SUMMARY:
This proposal outlines the scope and budget for the next two quarters of the Tokenomics Workstream, from July 1st, 2023 through December 31st, 2023.
Q3/Q4 PERFORMANCE REVIEW:
In this section I’ll take a look at our stated goals from the prior proposal (Q1/Q2 2023) and evaluate our performance.
Prior goal #1: Runway preservation
Since first taking this role, my number-one focus has been to encourage the ShapeShift community to be wise stewards of its treasury. While the Tokenomics Workstream has no ability to unilaterally make treasury decisions, I believe its guidance and counsel has been invaluable during this protracted bear market.
In my prior proposal, I discussed the strong likelihood that a challenging crypto landscape would persist in the first half of 2023. As such, a continued focus on runway preservation appeared to be the most prudent way forward. I continued to bang this negative-outlook drum during the various promising-yet-false recoveries in the first half of the year, cautioning the community against basing its planning on even a slight assumption that a more positive landscape would materialize in the near-term.j
In early-January the DAO had 10-11 months of runway denominated in stablecoins. Currently it has roughly 8 months. This is at the lower end of the range that the DAO has had through most of the bear market. So–in terms of months the runway has been winnowed down slightly rather than “preserved,” but not to a point where the DAO’s short-term existence is threatened. In hindsight I should have used a more specific goal than “Runway preservation”; the spirit of the goal is obvious, but it could have benefited from more specificity. (This proposal does provide a more specific goal).
As before, the DAO’s ongoing Bond Protocol program has been the prime contributor to its runway extension efforts. However, the TMDC was much more reluctant to use this tool as FOX descended to historical lows. This is the primary reason why the runway has shed two months since the last proposal.
This presents an intriguing challenge for the DAO–one which fortunately has a near-term solution, as we’ll explore shortly.
Stablecoin diversification
While this was not a stated goal in the prior proposal, it was highlighted as an important question for the community to explore. It subsequently became an urgent issue during Q1/Q2 that’s worth briefly recapping.
In the wake of the temporary unpegging of USDC, the DAO found itself in the precarious position of having most of its stablecoin treasury denominated in that asset. The TMDC had taken some initial action to diversify into LUSD, but at less than a month of expenses this was arguably not sufficient diversification.
Thus, the diversification issue became a timely and prominent issue–one which was explored and discussed in detail in the various Tokenomics meetings.
Following these discussions, the TMDC opted to move a portion of its stablecoin holdings out of USDC. Additionally, multiple subsequent bond offerings provided exposure to LUSD and USDC. As a result, the DAO is now much more well-positioned to weather a depegging event (as of early-July 2023):
571,000 USDC
445,000 LUSD
173,000 USDT
In a worst-case scenario where USDC went to zero (highly unlikely, given Circle’s post-unpeg decision to pivot out of treasuries), the DAO would still have enough stablecoins to cover roughly three months of expenses. Similarly, a complete collapse of either LUSD or USDT would leave the DAO with several months worth of stables.
There is no perfect way to manage the various stablecoin risks. But by diversifying out of only USDC, the DAO has diversified these risks in a sensible way.
Prior goal #2: Continue leading strategic discussions
In my previous proposal I opined that “…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.”
Thus, I took on the responsibility of ensuring that the DAO continued to have regular, community-wide discussions about the most important questions, such as: who are we; why are we here; what should we build; what should we prioritize or do differently?
Thanks to these monthly strategy discussions–typically characterized by solid community attendance & robust (and sometimes wonderfully-heated-yet-respectful discussions)–the DAO has been able to maintain that focus. After half a year of having these chats, there now appears to be a better sense of cohesion and agreement among Workstream Leaders about what we should (and should not) be working on.
While I certainly can’t take credit for the hard work of, say, the Product Workstream in creating a clearly-defined roadmap (accompanied by clear success metrics), or the Engineering Workstream for its deft allocation of limited resources, I do sense a strong shift away from the more haphazard and less-focused approach the DAO used to take. I believe our strategy chats are part-and-parcel of this shift, as it keeps those crucial existential questions top of mind while also helping get buy-in and support from a broader portion of the community.
Our monthly discussions also help avoid groupthink, which as I mentioned in my BUIDL Asia talk is one of the most dangerous social dynamics for any DAO. These meetings can help us avoid that minority-opinion-stifling and centralizing phenomenon by ensuring all community members have a chance to voice their opinions–especially with respect to questioning the current strategic direction and posturing of the DAO.
Prior goal #3: Continue to conduct and present research, with a focus on Ethereum scalability
In the first half of 2023, an R&D-driven discussion of Ethereum-based scalability platforms was featured in seven separate Tokenomics calls.
