Fire extinguisher - reiteration of MIP-7

Authors
@timour

Summary
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.

Abstract
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.

Motivation
To improve our Treasury management practices.

Rationale
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.

Additional notes

  1. 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.

  2. 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.

  3. 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?)

Proposal

  1. We don’t buy back & burn MC if P/B > 1 (when FDV is greater than Treasury).
  2. We don’t put price support above P/B = 1. Can be put lower (not so much sense with current market conditions).
  3. 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.
  4. 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).

Copyright
Copyright and related rights waived via Creative Commons CCO

1 Like

Timour thanks for sharing your thoughts.

Before we get to the topic of Burning tokens, Want to clarify few things .

Why are we considering FDV in P/B ratio ? Shouldn’t it be Market Cap ?
It takes years for all tokens to be released in which case we have to come up with some reasonable metric for how the treasury value will be at that time.
If we are considering current treasury value it’s best to consider currently supply no ?

considering current market cap of - 141,670,674 tokens * 0.836 = $118,448,197
current treasury value of $104,100,000
P/B ratio comes out to be 1.1378 .

P/E it’s too early to consider now in my opinion.
MC income mainly comes from Seed investments which takes few years to fully realise. Considering it’s not even been 8 months since MC started seed investments and frankly only ramped by in last 6 months, we should wait out for another 1.5 yrs to compare the earnings to investment ratios.

Want to know if you agree / disagree with the above points before I put forward my points on the issue of burning tokens.

You have mentioned the FDV issue in the Additional notes but want to know why you think FDV is fair while only taking the current treasury value into consideration.

I can see it as a good metric for absolute worst case performance for MC . Meaning all our investments go to zero, all the tokens are in circulation.

I feel any argument put forth considering absolute worst case scenario is not fair.

I would encourage you to explain further how this metric is more important than one with market value because it effects P/B and P/B is core part of your proposal.

We need to agree on that ratio before commenting further on the proposal.

2 Likes

Thanks a lot for excellent questions!

Why are we considering FDV in P/B ratio ? Shouldn’t it be Market Cap ?

Primary reason against using current Market Cap to calculate the price level above which we don’t buy - see my “Thought experiment 2” in Summary section: if buy back & burn is good for MC token price then more buy back & burn should be even better - right?

Now let’s imagine our current price is $0.7 . So that with current Market Cap the P/B is less than one: 141,670,674 tokens * $0.7 / $104,100,000 = 0.95.

That means we want to buy back & burn - the more the better. So with $0.7 we can buy back & burn $104,100,000/$0.7 = 148,714,285 (assuming price is not changed during purchase). But if we do that - Treasury is 0 and all remaining 766M tokens worth 0. It proves that our buy backs were wrong - expected price goes down, not up (function is evidently monotone - we can’t assume that some buy backs are good and more become bad: either the price is good for buying or not). Same calculation is applicable with any Market Cap between current and FDV. Only when we take FDV it becomes different.

Secondary reason: unlocking goes not so slow - beginning of next year we should be at half of Max Supply (huge unlocks Q3,Q4), end of next year - at 3/4. (https://1525737383-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FGZF4pyNeMbctNxpuaKb9%2Fuploads%2FGdRzVKSyfnK7irSbkrSz%2F33.png?alt=media&token=048180d6-2bf9-4571-8cec-1a28c9d77b63 ). So even though right now Market Cap and FDV are very different - relatively soon it will not be so and the question of “right P/B” will become more “academic” than practical.

Third reason is less objective: investors look at FDV. If you read MIP-7 (Abstract section) it is identified as an issue for which the solution was proposed to reduce supply by burning.

P/E it’s too early to consider now in my opinion.

I agree. I mentioned P/E to describe how market may valuate us at each particular moment (If I only mentioned P/B it could be easily criticized because performance over time is not less important than current state). Right now I think it is mostly not in play yet - except we can mention that we (Treasury) didn’t go down with cryptomarket - good!

Another thing about P/E - well, buy back & burn with P/B > 1 decrease P/E. Treasury per token goes down - means P/E as well. I forgot to mention that in my post so thanks to your question I can add a little additional argument.

Thanks for clarifying your point of view.
While I see merit to this metric I feel it’s appropriate for slightly mature companies.
Early Stage Companies / Growth related companies / Mature Companies use different metrics to signal their strength.

In this case P/B with FDV I feel is appropriate for slightly more mature DAOs not for a DAO which hardly existed for an year.

At this stage what we should signal is active investments / Products we are launching . Which I think we are doing well with treasury dashboards.
As and when our seed investments gets unlocked we should also showcase the ROI on those investments + how much earnings they bring in
After 3 yrs we can signal treasury size as a signal to how strong we are.

My reasoning is :-

  • Currently treasury mostly consists of everything that was raised from LBP. DAOs job is to invest into Games.
  • At this stage what does P/B show ? It def won’t reflect how well we did our job.
  • IN such case what is the point of highlighting P/B as the metric. It’s like judging an early stage start up in terms of their profitability . Investors don’t do that for a reason.

To me most investors fall under two buckets.

Sophisticated investors who research and base the valuation on some fundamental / Growth analysis.

