Proposal: Boost CXD via buybacks

CIP: [to be assigned]
Status: Discussion
Author(s): awinter
Discussions-to: https://forum.cortexdao.io/t/proposal-boost-cxd-via-buybacks
Created: 06-01-2022
Quorum: 4% of vlCXD / 50% of voting vlCXD must be in favor of the proposal

–Simple Summary–
The current CXD boosting mechanism limits selling pressure by locking CXD, and thus removing their supply from the market. A superior approach would be to create CXD demand by establishing a weekly buyback program from the open market. That is what is being proposed.

–Abstract–
Redirect the payouts (via 3CRV and idxCVX) to buyback CXD from the open market. The constant buy pressure is akin to share buybacks - by purchasing those tokens from the open market it ensures constant token demand growing proportionally to the platform, it reduces the openly traded supply of CXD and thus increases the value of CXD tokens. It benefits all CXD token holders proportionally to their holdings, it requires no gas fees to claim, and it is not a taxable event to holders of CXD.

Repurchased tokens will be held within the DAO Protocol entity, available to be used or burned in the future by a vote of the DAO via the proposal mechanism.

–Motivation–
The current fee distribution for methodology has a number of serious flaws that will make owning the CXD token less attractive.

Current flaws:

  • Gas fees. Claiming rewards requires gas fees, often making it impractical to claim rewards.
  • Tax inefficient. Claiming rewards is a taxable event.

Because of these flaws, the fees that are being distributed are not even being claimed. As of 6/1/2022 at 10:44 pm, only 2 people have claimed their fees representing 33% of the fees that have been distributed.

The fees distributed for the past two weeks were $6,609 and $1,827. The current 24 hour trading volume of CXD is $196. If those fees had been redirected to CXD buybacks it would move the price upwards. Regular buybacks would continue to support an upwards price and would attract more institutions to CortexDAO and the CXD token.

This approach has been used successfully by Midas.Investments and their MIDAS token. Despite the current bear market, it has recently hit it’s all-time high (on May 23rd).

Voting

–FOR:–
Short description of what a future voter will be voting for.

–AGAINST:–
Short description of what a future voter will be voting against.

–Copyright–
Copyright and related rights waived via CC0

I support using rewards to buyback from the open market for the reasons well explained in @awinter proposal. There was also a thought about directing part of rewards for buyback and part for claiming. However, part-buyback-part-reward will be a self goal as it will further worsen the problem where people are not claiming because of low reward and high gas fee.

I believe that until weekly rewards reach a reasonably big number (which can be pre-decided by DAO) entire weekly rewards should be used for buyback

Tax event on claiming weekly rewards is indeed a big problem. The reward will show up as income but I wonder if the gas fee paid to claim it can be offset as an expense against the reward income. Different sovereign tax jurisdiction may have different views on this and that will further add to the complexity.

Not as many comments here as with the other proposal regarding vote-locking but still some contrast on the subject due to lack of debate on forum. (come on membership, let’s get active!)

  • While the market has been kind to the platform mentioned in the OP, there are other protocols that utilize a buy-back program that are not experiencing the same momentum and are in fact in a downtrend. It’s hard to directly tie the presence of a buyback program to price appreciation/depreciation.

  • Due to the above, buy-back programs at the least can be considered indirect (but not guaranteed) incentives to holders whereas direct rewards in a stable (3CRV) and soon an appreciating asset (idxCXD) are directly realized and are not subject to market conditions.

  • There is a loose correlation to the reasons why claims are left unclaimed. Gas fees v reward are an obvious factor, no denying that, especially for claims where gas cost is higher than the reward. However, tax efficiency could also be a reason that not only the current reward is claimed, but future rewards.

  • Since the 3CRV tokens maintain a stable value overtime. The downside risk of leaving a claim unclaimed is limited.

  • Once the idxCXD token becomes the reward, unclaimed value actually increases over time. This is extremely unique to CortexDAO as most rewards on other platforms are distributed in stables with a heavy subsidy from volatile assets. One could treat their fee share claim as a long term investment fund, never claim, and only pay taxes on the backend when they claim in however many years they’d like.

I have made it clear in previous proposals and discussions on Telegram/Discord of a strong interest in token buy-back proposals and am very interested, should a buy-back program be enacted by the DAO, in seeing the next proposals on how the DAO would handle what to do with the recaptured tokens. I think there is room here for the ability to merge the indirect benefits of token buy-backs with the direct benefits of fee share and vote-locking (similar to how Yearn handles vote-locking + fee distribution + market buy-back).

5 Likes

I need to think more on gas fees and tax efficiency. If fee distros are in stables, it’s pretty safe to let them accrue before claiming. Similarly, from a tax perspective, you don’t run the same risks from stables as you do from token rewards.

If you had a volatile token treated as income, then took a loss on it, you could find yourself unable to pay the income tax, and unable to save yourself by deducting the capital loss from the income tax. Unless, of course, your god-tier trades have turned your cap gains tax bill into a hulking Akira-like monster with an insatiable hunger for carryover.