I’m a big believer in a scalable future where Ethereum-based rollups garner the lion’s share of transactional throughput and liquidity. This is not to cast shade upon alternate ecosystems such as Cosmos or Solona. However, due to the superior balance of decentralization and security, for the past two years I’ve been anticipating a future where rollups like Optimism, STARKWARE, ZK-sync, and Arbitrum gain more traction than their “alt-L1” counterparts.
With this potential future in mind, I’ve made it a point to consistently educate and inform the community about the state of rollups. Interestingly, the metrics on rollup adoption vis-a-vis other ecosystems support my thesis; take a look at DefiLlama or L2beat to see how rollups are, in fact, outperforming other ecosystems. It’ll be interesting to see if this trend holds once the bear market ends.
Fast-forward to present day, and it’s wonderful to see that the DAO has exposure to the broader rollup ecosystem with its Optimism partnership. Meanwhile, Arbitrum and ZK-Sync have a presence in our Product discussions. To the extent we can optimize and prioritize towards the rollup world, we may be better positioned to leverage the multi-chain thesis that ShapeShift is predicated on.
FOX is near all-time lows. Hasn’t the Tokenmomics Workstream failed? Shouldn’t it be replaced?
I’m anticipating some community members will have this thought. FOX has dropped to all-time lows and consistently underperformed ETH. Why, then, should the same Workstream leadership be elected to another term? They’ve presided over an excruciating downtrend in the token price that shows no signs of improvement!
My response to this critique is very simple: it is not the job of the Tokenomics Workstream to make Number Go Up. Nor has it ever been. In prior proposals and meetings I’ve stated repeatedly that the Workstream under my leadership would never encourage the DAO to focus on the token’s price–particularly with tactics designed to boost the price in the short-term, at the expense of long-term viability. This might include hamfisted tactics like token burning, DAO purchases of its own token, and similar approaches.
The Tokenomics Workstream’s core responsibility is to encourage the DAO to be wise stewards of its treasury and not run out of funds–not to ensure that FOX token exhibits any specific type of price action. If the token does trade happen to trade much higher in the years ahead, it will be because ShapeShift a.) survived the bear market without going bankrupt, and b.) built a platform and/or profitable products with a reliable product/market fit. These are the elements that may make FOX move higher eventually–a potential outcome of Tokenomics and everyone else playing their role successfully here at ShapeShift.
So why is FOX near historical lows? Arguably, a very large portion of the downtrend can be chalked up to the simple fact that in this type of market environment, the majority of non-blue-chip crypto assets are in persistent downtrends. Additionally, the DAO continues to struggle to find that elusive product/market fit. There are certainly promising signs on a number of fronts, but we’re not there yet. Hence the need for a stablecoin runway to provide the DAO with the takeoff room (and more specifically, the time) it needs.
The price of FOX has never been a direct success metric for Tokenomics, nor should it ever be. This would create a situation of perverse incentives where the Workstream might encourage the community to take short-sighted actions to change the token’s price. This type of financial engineering has no place at the DAO.
Anyone who differs is welcome to vote against this proposal.
In terms of helping the DAO find a viable business strategy, this Workstream certainly does play an important role. It can also help articulate potential value accrual mechanisms for FOX (as we’ll touch on shortly).
PRIMARY GOAL FOR THE SECOND HALF OF 2023:
Encourage the community to take the necessary steps to maintain the stablecoin runway at or above 8 months.
Once again, it’s crucial for the Tokenomics Workstream to help the community keep a conservative posture with respect to its treasury. In practice, this means no crazy degen positioning; no wildly optimistic assumptions about when market and industry conditions will improve; and a constant focus on maximizing the time period for the DAO to become self-sufficient.
To be clear, the hesitancy of the TMDC to continue Bond Protocol offerings with FOX at all-time lows does potentially put the DAO in a very precarious position: unless something else changed, the DAO would only have 8-10 months of runway (the two extra months might be achieved via sales of the community’s non-stablecoin assets, as well as a partial offset of expenses with monthly revenue).
This is why the timing of the Fox Foundation loan–recently approved by the DAO’s governance process but still awaiting approval from the Foundation’s Board–is so crucial. Simply put, this loan of up to $1 million worth of USDC would provide the means to extend the DAO’s runway by up to six months, from January/February 2024 to July 2024 (assuming the associated revenue-related performance incentives were maxed out). Meanwhile, the DAO would not be faced with the tricky decision of either making its stand with only 8-10 months of runway, or pursuing further Bond Protocol offerings with FOX at historical lows.
The fundamental stance of the Tokenomics Workstream will not change if the loan is approved; as always, a cautious, deliberate, and conservative approach is the way forward. The TMDC, for its part, might even decide at some point to augment the loan stablecoins with further Bond Protocol offerings. And meanwhile, the performance-based revenue requirement for the loan should ostensibly help the DAO prioritize various initiatives more effectively.
ADDITIONAL GOALS
Continue leading monthly strategy sessions
As outlined above, our regular discussions have helped the DAO talk through crucial issues while involving a larger portion of the community in these discussions. Conversations about strategic direction are always necessary; Q3/Q4 will feature more of the same.