  • To these we should keep highlighting our potential (not our current state) . By showcasing how well our investments are doing.
  • To these burning may not matter, they might prefer adding to the treasury and reinvesting into more games.
  • Problem with this we have enough treasury to keep investing even if we don’t add our income to the DAO.

Retail investors who mostly go by gut feel or narrative.

  • They care about some signals which are sadly not under our control.
  • Influential people talking about your project is one signal. I think we are already doing good in this area
  • Burning tokens → Is emotionally bullish to many retail investors. I think MIP-7 really addressed this.
    I remember whenever I faced counter-arguments to my MC thesis , I tried to explain logically to people and they refuse to understand it. But when I say MC simply burns tokens with a part of their returns from investments. The better the investments do more the burning will be. They understand and acknowledge it.

Sadly the current GameFi market is mostly retail.
In lieu of above arguments, I feel we should

  • Let MIP-7 be for now and revisit it during our 2nd year once we start getting significant returns from investments
  • Revisit if our treasury is trending lower and we need to save dry powder for more investments.
3 Likes

I agree with most of your arguments but still get to different conclusions :grinning:.

Early Stage Companies / Growth related companies / Mature Companies use different metrics to signal their strength.
In this case P/B with FDV I feel is appropriate for slightly more mature DAOs not for a DAO which hardly existed for an year.


After 3 yrs we can signal treasury size as a signal to how strong we are.

So let’s make a simple model for one more thought experiment: let’s assume right now we are at early stage, the market cap and price are completely independent from treasury size and P/B. But during the next 3 years we are maturing and step by step the market cap becomes function of treasury, P/B & P/E, simultaneously all vested tokens unlocked. So what would be an outcome of buy back & burn?

  1. Burning tokens right now should make a clear positive effect on price - no doubts. Supply down, morale up.
  2. As part of Treasury is burnt - in 3 years we have significantly lower Treasury. If for example 10% of Treasury is used each year for buy back & burn (don’t know exactly how much we spend this year - but 4M tokens bought back, so I suppose 10% of Treasury is relevant rough assumption) - in 3 years we have Treasury at ~73% of what we could have without buy back & burn. Means market cap as well. P/E is also lower than it could be (as Treasury is growing slower).

Conclusion is: even if we take the most extreme assumption that decrease of treasury is not influencing the price at all now (can’t be like that in reality - I suppose the very minimum is somewhere in between) - we will pay for that in a future. And the only who benefits from burning - those who sell early, before this future comes. If DAO should choose whom to support - those who want to sell quickly or those who want a long run - what would you choose?

Currently treasury mostly consists of everything that was raised from LBP. DAOs job is to invest into Games.
At this stage what does P/B show ? It def won’t reflect how well we did our job.

It shows our muscles, our assumed potential. Like with wrestler before the fight - you don’t know if he is good or bad, but if he has bigger muscles it makes us to be more optimistic about him.
Simple question: imagine our whole Treasury has exactly the same structure like now - just quantity of all tokens (and overall size) is twice bigger or twice smaller. What would you think about market cap and token price in both cases ?
Another simple question - when the chances to get $1M annual profit are bigger - when you start with $200K or when you start with $400K (without knowing anything about performance) ? And to estimate profit per 1USD invested we need to estimate absolute profit (not just percentage). So both Treasury size and performance are kind of multipliers.

To these we should keep highlighting our potential (not our current state) . By showcasing how well our investments are doing.

Yep, quality of our investments plus quality of our money management (how do we manage the not invested part of Treasury) = P/E

Problem with this we have enough treasury to keep investing even if we don’t add our income to the DAO.

This is a serious counterargument. Yes, if we assume that number of good opportunities we can find is limited (for example by $200M per year) - then we don’t need to increase the treasury above certain level and everything above should normally be just distributed to token holders (even in that case I suppose direct airdrops would be much better than buy backs & burns). That would also mean that market cap has limit of growth - and not at the Moon level. Would be a serious red light. But I do not think it can be the case - games related markets are huge and growing (https://earthweb.com/wp-content/uploads/2021/10/image-40.png), big guys like a16z create 10-11 digits funds for crypto investments. New markets like metaverse & NFT are emerging. I think you got an opinion that we have enough treasury because we have significant part in stables. But - as far as I understand that’s not because we don’t have where to put money but for two possible reasons:

  1. Money management - safety (protection from black swans like what we see this year with recession and contagion combo) and always keeping enough dry powder to jump into good opportunity. Good idea is to have a rule - which percent of treasury should always be in stables (may be core team is doing that already with ~40% of Treasury kept in stables).
  2. Size of the team - the more deals we want to find and manage simultaneously, more products to deliver - the bigger company we should have. And growing a company can’t be immediate. So it might create temporary bottlenecks for number of investments and products in development.

Though would be great if the team (@DAOCoreContributors) could comment on that - which size of Treasury they think we could comfortably accommodate without sacrificing quality of deals - now and during 2-3 next years (not exact numbers, just order of magnitude).

Burning tokens → Is emotionally bullish to many retail investors. I think MIP-7 really addressed this.

