I believe that the current usage of proceeds, in particular buy back & burn practice described and approved via MIP-7, was designed with best intentions but in reality acts the opposite way - against price of MC, so needs to be changed asap. Each buy back & burn increases every holder’s piece of pie but the pie itself is becoming much smaller.
Consequently I also believe that burning a part of community rewards doesn’t make sense - better options are moving to treasury or using for staking V2 rewards.
As my claim might look counterintuitive below I will try to prove.
I put the simplest logic here and long story in Rationale section:
Thought experiment 1: let’s imagine today we buy back and burn 1% of max supply (9.14M tokens). Current price is $0.88 so we should spend $8M. Which represents 8/104.1 = 7.7% of our Treasury! (I ignore the fact we will spend even more money because price will go up during purchase).
We think that we decrease supply and thus increase price, but in fact we do exactly the opposite because we can expect market will correct market cup and price to fit treasury size which becomes lower - and lower much more significantly (in percent) than the decrease of supply. We can not expect market cup to remain the same if treasury goes down.
Thought experiment 2 (same but extrapolated): we take the whole Treasury, buy back and burn as many tokens as possible with current price (again I ignore price move during purchase). $104.1M/$0.88 = 118M tokens. After that we just switch off the light and close DAO because Treasury is 0 and all remaining 800M tokens worth 0 as well. Of course we don’t do that in reality - I used Reductio ad absurdum to illustrate that each buy back & burn is decreasing the price of remaining tokens.
We spend our treasury to decrease token price - isn’t it funny? We already bought back around 4M tokens, means already spent some millions USDC. I believe without doing that the price could be some percent higher than now already. Who wins from buy backs if we lose? The only winner is the one who sells immediately after buy back. I think smart guys could write a bot to catch these little price spikes but that’s a speculation.
Another remark (less important but still): In MIP-7 a term “proceeds” is used - as a base for distribution (15 percent of proceeds are distributed for buy backs, 60 for price supporting orders, 25 go back to treasury). It may look OK if profit is huge - like we invested $1M to tokens and sold it for $10M - $2.5M returns to treasury. What happens if we just get 10% of profit or if we get loss ? The return to treasury will be much lower than initial investment - and that’s very bad. I think that if we want to have some rules about profit distribution we need to use not the individual proceeds but the whole treasury growth (monthly or annual) as a base for calculations.
To improve our Treasury management practices.
All of us want to maximize our profit, means to increase MC price (ok, some want it to go lower to buy more but temporary). So let’s ask ourselves - which factors influence MC price. The answer is much more simple than for BTC or ETH: MC is kind of ETF and token price will depend on success of its investments (including of course investments to own products like Sphere, Edenhorde etc).
Investors valuate ETF by metrics like P/B (Price-to-Book) and P/E (Price-to-Earnings), there are others like risks, liquidity etc. but these two are basic. (Remark: that’s totally different from L1 where number of users, transactions, volume, technologies, adoption, hype, supply/demand and zillion of other factors are in play.)
P/B in our case is market value (FDV) to Treasury value ratio. Currently (yes, I know that if we continue burning the supply may go down 1.5-3 times but it doesn’t matter for my conclusions - just alter some numbers) it is equal to 914.6M (max supply as of today) * $0.88 (token price) / $104.1 (treasury size according to last report) = 7.73 (per each $1 of treasury we have $7.73 of fully diluted market cup, if we close DAO today and unvest everything we would get ~$0.11 per token). By itself this number isn’t good or bad - investors may compare that with competitors and other opportunities to find most attractive variants.
P/E is simply speaking just the performance over time - how much profit company gets per token per year, how fast the treasury per token is growing. Right now we are around zero as treasury is down from $117.2M in November to $104.1M in June with supply down from 1B to 914M, still we see that we significantly outperform at least the cryptomarket in general (don’t have any data about companies which might be considered as competitors).
So, we can expect that MC market cup would be a function of treasury size and treasury performance over time. Market (investors) looks at quality of our portfolio and its performance and gives us P/B - so we get market cup and token price.
That means at one particular moment MC market cup (I prefer to use FDV, discussed in Additional notes) is proportional to treasury size.