Regardless of the gas and tax implications, I did want to discuss the buybacks themselves because they relate to some of the possibilities around reward emission schedules. I’ll outline the approaches, and then explain how they relate to @awinter’s proposal.

There are two main approaches to rewards:

  1. The CXD <=> idxCVX flywheel
    The interaction between the two tokens creates an incentive to keep users involved, building their position over time, instead of dumping one or the other.

    My theory is that flywheels are most potent during frothy markets when users are most likely to want to build larger positions.

  2. All stables, all the time
    Emit zero CXD tokens and fuel the entire protocol with stables. Locked CXD earns stables in the form of idxCVX, and idxCVX stakers can get their stablecoin returns boosted from vlCXD.

    For this one, the theory is it’s best for deep bear markets when users value reliable returns over anything else. In a risk-off market where users are most likely to dump returns instead of reinvesting to build a larger position, inflating token supply to reward users is bearish. Even buybacks can become negligible if users immediately dump the tokens that were bought for rewards.

The Flywheel

If CXD lockers earn idxCVX, they become users of the Convex Index and can start to benefit from their vlCXD boost.

If idxCVX stakers earn CXD, they become voters for the Convex Index and can start to have their idxCVX boosted.

Whether you start with stables or CXD, you can earn your way into both the protocol and the governance.

If CXD lockers earned more CXD, it would simply increase everyone’s share pro-rata. However, if each token earns the other, it creates a flywheel.

All stables, all the time

One issue with the flywheel, is inflation from CXD rewards to idxCVX stakers. No one wants inflation, the US has enough of that already. But there needs to be some token rewarded to idxCVX stakers so it can be boosted by vlCXD.

However, there is a way to have vlCXD boost idxCVX returns, without emitting more CXD.

Every harvest, something like 50% of the returns can be used to mint more idxCVX. This still has the same compounding effect on the returns, while increasing both the supply of idxCVX and the NAV price of idxCVX. The extra idxCVX minted is used in place of CXD as a reward to stakers.

The “all stables, all the time” approach allows a user to have 100% of their return in stables, have that stablecoin return boosted with vlCXD, and do it without breaking the fungibility of idxCVX.

For example, if the average APR of the index was 8%, unboosted users might get 4%, whereas a fully boosted user might get 12%, all in stablecoins. These numbers are off the cuff, but you get the idea.

To bring everything back to @awinter’s proposal, there is a way to combine these two approaches to create a flywheel with buybacks instead of emissions. Instead of using the 50% of returns to mint more idxCVX from the all stables approach, they could be used to buyback CXD. That CXD could then be used as rewards to the idxCVX stakers, which could be boosted by vlCXD, without increased CXD supply, to create the flywheel.

This approach would have many of the same benefits as the MIDAS token mechanics referenced in the proposal.

Personally, my theory is that buybacks and token rewards are desired most during bull markets and stablecoin returns are desired most during bear markets. The question is, which one should we plan for.

3 Likes

@Will very interesting hybrid approach suggestion. That could have many of the same benefits.

Is there a point at which there is no benefit for locking more CXD into vlCXD? A point where you’ve maxed out your boost? Because if an idxCVX staker hits that point then the incremental CXD that was bought back and then distributed to her - it would make sense for her to sell rather than stake CXD to vlCXD.

To your last question can we have both options (I know it means more work for you) but only one option can be switched on while the other is off and that we vote as we reach consensus (due to market price action and sentiment) that we are in a bear market or bull market?

The advantage of such a DAO is that this can happen and if you wrote the code right would’nt it be a matter of switching on or off a Smart contract? Excuse my ignorance.

1 Like

After considering @Will’s proposal, I’m going to stick with my original proposal with the amendment that in the buyback of CXD tokens those tokens are to be burned (not stored within the DAO).

His proposal that idxCVX be used to buy back CXD from the market is essentially the same as mine, but then going on to redistribute the CXD to idxCVX stakers puts those tokens back on the market. I would like to see the supply of CXD permanently reduced which drives up the value of CXD for everyone.

A total of 3 wallets have claimed the distributed fees. Most of the distributed fees are sitting idle. The 24 hour trading volume is ridiculously small. Let’s switch the fee distribution model to put upwards pressure on the token and encourage more people to support the project.

I’m going to go ahead and open a poll to gauge sentiment on moving this to a formal proposal.

Temperature Check Poll

Participate in this poll to vote on whether this topic should move to an official proposal using Snapshot.

At least 10 community members must be in favor of the proposal.
The poll will be open for a minimum of 72 hours.
The results must reach at least 50%

  • Agree
  • Agree with revisions (please comment)
  • Disagree

0 voters

Given that project funding happened in late 2020 it is most important ATM to make sure that team has enough funds to take care of OPEX and that funding does not become an issue with hiring/operations. I wonder if further funding has been raised. Assuming no further funds were raised it is imperative that treasury should be topped up from rewards/buybacks and push is made to appreciate $CXD price so that team can sell token to raise funding as needed.

Checking on the project funding status (given that last funding happened long ago) is of foremost priority I believe.