You are 100% right here. But for ETF “emotional” investors can bring only a short term price fluctuations - longer term objective evaluation will clearly win. If Treasury will be $1B and each year generates $200M of profit (average) - we more or less understand what market cap can be expected. MIP-7 was created when a lot of investors (including myself) didn’t have a good understanding of what MC really is, its treasury size and structure, so it was quite good to emotionally support community. But now - to pay millions of USDC for emotional support looks a bit wasteful.

Let MIP-7 be for now and revisit it during our 2nd year once we start getting significant returns from investments

If you follow my logic above - I think that harm happens right now, with each buy back. With my initial assumptions (market cap is proportional to treasury size at any particular moment) - both immediate harm and harm for future. With your model (difference in valuation between early stage and mature companies) - at least harm for future.

Also - you didn’t comment on my last proposal about using proceeds as a base for calculations - any opinion ?

Meow,

MIP-7 is installed as a strategic (long-term) system, where burning plays a large part of how the tokenomics are meant to be set up. Negating that through the use of very arbitrary acrobatic mathematics does not really seem to compute with the ideals we set out.

All of that was already thought of way in advance with the creation of MIP-7, which greatly supports long-term investors in their approach to risk. Fundamental changes like the ones you mention, greatly shifts risk and demeans their expectations, which is not what MC is about.

Part of MIP-7 that is often under-looked is how liquidity engineering is more cost-effective with the proposed limit-order system. Too much emphasis is made on ‘MCAP’ and ‘FDV’, instead of actual liquidity both passive and active. These terms are, at least in our opinion, more about marketing, than they are about economic reality and fluidity of market dynamics.

To give one example, imagine Staking v2 lets people stake for 4 years. That requires expectations to be upheld. A sudden proposal being pushed like the above, and things being shifted in such a way where their expectations are significantly altered is not upholding the MC DAO etiquette nor protects such investors.

Therefore: we don’t agree, and we will be voting against if it comes to a vote.

Signed with both paws,

Mc. Butterface
Sad Cat Capital

2 Likes

Thanks a lot for replying @SadCatCapital . Not having a purpose to change your mind, still I think that your arguments should be answered - especially as they raise ethical concerns about my post.

MIP-7 is installed as a strategic (long-term) system, where burning plays a large part of how the tokenomics are meant to be set up. Negating that through the use of very arbitrary acrobatic mathematics does not really seem to compute with the ideals we set out.

Mathematics and logic are not about ideals. Mathematics can be either right or wrong. Assumptions can be right or wrong. I’m totally OK if flaws or limitations in my equations and assumptions are found (like in my exchange with @deepu256 above), I’m sure we have community members with great minds and education in mathematics and economics who can review and criticize. But negating any system is normal and desirable as long as it is based on evidence and logical arguments, else we could still believe in flat Earth.

All of that was already thought of way in advance with the creation of MIP>-7, which greatly supports long-term investors in their approach to risk.

That’s amazing - so you should be able to show some models and evidence. MIP-7 did not include any mathematical modeling of tokenomics, I hope just to make the document smaller.

Fundamental changes like the ones you mention, greatly shifts risk and demeans their expectations, which is not what MC is about.

My goal is to decrease risks. I think the only users that can be harmed by my proposal are those who want to sell quickly or flip (like those who may exploit price spikes caused by buy backs). For mid and long term holders preserving the Treasury should decrease risks.

Part of MIP-7 that is often under-looked is how liquidity engineering is more cost-effective with the proposed limit-order system. Too much emphasis is made on ‘MCAP’ and ‘FDV’, instead of actual liquidity both passive and active. These terms are, at least in our opinion, more about marketing, than they are about economic reality and fluidity of market dynamics.

I do not agree that MCAP and FDV are about marketing. Basic question about any company is: don’t you cost too much for what you are. MCAP and FDV are not the only but still key parts of answer.

To give one example, imagine Staking v2 lets people stake for 4 years. That requires expectations to be upheld. A sudden proposal being pushed like the above, and things being shifted in such a way where their expectations are significantly altered is not upholding the MC DAO etiquette nor protects such investors.

That’s an interesting argument, even more than one:

  1. Yes, the tokenomics should not be changed in a middle of staking. Still Staking V2 is not started and even not specified yet (at least such specs are not published). So right now it is the best time for any proposals which can change expectations of potential stakers and/or influence Staking V2 design.
  2. My proposal is designed to benefit long term holders and stakers. I see no way it may harm long term stakers, vice versa - they can expect higher token price at the end of staking period.
  3. What does it mean “sudden proposal being pushed like above” ? I used the correct way to make proposal, before that I discussed my thoughts at MC discord during couple of days. Knowing that my opinion is counterintuitive and goes against current community sentiment - I specifically wrote that no quick voting is expected. Today I will invite TG users to join the discussion and will not initiate voting if there is no interest.
  4. I don’t know what “MC DAO etiquette” is, never saw such document. Proposals go through moderation - approval for this one was received two days after submit, so I suppose that if I violated any written or non written rules I should be informed by moderators.

I do think that accusations in violating ethics and not fitting to ideals should be done with higher level of responsibility and some evidence.

Thank you Timour for the detailed thoughts about the use of proceeds. You have a valid argument and this is worth discussing as it makes sense.

