[SCP-48] Tokemak Reactor Funding via Treasury Fox

This proposal outlines a strategy for earning revenue from the ShapeShift Tokemak reactor. Specifically, the DAO would fund the reactor FOX from the DAO’s treasury, and in return could generate a substantial revenue stream in the form of TOKE rewards.

The Big Picture

The ShapeShift DAO is sitting on a large amount of untapped potential in the form of its extensive FOX treasury (over $200 million at the time of this writing). Thanks to DeFi, there are myriad ways in which we can generate yield on those assets. That revenue, in turn, could potentially be used for treasury diversification and redistribution to FOX holders, and employed in other beneficial ways.

What’s the potential upside?

This proposal calls for XX FOX to put moved into the ShapeShift Tokemak reactor, where XX = the DAO’s total treasury value in USD * YY%. Three options for YY are presented here: 10%, 12%, and 15%. As of this writing, this translates to roughly $20 million worth of FOX, $25 million worth of FOX, and $30 million worth of FOX, respectively.

Assuming current prices of FOX and TOKE, as well as an average Fox Reactor APR of 50% (currently it’s at 42%), a deposit of $30 million worth of FOX (roughly 15% of the current treasury) would generate about $1.25 million in TOKE rewards per month. ($30 million at 50% = $15 mil/yr or $1.25 mil/mo)

TOKE also bears significant value to ShapeShift DAO as the governance token of the Tokemak protocol, which is used to allocate both TOKE rewards and vault liquidity, helping secure deep FOX liquidity and offsetting the need for ongoing liquidity mining programs.

Further, TOKE rewards can also be staked for additional TOKE yield of 50%+ for maximum yield.

What are the potential downsides and risks?

Due to the “balancing game” mechanics behind Tokemak, a sizable deposit of FOX would lead to a substantial decline in the reactor’s APR for FOX rewards–not great for those staking FOX in the pool. However, the very same balancing mechanics would likely lead to a recovery in that APR within a few days: when the APR on the FOX side of our reactor goes down from a large deposit, the APR on the TOKE side goes up, incentivizing the “rebalancing” of the rewards. This, in turn, should encourage TOKE voters to balance out the reactor and bring rewards back up to match the deposit.

With respect to risks: in the worst-case scenario, a smart contract bug or exploit could completely drain our Tokemak reactor, leading to the loss of all of the DAO’s reactor-held funds. This draft proposal outlines the use of 10%, 12%, or 15% of the DAO’s treasury. While the DAO would live to fight another day, losing up to 15% of its treasury would certainly be an unwelcome development–a setback in terms of both optics and almost certainly the short-term price of FOX.

The DAO Treasury can be viewed here: ShapeShift: DAO Treasury | 0x90a48d5cf7343b08da12e067680b4c6dbfe551be

However, this proposal assumes that the risk of a smart contract is small enough to risk a relatively large about of FOX. Tokemak has been live for several months, has a published audit from Quantstamp (https://certificate.quantstamp.com/full/tokemak), and is currently protecting more than $850 million in TVL (Tokemak Protocol: TVL and stats - DefiLlama). This suggests (although certainly does not guarantee) that there are no game-stopping smart contract bugs lurking in the shadows. Similarly, the game theory behind TOKE has worked fabulously thus far, as seen by its steady success across various projects’ reactors. This also bodes well for its continued success.

Given Tokemak’s track record of liveness and security thus far (including, more recently, our own reactor), the risk/reward profile of this proposed strategy appears favorable enough to pursue it. Additionally, the DAO itself is streamed roughly 250,000 FOX every day, which would gradually replenish the lost FOX in the event of a complete, worst-case scenario loss.

What exactly does this Proposal do?

YES: FOX representing 10%, 12%, or 15% of the ShapeShift DAO treasury (the exact amount will be determined via community deliberation prior to voting) would be deposited into the FOX Tokemak reactor.

NO: No changes are made.

  • How much of the FOX treasury should we put into the Tokemak reactor?
  • 10% of the DAO’s treasury
  • 12% of the DAO’s treasury
  • 15% of the DAO’s treasury
  • Something less than 10%
  • I don’t support this proposal under any conditions

0 voters

4 Likes

Previous step, Forum, can be viewed at Draft Proposal: Fund our Tokemak reactor with FOX from the treasury

3 Likes

After reading this proposal, and hearing about it in Tokenomics office hours, I’m fully in favor of this proposal. For transparency, I voted for 15% :heart_decoration:

I worry about the decreased APR for FOX hodlers - since its a single sided pool its one of the lowest barriers to entry for L1 FOX, and it would be awesome to keep that APR as high as possible.

There is a mention that “TOKE rewards can also be staked for additional TOKE yield” - are there other ideas for using that TOKE? Or, would it be reasonable to add an addendum promising to take the TOKE rewards on the other side of the reactor in order to keep buoying the APR on the FOX side?

2 Likes

Thanks for the vote and awesome questions, PeteCoin.

APR will indeed be negatively impacted on a short-term basis. However, as noted above, it’s likely that this will quickly rebound: “…the very same balancing mechanics would likely lead to a recovery in that APR within a few days: when the APR on the FOX side of our reactor goes down from a large deposit, the APR on the TOKE side goes up, incentivizing the “rebalancing” of the rewards. This, in turn, should encourage TOKE voters to balance out the reactor and bring rewards back up to match the deposit.”

Without this balancing mechanic, it’s likely that the APR would remain depressed and thus make this proposed strategy less appealing.

In terms of other things we can do for TOKE rewards, one attractive idea is that we could swap them for stablecoins and then use those stables for either hedging or growth purposes. The use of TOKE to balance on the reactor - on our own part - is another interesting option, although as described above it’s likely (but not guaranteed) that this dynamic will rebalance due to the incentives of other market participants.

1 Like