Continue to conduct and present research and analysis on a monthly basis, with a focus on Ethereum-based rollups
Similar to last term, I see a great deal of value in donning my old R&D hat and continuing to keep the DAO informed about the latest developments around platforms that combine scalability and decentralization. One tantalizing question is: given the emerging, tentative success of platforms like Arbitrum, what can ShapeShift build to better meet the needs of those networks and their users?
BUDGET STUFF:
Workstream Leader Compensation
This proposal continues with the previous approach, whereby the Tokenomics Workstream Leader receives $14,000 worth of FOX each month.
As before, this proposal entails that these monthly salary payments would be made via Boosted FOX Hedgies, with a 12-month timelock. Per the Governance-approved Boosted FOX proposal, this time-locked option provides an extra 20% of FOX (on top of the regular monthly salary) following the end of the lockup 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
The Tokenomics Workstream currently has 11,600 USDC, after starting the term with 20,000 USDC. Spending in Q1/Q2 totaled 8400 USDC and can be broken down as follows:
1500 USDC: March - ETHDENVER DAO team dinner
1500 USDC: March - DAO sponsorship of KryptoDenver/ETHDENVER brunch
400 USDC: May - DAO sponsorship of PizzaDAO Denver event
5000 USDC: June - Travel (2500) and lodging (2500) expenses for ETH Seoul and BUIDL Asia
I was particularly proud to represent ShapeShift in my talk at BUIDL Asia in Seoul, where I explored challenges and potential solutions around the DAO’s journey over the past 18 months. I also had the opportunity to moderate an Interoperability Roundtable with other experts in the field–an apt fit, considering ShapeShift’s own focus on a multi-chain world. To date, the DAO hasn’t had much of a presence in Asia. It’s my hope that our presence at this conference can set the stage for a further advance into that market in the coming years.
“Thought Leadership” is a cliched term, but it’s super-important from a DAO perspective. We’re out on the frontier. We’re making this shit up as we go along. There is no playbook to follow. If other DAO’s can learn from our successes and challenges, the broader crypto world will be a better place, and the next iteration of DAO’s will have greater odds of success.
Moving forward, the current 11,600 USDC in the Workstream’s Colony should be sufficient to meet operational and logistical expenses in Q3/Q4. Thus, there is no USDC operating budget request in this proposal.
Return on Investment in a Tokenomics Workstream Context
Recent discussions about each Workstream outlining its own ROI are interesting from a Tokenomics perspective. Perhaps someday the DAO will be in a position where it could earn a return on its treasury holdings, effectively turning Tokenomics into a profit center. However, we appear to be a ways off from this scenario; it would be folly to risk even a small portion of the DAO’s stablecoin runway in order to earn a single or double-digit return in staking or DeFi protocols.
The lack of a clearly-definable ROI (at least in monetary terms) of Tokenomics is one reason why it makes sense for its Leader salary to be paid in time-locked FOX rather than USDC. Given the focus on preserving the stablecoin treasury, it’s nice to have effectively zero impact on the runway. This arrangement also creates an elegant long-term incentive mechanism; the contributions of Tokenomics are geared toward survival and success over the coming years.
At the end of the day, the Tokenomics Workstream here to a.) constantly and transparently communicate the state of the DAO’s finances, b.) maintain a culture of financial prudence, c.) encourage a strategic mindset around how the DAO positions itself in the broader crypto marketplace, and d.) help cultivate an environment where civil discourse and respectful debate discourages centralization and allows the DAO to more effectively tap into the collective hive-mind brain of its myriad contributors and members. Continued success on all these fronts would likely mitigate the threat of running out of operating funds, while also putting the community in a better position to succeed over the long-term.
VALUE ACCRUAL: Why would anyone want to own FOX?
I posited this in the prior proposal, and it remains an important question for the DAO to ponder. It’s also a crucial consideration from a Tokenomics perspective.
Over the past half-year I’ve become convinced that project incubations along the lines of Arkeo could be one of the most powerful value-accrual mechanisms for FOX. Specifically, airdrops of incubated projects might provide a powerful incentive to join the community. Of course there are no guarantees of success–and Arkeo has yet to leave the tentative testnet phase–but there may be a clear, repeatable template here in the ShapeShift-as-an-incubator strategy. I’m looking forward to continuing to advocate for further exploration of projects that might fit this paradigm.
In the two coming quarters we’ll focus heavily on this value accrual piece as part of our regular strategy discussions. It’s crucial that the DAO thinks outside the box and considers various perspectives/ideas–both in general, and with this specific topic.
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 Hedgies, which provide a 20% bonus upon the expiry of the unlock period).
2.) Re-elect Kent as the Tokenomics Workstream Leader from July 1st, 2023 through December 31st, 2023.