As discussed on Discord, where traditional metrics such as P/B and P/E are used to evaluate investments, Crypto is more reliant on the prospect of future returns more than anything else. This does not mean we cannot work toward more ‘familiar’ metrics and use them as rational decision-making.

Having the PB and PE ratio in mind, I would like to add a few other avenues of reasoning. I think we have to walk a difficult line of appealing to the current and future investor while also looking ahead and creating the most value from our treasury. That is the question it boils down to; how can we create the most value. There’s two (to me) important aspects we need to keep in mind. Feel free to add

  1. Treasury
  2. Token performance

(1) Treasury: I do like your suggestion of considering the value flowing back to the treasury from investments - being proceeds. After all, the treasury shows the strength of the project. With liquid and illiquid assets showing current and foreseeable strength and cash showing the future strength allowing us to take advantage of opportunities. Thus we need to keep treasury strong, I think that’s also one “concern” Timour has.

So, let’s look at treasury. In the last few months, the cash in treasury has declined steadily while tokens are growing steadily - disregarding future or current token price. I don’t have the numbers of what the usual return is, but these are likely to return profits plentiful. So investing is going well and in a bull market, this will be no problem. Currently, there may be concerns over the diminishing cash in treasury and that team might have to be more picky than they want to be. What if we could find a way to tweak a few things so that we have a growing treasury, even in a bear market. And if team says that it is easy to inject more USDC into treasury, that’s fine by me, we just do not have the full picture at the moment.

E.g. What if we use proceeds to first pay back treasury by its investment. Say an investment of 500k was made to Project C. When some tokens of Project C are sold, we could say that 50% flows back to treasury, and 50% is subject to MIP7, until we have paid back treasury. So, 500k was invested. At the first opportunity we have 200k returns from sales. Then 100k is paid back to treasury while 100k is subject to MIP7. Only 400k of the investment needs to be paid back to treasury afterwards. We only do that 5 times, then afterwards the debt is paid and all further proceeds can be subject to MIP-7. This assures a steadily growing strength of treasury by paying it back and the 25% of proceeds to still be sent to Treasury as per MIP-7.

Now, token performance.

To appeal to current and future investors, we cannot allow the MC token to perform badly in the market. Whether we like it or not, token price matters. So would preferably correlate to or even outperform the market. Fortunately for us, token performance has been relatively stable and after we’ve stopped decreasing (as did the rest of the market), we have only gone up since. Regardless, if we want to assure current and future investors, we need to keep it in mind if we are tweaking MIP-7. If we pull one lever, we can maybe let go of another.

So, two things affect token price at its core; sell pressure and buy pressure. What levers can we pull to attempt a good performing token to appeal to future investors. I think that a combination of these tools will allow us to design a good plan to assure token performance. This is more meant to start a discussion, if so desired.

I do want to weigh in on your mentioning of burning not being worth it. We have to consider the amount that is being burnt using the proceeds. On average there has been about 2m of proceeds monthly. If we take 15% of that, roughly 331k of tokens were burnt last month using proceeds. If we compare that to the 6000k of tokens being burned from unused community incentives, that’s 5% of monthly burns from proceeds. That’s pretty insignificant and if we were to change that percentage to strengthen treasury more, that could make sense.

Regarding the buy-backs not being worth it, yearly the proceeds (averaging 2m in this case) would make for a 15.870m of tokens of MC. This would be a sizeable start for the bucket from which staking rewards can derive. It’s not much, but it’s a start. I think putting that aside for staking rewards will also reward current (long-term) holders and will relieve some of the sell pressure which also affects token performance.

That being said, my post is more meant as a starter for a discussion and possibly trigger some additional thoughts around the question how we create the most value with our cash. I think MCap and FDV are nice numbers, but the market is highly speculative and we need to do what we think is right, not just in the numbers but also in the market in general.

As for one lever of the tools we have at our disposal, I’d like to discuss the community incents. Currently 75% of unused are burned. These are a different matter than from buybacks. To burn community rewards, it is not required to buy back tokens, therefore treasury does not decrease for it. Relating it to the main question; how to create the most value. The three most prominent ways to have community rewards create value are

  1. Burn them. There are 294M tokens in this bucket, meaning an unvesting of 8.16M tokens per month, and as few tokens are actually being used, this will result in a burn of roughly 6M tokens per month, if not more. 2m of residual tokens for 36 months is a nice 72m of tokens of community incentives. In my opinion, this is plenty of runway for community incentives and the burn will tally up to 216m tokens burned.
  2. Another option is to have the incentives flow back to the treasury so we can put it to use later as investment. Makes a fair point, investments are likely to give returns. To invest in a project, however, either we or they will need to sell MC to make use of that. Eventually this will become sell pressure, even OTC. And an extra 6m (if not burning) of sell pressure. If we compare that to the 5M of daily trading volume we have, it’d greatly drive the price down.
  3. The last is to revert the burn system and to actually use them as community incentives. This makes for a 300M “give-away” to people, 30% give-away of your project. I’ll stick with the current use of burning 75% of it. Still plenty of incentives.

For me, this part of MIP-7 is more than fine and should be considered when we discuss the topic further. For example, if we increase or decrease burning from another source, how much influence does it really have since we already have this in place to burn 75% of the unused tokens.