This assumption is the pillar of my logic - if you want to criticize this proposal that’s the best place, the rest is more or less arithmetic. I believe that right now if our treasury was twice bigger, an MC price would also be twice higher and if our treasury was twice smaller - MC would be twice cheaper. Of course if instead of “twice” we put 10 times or 100 times it might become different because we would be of different scale and might be compared with different players. But inside reasonable range of coefficients - our market cup is expected to be proportional to treasury size.
And for MC we should expect market to be “reasonable” - as everything (our treasury and its performance) is transparent and “objective” valuation is not difficult. We may (I hope will) get new waves of hype but it will be caused by objective reasons - when we will demonstrate how quickly our treasury is growing.
Now a bit of arithmetic:
What happens when we buy back and burn of N% tokens ?
[New Max Supply] = [Max supply] * (1 - N%/100).
[New Treasury] = [Treasury] - [Max Supply] * [Current price] * (N%/100) = [Treasury] - [P/B] * [Treasury] * N% = [Treasury] * (1 - [P/B] * (N%/100)).
[P/B] doesn’t change - see my explanations above. That means:
[Max Supply] * [Current price] / [Treasury] = [New Max Supply] * [New Price] / [New Treasury]
[New Price] = ([Max Supply] * [Current price] * [New Treasury]) / ([New Max Supply] * [Treasury])
[New Price] = ([Max Supply] * [Current price] * [Treasury] * (1 - [P/B] * (N%/100))) / ( [Max supply] * (1 - (N%/100)) * [Treasury] )
[New Price] = [Current Price] * (1 - [P/B] * (N%/100)) / (1 - (N%/100))
So we’ve got a nice little formula from which we see that when P/B > 1 the new expected price after buy back will be lower than current price. Can become 0 if N% is big enough.
Conclusion: buy back & burn may have sense when we have P/B < 1. Right now it would be with price around $0.11.
Consequences: same logic might be applied to community rewards we are burning. If instead of burning we just sell it (when P/B > 1) - we increase Treasury and expected MC price. That sounds counterintuitive - but it is so. I’m not proposing it right now - because we might think about rewards for Staking V2, but I propose to stop burning.
There are two important non-economical benefits from burning:
1.1. It allowed to form strong community by showing the intention of DAO to work for the interests of token holders and to maintain a good morale through this tough bear market. I also felt “wow” each time I saw news about burning - before our new amazing treasury report pushed me to think about economical sense. Emotionally I’m sad to propose stopping it. And even though I believe it was a mistake - I think this mistake was somehow useful.
1.2. It created a “Point of Sale” - people like deflationary tokens. Still it is clear that our success does not depend on number of users attracted to MC token. It depends on success of MC investments and products - on Treasury performance. We don’t really need to market MC token, it may create a short term price moves but has no sense mid & long term.
I also expect some criticism around using FDV vs current market cup. That’s arguable - I believe FDV is more fair. But even with current market cup P/B is slightly greater than 1. One of the most radical forecasts I saw in TG chats for Max Supply after intensive burning was 250M - also gives P/B much greater than 1. So it will not change the conclusion.
If we don’t burn - how we can make sure that token price will reflect the success of DAO investments?
I’m pretty sure that we will not need to use artificial measures for that - market will valuate the treasury performance. But if we need - we can start distributing dividends with direct airdrops - it will quickly send token price to fit. I don’t think we should think about that too much before Treasury performance shows real strength ($1B? $10B?)
- We don’t buy back & burn MC if P/B > 1 (when FDV is greater than Treasury).
- We don’t put price support above P/B = 1. Can be put lower (not so much sense with current market conditions).
- We don’t burn unused community rewards. We accumulate it till the decision about Staking V2 is done. We expect it to be used either for staking rewards or moving it to Treasury.
- Generic rules to manage treasury (if any) should be based on treasury performance metrics (instead of individual proceeds).
I do not want quick voting on that. I would appreciate thoughtful discussion with as many reasonable arguments against as possible and as many token holders involved as possible - till we get a widely shared vision. If anybody wants - I will be pleased to talk at discord (same name).
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