone want to own FOX?
It’s crucial that the DAO gets this question right. FOX has allowed the DAO to fund itself following its transition from a centralized entity. Compared to mid-2022, we’re better positioned to survive the bear market (the runway has been maintained, and the Rari loan is paid off). But has the DAO clearly articulated how or why value will accrue to FOX once a product/market fit has been reached?
This is a question that does have some initial answers. FOXy offers an important avenue for value accrual, as do Yieldies (albeit in a slightly less direct fashion). The planned Arkeo airdrops may temporarily offer another reason to own FOX, as FOX ownership provides exposure to said airdrop. Arkeo provides an interesting precedent here; in the future, it’s easy to imagine another DAO-inclubated project taking the same route toward an independent project that the DAO still has significant exposure to.
Additionally, the notion that the DAO could someday turn on fees might make it desirable to own FOX. The “should the DAO add fees?” discussion was one of the intensely-debated topics at the retreat, and at this point there’s no clear consensus on what the community thinks. (The Thorchain fee proposal is a good move toward finding this consensus).
FOX has gotten the DAO this far. But to be viable in the future, ShapeShift needs to not only survive, but also build reliable mechanics by which its success accrues back to FOX holders.
POTENTIAL DRAWBACKS OF THIS PROPOSAL:
Imagine a ShapeShift DAO where there was only an unofficial, non-funded, Tokenomics Workstream. In this scenario, a lot of meaningful work would still get done; the TMDC would still function (its budget is not a subset of Tokenomics), and contributors could still find myriad ways to collaborate–all without needing to spend funds from the DAO treasury on Tokenomics functionality or leadership.
WHAT THIS VOTE DOES:
1.) Fund the Tokenomics Workstream with a monthly Workstream Leader salary of $14,000 worth of FOX (payable in 12-month-timelock Boosted FOX Hedgey) and a one-time distribution of 17,933 USDC (payable in February).
2.) Re-elect Kent as the Tokenomics Workstream Leader.