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Thanks a lot for commenting @Niesigreen - very good questions, I will answer inline:

Thus we need to keep treasury strong, I think that’s also one “concern” Timour has.

That’s true and I use even a stronger form - I do think that Treasury per token and its dynamics are the main metrics and main drivers for token price.

E.g. What if we use proceeds to first pay back treasury by its investment. Say an investment of 500k was made to Project C. When some tokens of Project C are sold, we could say that 50% flows back to treasury, and 50% is subject to MIP7, until we have paid back treasury. So, 500k was invested. At the first opportunity we have 200k returns from sales. Then 100k is paid back to treasury while 100k is subject to MIP7. Only 400k of the investment needs to be paid back to treasury afterwards. We only do that 5 times, then afterwards the debt is paid and all further proceeds can be subject to MIP-7. This assures a steadily growing strength of treasury by paying it back and the 25% of proceeds to still be sent to Treasury as per MIP-7.

I have some remarks here:

  1. Tokens we get from investments are also the part of Treasury. It is better to look at Treasury holistically - it consists of stables, staked tokens, gaming projects-related tokens, NFT. Each time the team makes decisions to move from one category to another it has some reasons - new deals, taking profits (or sometimes taking loss), decreasing risks, improving liquidity (for example exiting from low liquidity tokens like NFT), maintaining the good part (maybe even formally defined) in stables for safety and for dry powder.
  2. If you are thinking by individual investments and their “debt” to Treasury it is easy to get into trap - when you are fine with Project A (distribute part of returns to close “debt” and the other part use for buy back or dividends or whatever else) but get the loss with Projects B and C which just can’t pay their “debt” to Treasury - so the Treasury goes down. To manage that I wrote the 4th point in Proposals section: if we want to distribute part of Treasury somehow (buy backs, dividends, charity, staking rewards, whatever…) - the base for calculations should not be the individual proceeds but overall Treasury growth (for example - each quarter we take 10% of Treasury increase).
  3. The main disagreement I have here is with “…assures a steadily growing strength”. I believe that we need not a steadily but the quickest possible growth, the maximum efficiency of each token we have. Philosophy of steadily growing is nice for some kinds of business but not for ETF (by quickest possible growth I don’t mean taking more risks, I mean just putting all tokens to work in a most efficient way).
  4. The only reason we may decide to partially sacrifice our growth for (especially now, at early period) is if we can not manage it. Simply speaking - if we can not find enough good deals and development ideas for the Treasury of our size, if we need bigger team for that but can not grow it quick enough. It might be the case at one point - and I hope we will be informed by the team. In that case we might make decisions how to distribute the unused part.
  5. At one moment the growth might become limited by environment (as market is not infinite). But I believe we are so much far from that point.

Whether we like it or not, token price matters.

Agree wholeheartedly.

So, two things affect token price at its core; sell pressure and buy pressure.

At each particular moment - clearly yes. Though we need to keep in mind that sell and buy pressure come for the reasons, they depend on how market valuates the token.

I do want to weigh in on your mentioning of burning not being worth it. We have to consider the amount that is being burnt using the proceeds. On average there has been about 2m of proceeds monthly. If we take 15% of that, roughly 331k of tokens were burnt last month using proceeds. If we compare that to the 6000k of tokens being burned from unused community incentives, that’s 5% of monthly burns from proceeds. That’s pretty insignificant and if we were to change that percentage to strengthen treasury more, that could make sense.

It might be insignificant comparing to total number of tokens burnt from unused community incentives - but there is no sense to compare. The real sense is to compare benefits from buy back & burning (decrease of supply) with drawbacks (decrease of Treasury). My basic example in Summary section: buying back and burning 1% of Max Supply requires 7.7% of Treasury. With burning 1% of Max Supply we can assume our token worth 1% more. With burning 7.7% of Treasury we can assume our token worth 7.7% less. Even if we take current supply and not Max Supply - we pay 2.2% of Treasury for each 1% of supply burnt.

That being said, my post is more meant as a starter for a discussion and possibly trigger some additional thoughts around the question how we create the most value with our cash. I think MCap and FDV are nice numbers, but the market is highly speculative and we need to do what we think is right, not just in the numbers but also in the market in general.

I agree that market is speculative. Still I deeply believe that logic like “ok, we buy back & burn 1% of supply by using 7.7% of Treasury hoping that it creates a positive hype and price will grow just because some guys like such news” is deeply flawed. Such price increase if it happens is not sustainable. Treasury loss from the other side is sustainable.

As for one lever of the tools we have at our disposal, I’d like to discuss the community incents. Currently 75% of unused are burned. These are a different matter than from buybacks. To burn community rewards, it is not required to buy back tokens, therefore treasury does not decrease for it. Relating it to the main question; how to create the most value. The three most prominent ways to have community rewards create value are

Burn them. There are 294M tokens in this bucket, meaning an unvesting of 8.16M tokens per month, and as few tokens are actually being used, this will result in a burn of roughly 6M tokens per month, if not more. 2m of residual tokens for 36 months is a nice 72m of tokens of community incentives. In my opinion, this is plenty of runway for community incentives and the burn will tally up to 216m tokens burned.

