SUMMARY:
This proposal outlines the scope and budget for the next two quarters of the Tokenomics Workstream, from January 1st, 2023 through June 30th, 2023.
For additional context around this proposal and discussion of performance and goals, see the Ideation forum post (which exceeds the Snapshot character count), as well as the linked Related Discussions.
Incubation Post: https://forum.shapeshift.com/thread/draft-proposal-fund-the-tokenomics-workstream-in-q1-q2-2023-and-re-elect-kent-as-its-leader-41836
Ideation Post: https://forum.shapeshift.com/thread/ideation-scp-124-fund-the-tokenomics-workstream-in-q1-q2-2023-and-re-elect-kent-as-its-leader-41884
Related Discussions:
https://forum.shapeshift.com/thread/random-questions-41908
https://forum.shapeshift.com/thread/a-discussion-of-concerns-voiced-by-thekiloalpha-on-twitter-41951
Q3/Q4 PERFORMANCE REVIEW:
In this section I’ll take a look at our primary goal from the prior proposal (Q3/Q4) and evaluate our performance. (See the ideation forum post for deeper discussion of goals).
Prior goal #1: Preserve and extend our runway
The DAO currently has 10 months of runway, through October 2023: https://docs.google.com/spreadsheets/d/1tKUiYs2vCYMmFl8A7mAqBQWL4B2EvwMNqhoNz_sG97s/edit#gid=1195054952
This figure is similar to the runway that existed when the prior Tokenomics proposal was written in June 2022.
(Note that the Ideation version of this proposal referred to 11 months, rather than 10 months, of runway. In the intervening week since it went live, new expenses related to infrastructure spending attributed to the Engineering Workstream have been brought to light. These expenses stem from infrastructure spending that the Fox Foundation was previously paying for, which will be borne by the DAO moving forward.)
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). As shown by the ShapeShift Treasury DAOshboard, these initial efforts have been successful; 11% of the DAO’s stablecoin treasury is now denominated in LUSD.
ShapeShift Treasury DAOshboard: https://docs.google.com/spreadsheets/d/1SmTXEd3ALGWGMpW54qRpvaoCzRw2BQKPXag5K5XS3K8/edit?usp=sharing
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 10-11 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).
PRIMARY GOAL FOR THE FIRST HALF OF 2023:
Continue to focus the community on the goal of runway preservation
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.
ADDITIONAL GOALS
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.
BUDGET STUFF:
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.
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, 20% Boosted FOX Hedgey) and a one-time distribution of 17,933 USDC (payable in February).
2.) Re-elect Kent as the Tokenomics Workstream Leader.