Another option is to have the incentives flow back to the treasury so we can put it to use later as investment. Makes a fair point, investments are likely to give returns. To invest in a project, however, either we or they will need to sell MC to make use of that. Eventually this will become sell pressure, even OTC. And an extra 6m (if not burning) of sell pressure. If we compare that to the 5M of daily trading volume we have, it’d greatly drive the price down.
The last is to revert the burn system and to actually use them as community incentives. This makes for a 300M “give-away” to people, 30% give-away of your project. I’ll stick with the current use of burning 75% of it. Still plenty of incentives.
For me, this part of MIP-7 is more than fine and should be considered when we discuss the topic further. For example, if we increase or decrease burning from another source, how much influence does it really have since we already have this in place to burn 75% of the unused tokens.

I believe that burn is worse than moving to Treasury if Treasury can accommodate it - all the logic of my post and answers is about that. But - we still need to find the source of rewards for Staking V2. So my proposal would be first to think which part of community rewards might be dedicated for that. Second - to send the rest to Treasury. Third - to reserve the option to use part of Treasury for real community rewards upon necessity. Burning is wrong, just holding not-working tokens is bad as well. So let them work and let’s be flexible.

I suspect in this month treasury report we will see a nice bounce in the treasury balance (given our holdings on Eth, BTC and how the bounce in prices should benefit our battered ETH/MC liquidity pool position) showing that, in no way, is it impossible to both grow the treasury and burn tokens. The last 6 months are not really indicative of anything for MC it has been a crypto collapse while basically none of MC’s investment are anywhere close to maturing! That the treasury dropped only 20% (mainly the eth/mc liquidity pool investment) is to me a win not a loss, given the macro.

I also take into consideration the coming regulations for crypto! I favour a structure where holders are rewarded indirectly via burning (via reducing the denominator) than directly via high staking rewards (that in the current case of MC it clearly is akin to a dividend distribution as no staking is needed to secure the MC token from a proof of stake perspective) as it lessens the chance of being classified as a security by the SEC with all the annoyances that that would bring.

You also need a structure that incentivises speculative spot buyers to buy MC and, for them, a constant burn mechanism is far more appealing then a mechanism that adds no value to them unless you freeze your money for a year or more, as we clearly saw with LUNA whose only claim to value was the constant burn mechanism. Its spot buyers that move the price not long term holders. Same can be said about the community tokens! All buyers just look at FDV counting all the tokens, they don’t discern between tokens held by investors and tokens held by the treasury, so we need less tokens to spook spot buyers less and entice them to believe the opportunity is compelling….the DAO can always vote on a new issuance of tokens, down the line, if there is a clear benefit to do so.

So I would vote no to this proposal.

Best

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Thanks for the thoughtful proposal Timour. Always good to have discussions around the DAOs tokenomics, it should be a process of iteration based on changing treasury & market conditions.

Growth vs Distribution
The DAO should keep carefully evaluating growth vs distribution. First of all, I think the thought experiment is interesting, but the Reductio ad absurdum example doesn’t really do any justice to the nuanced reality. It is unlikely the DAO would ever decrease treasury value levels to a degree where the continuity or succes of the different product verticals would be negatively affected due to a lack of capital. Keep in mind also, the MIP-7 uses profits not revenues, so in that sense, the treasury value should not go down too much outside of short-term volatility. And in the mid-long term it should generally rise, alongside buybacks.

The DAO should only want to re-invest everything (aka only build more treasury - 100% all-in on aggressive growth) when you have more investment opportunities (with EV of the investments > buybacks at current prices) than an organisation has capital for, that does currently not seem to be the case for the DAO. That does not mean the DAO cannot scale beyond 100MM> investment opportunities per year. Infact, I think the investment arm alone can scale to 1B> in GameFi investment opportunities per year over time. Currently it is simply more advantageous to be a bit more prudent, while the market provides a lot of new insights on what will work in GameFi and what does not work. In the form of feedback from the market, direct feedback from partner games and feedback from the usage of our own products and games. In addition the DAO can use the same time to refine the investment arm (and other product verticals - that generally require less $ input) into a well oiled machine. Before the DAO starts scaling blindly into negative EV investments or investments with a lower EV then buying tokens back at current prices. And even in a scenario where you have more opportunities with +EV investments >buybacks at current prices than you have dollars for, there is still an argument for diversification between value accretive strategies. A bought back token = value realized now. Treasury build up = potential for more future value realized. They have different time horizons and therefor allow the DAO to diversify in time. It assumes the DAO has no perfect knowledge about what will have been the best decision 5-10 years from now.

Separately, but you acknowledge this in your replies, there needs to be a robust treasury strategy, where a robust asset mix is used and an operational cash reserve is maintained at all times. This is btw not an argument for buybacks, but against aggressive re-investment of all treasury funds.

In the current situation, I think it is preferable to both build treasury and perform buybacks. With the above conditions, I would assume the market prefers buybacks + treasury build. Hence, this should make the MC token price more valuable than just building a large treasury.

Although the P/B value (B= treasury value x circulating supply) should stay the same (assuming all high EV investments are made before distribution), the combination will ensure an indirect form of value accrual to tokenholders. Buybacks + treasury growth will appeal to different types of tokenholders, the growth camp and the value camp. Further, it will create a strong value/hard asset narrative for $MC as a token, that is not just mechanical, but also psychological in nature. Like others have pointed out above as well. I think this effect is often understated by blindly applying growth startup optimization theories onto tokenmodels. It always points to the succes stories that survived on hyper aggressive growth strategies, like Amazon, but it negates the fact that a lot of fast growing companies, could have done better with a discipline of realising value consistently & strategically vs blindly investing into only more growth. Aside of companies being very different from DAOs and tokens being different from assets.

The treasury build up might be less significant or more challenging in bad market conditions, but at the same time the DAO gets to buy back tokens at much lower prices = more token supply reduction on a per $ basis. In that sense, treasury build in bull markets and (delayed) buybacks in bear markets would be the ideal scenario.

Unused $MC supply
Even when you extrapolate the current burn rate, the DAO will still have a lot of reserve $MC tokens in the community bucket and in the treasury for potential staking V2 incentives.

Metrics
Lastly, I think P/B and P/E are probably the simplest metrics to track and good metrics to strive to increase for the DAO. However, $MC is a governance token that can have much more utility (directly integrated and through composability) than a stock. In that sense, the two asset types have some similarities, but $MC, as a governance token, is a very different beast. There will most likely be a wider variety of metrics to evaluate it on. The average premium to P/B and P/E ratios could be much higher for succesful governance tokens.

Going forward
I do think the DAO will probably have to tweak the relative parameters of MIP-7 at some point, probably in favor of slightly more treasury build (/reinvestments) once investment opportunities with very high EV start to exceed current cash positions. However, I do think there should at most times be a combination, to appeal to different types of tokenholders and maintain+strengthen the hard asset/token argument for MC.

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Thanks you very much for taking time for reviewing and answering @tommyq - you have very consistent vision and excellent arguments, I really enjoyed reading. Some remarks below - mostly for clarification.

The DAO should only want to re-invest everything (aka only build more treasury - 100% all-in on aggressive growth) when you have more investment opportunities (with EV of the investments > buybacks at current prices) than an organisation has capital for, that does currently not seem to be the case for the DAO.

Separately, but you acknowledge this in your replies, there needs to be a robust treasury strategy, where a robust asset mix is used and an operational cash reserve is maintained at all times. This is btw not an argument for buybacks, but against aggressive re-investment of all treasury funds.

I absolutely agree. When writing the proposal I didn’t take into account that not having enough high quality investment opportunities might be the case now - thought we are far from that and the significant amount of cash assets we keep is more of a risk management in a bear market plus dry powder accumulation. From your and some other guys comments I see my assumption was wrong. I absolutely agree that if we have more than we can use for high quality investments and reasonable amount of dry powder - no better option than to distribute it to token holders.

Remaining question is: why not to calculate the amount to distribute based on amount of Treasury we don’t need instead of percent from proceeds. Like if we have more than 50M (just as example - no particular number in my head) in cash assets at the end of month or asynchronously - at any time when cash assets exceed the limit - we distribute. Seems it should be more simple and clear. And will allow us to avoid the situation when we distribute parts of Treasury we could use more efficiently.

In the current situation, I think it is preferable to both build treasury and perform buybacks. With the above conditions, I would assume the market prefers buybacks + treasury build. Hence, this should make the MC token price more valuable than just building a large treasury.
Although the P/B value (B= treasury value x circulating supply) should stay the same (assuming all high EV investments are made before distribution), the combination will ensure an indirect form of value accrual to tokenholders. Buybacks + treasury growth will appeal to different types of tokenholders, the growth camp and the value camp. Further, it will create a strong value/hard asset narrative for $MC as a token, that is not just mechanical, but also psychological in nature.
Like others have pointed out above as well. I think this effect is often understated by blindly applying growth startup optimization theories onto tokenmodels. It always points to the succes stories that survived on hyper aggressive growth strategies, like Amazon, but it negates the fact that a lot of fast growing companies, could have done better with a discipline of realising value consistently & strategically vs blindly investing into only more growth. Aside of companies being very different from DAOs and tokens being different from assets.

My concept is that MC is an investment fund and on a mid/long run it will be valuated by market as an investment fund - in a “rational” way (means very different from both most of crypto projects and hi-tech companies like Amazon or Google). Based on that I dismissed psychological aspects assuming they are in play only for relatively short period of maturing. Right now it is not the case of cause as CT and other media compare MC with DAOs and gaming guilds and not with a16z. Sure I can’t prove if my vision is right (or wrong) - can only become clear with time.

Unused $MC supply
Even when you extrapolate the current burn rate, the DAO will still have a lot of reserve $MC tokens in the community bucket and in the treasury for potential staking V2 incentives.

Here I agree without any doubts. If we are in a situation when we don’t need more resources for investments - burning the unused MC supply is evident (except the part to be used for Staking V2).

Metrics
Lastly, I think P/B and P/E are probably the simplest metrics to track and good metrics to strive to increase for the DAO. However, $MC is a governance token that can have much more utility (directly integrated and through composability) than a stock. In that sense, the two asset types have some similarities, but $MC, as a governance token, is a very different beast. There will most likely be a wider variety of metrics to evaluate it on. The average premium to P/B and P/E ratios could be much higher for succesful governance tokens.

Could you please extend your thought a little. I was thinking that governance rights of token are similar to voting rights of stocks. Except they are used more actively for wider range of decisions but with maturing we will use governance (voting) more rare as our vision will stabilize.

Going forward
I do think the DAO will probably have to tweak the relative parameters of MIP-7 at some point, probably in favor of slightly more treasury build (/reinvestments) once investment opportunities with very high EV start to exceed current cash positions. However, I do think there should at most times be a combination, to appeal to different types of tokenholders and maintain+strengthen the hard asset/token argument for MC.

Very well said! Thanks again!

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Blockquote Remaining question is: why not to calculate the amount to distribute based on amount of Treasury we don’t need instead of percent from proceeds. Like if we have more than 50M (just as example - no particular number in my head) in cash assets at the end of month or asynchronously - at any time when cash assets exceed the limit - we distribute. Seems it should be more simple and clear. And will allow us to avoid the situation when we distribute parts of Treasury we could use more efficiently.

I don’t think this will make much of a difference at this stage. Personally, I am very open to improvements along these lines. Anyone can propose improvements to the current token economics or treasury management parameters. In general, think well thought out tweaks have a higher probability of passing or going to vote than complete overhauls.

My concept is that MC is an investment fund and on a mid/long run it will be valuated by market as an investment fund - in a “rational” way (means very different from both most of crypto projects and hi-tech companies like Amazon or Google). Based on that I dismissed psychological aspects assuming they are in play only for relatively short period of maturing. Right now it is not the case of cause as CT and other media compare MC with DAOs and gaming guilds and not with a16z. Sure I can’t prove if my vision is right (or wrong) - can only become clear with time.

I see. The metaverse index fund is indeed one of the interesting value propositions for Merit Circle. However, Merit Circle GamingDAO is broader than just investments. It is also launching creative projects (games & NFT collections), an NFT marketplace and a Gaming platform. Of course, you could still lump these in as same different categories into a broader GameFi index fund. However, I would argue that the GamingDAO is broader than just the index angle. Either way, valuing the gaming DAO as a whole will be less straightforward than a single fund, single company or a set of token utilities. There are more angles to consider than just optimizing the investment arm.

Could you please extend your thought a little. I was thinking that governance rights of token are similar to voting rights of stocks. Except they are used more actively for wider range of decisions but with maturing we will use governance (voting) more rare as our vision will stabilize.
Certainly.

In essence, $MC is a pure governance token. This means the DAO decides what uses it will get. I will list some potential use cases and ways in which it could be composable, just as examples. Some are not feasible yet, and some might never materialize. Also, the list is by no means exhaustive; just the ones I can think of from the top of my head + the potential composability and types of utilities within web3 are expected to keep growing in the future.

Utilities

  • Token is used for governance over a potentially important GameFi ecosystem with decisions that can impact games, players and tokenholders.
  • Token can be used to share in indirect or direct revenue (indirect through buybacks atm).
  • Token can be used for bonuses or discounts within Merit Circle gamefi ecosystem (in games or on marketplace)
  • Token can be used as access token within the ecosystem.
  • Token could functions as a store of value, portfolio diversification or an inflation hedge. (Lumped these in as they are not really specific to tokens - applies to most assets as well - but any token could in theory become very suited for any of these properties)
  • Token can be used as backstop or risk curation mechanism to secure elements of the Merit Circle Ecosystem (for example - stake $MC to a certain gamefi vault as an insurance pool - lender of last resort)
  • Token can grant access to airdrops from partners or Merit Circle DAO products/projects.
  • Token can grant access to mints from partners or Merit Circle DAO products/projects.

Composability

  • Token can be used as currency on other platforms
  • Token can be used as collateral on other platforms
  • Token can be used as access token on other platforms (socials, NFTs or applications)
  • Token can be traded vs any other tradeable token on-chain and off-chain.
  • Token can get utility within other games or ecosystems.
  • Token can be used for automated market making with other tokens.
  • Token can be insured on-chain, permissionless and automatic.

A lot of these utilities and composability are not possible for traditional assets. A lot of them are also not interesting for most tokens that have a narrower scope. Hence, there could be a premium to the average valuation multiples, where cash flow and treasury assets are used as the main inputs.

Thanks for starting and engaging the discussion, some very valid topics explored.

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Thank you very much again @tommyq - learned a lot from your answers about what MC is now and its vision for future!

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Reading the above discussion and weighing in the discussion throughout the various communities (Telegram & Discord), we would suggest to not put this proposal up for voting as of right now.

We’d love to move this topic to the ‘Discussion’ category and simply allow the topic to be discussed more in length by anyone who has an opinion. Whenever the proposal goes through several changes born out of a lengthy discussion, this can go back up for voting.

Thanks for understanding, and really appreciate you putting in the time and effort to create this proposal in the first place.

Sure, I have no objections - topic can be moved. Appreciate all feedbacks and information received. Thanks a lot !