I am against boosting CXD via buybacks. This will ruin the tokenomics of $CXD before it begins.

A buyback program punishes $CXD lockers without any tangible benefit in return, or any recourse. Up until now, $CXD lockers entered into a contract with CortexDAO: They agree to lose control of their tokens for a time, and in exchange, they get fee distribution over the entire lock time. If buyback is implemented, then CortexDAO would be changing the contract unilaterally with all $CXD lockers while also simultaneously stopping them from making any changes to their token holdings. In the previous APY.Finance project, when the decision was made to transition to CortexDAO, everyone’s tokens were unlocked so they could make their own decisions (Sell, lock again for bonus $CXD, leave them unlocked for equivalent $CXD). By contrast, this change takes away a long-term benefit (fee distribution) while literally shackling people’s tokens so they can’t leave in response to that loss. If CortexDAO does this, it is directly responsible for this loss to each $CXD locker. Even if the price goes up from buybacks, no $CXD lockers can take advantage of this fact. This is a terrible first move for the DAO.

A buyback program may cause the SEC to accuse $CXD of being a security. Buyback programs have been used for both stocks and bonds, but both are securities. The MIDAS crypto project has been given an example of a buyback program, but I see no evidence that the MIDAS team is building their crypto asset in the United States. By contrast, the CortexDAO devs are operating for the most part in New York State, USA, which is the most regulated state in the United States for financial products. Anything that brings this project closer to the idea of a security is a very bad situation for $CXD. Even if the SEC is incorrect in calling $CXD a security, the mere hint of a potential lawsuit would stop any interest of financial institutions from ever touching $CXD.

This is a terrible change to the tokenomics of $CXD, and this proposal (along with all other proposals associated with it like making $CXD the governance token instead of vlCXD) should be rejected by the DAO.

3 Likes

(1) Reward for token holding (similar as stock dividend) is closer to stocks than token buyback if SEC were to look into it. Given discussions in past on APY discord it was mentioned that buyback-and-burn is less risky than reward distribution for locking/holding tokens as far as SEC is concerned.

(2) If token value appreciates because of buyback then how is that not benefiting CXD lockers? Its not that their CXD count is going to diminish over time when locked if buyback is implemented

(3) Going by the spirit of DAO CXD should have been used as governance token to decide on the proposal to use vlCXD as the governance token. I say this since CXD replaced APY and APY was the governance token not locked APY.

(4) With DAO in place nothing should be treated as cast in stone as long as it does not violate an explicit financial assurance given by the project. The way I see, no assurance of any kind was given either to CXD holders, or to the vlCXD holders. Now everything should be governed through a proposal and we are just starting

(5) Using vlCXD alone as governance token and distributing all protocol earning to vlCXD holders creates incentives only for large holders. Small CXD holders will have no incentive to lock CXD as rewards won’t even cover gas costs of locking/unlocking. And, they won’t get to vote either with CXD. If so, then what would be the point for a small buyer to buy/hold CXD?

(6) If there is not enough buy pressure then token price is unlikely to increase with time even if 90% of CXD are locked for years. We need to create tokenomics so that it encourages more people to buy for long term token price appreciation. Let’s remember that even in stock most people buy stocks for stock price appreciation not for its few % dividend.

I agree that DAO should bring proposal to enhance tokenomics. There is no ‘the best tokenomics’ and it should be an iterative process to enhance the tokenomics based on market response. As I see, there is no evidence that current reward distribution to vlCXD holders is the best tokenomics that will work well for long term token price appreciation (which will help small holders also) and encourage more people to buy to expand the decentralization.

Ultimately, decentralization itself is open to interpretation. Is voting by 90 holders out of 100 token holders a better decentralization, or 200 holders voting out of 500 total holders better?

1 Like

I think buybacks are a cool idea, and could have a lot of utility to the project, but I’m voting against here because I think they’re adding unnecessary complications at this point in the project, where we should be focusing on getting to market as quickly as possible. I don’t see a large enough gain in value of implementing buy-backs over (or with) vote locking to add further lead time.

I also believe vote locking is very important to the overall health and reliability of the project. Defi is still a nascent industry and most people have either lost some money to a protocol exploit or are aware of the risks, and vote locking adds a level of stability and safety by requiring those who participate in governance to have to invest in our future.

4 Likes

Everyone is talking about their own rewards and locking but none talking about the most important point - how the project and the team members are going to make money. If the team disperses or whittles down then is this DAO going to run the protocol by passing proposals?

Do you think the team members have lots of money to buy CXD, lock it and earn few hundred $ every week to run their families? They need $$ every month and that will come either from salary or from selling CXD that they have received as part of team tokens. Given that APY finance got funding of $3M in Sep 2020 it is unlikely they would be left with big chunk of it. So, offering market competitive salaries to hold the team is out of question unless another venture funding is raised which I have heard nothing about from the team. The other and reasonable option is that team can periodically sell their tokens to support their finances which does not look good given that the CXD price is in tatters.

For me the first priority should be to make sure that team is well fed and has good reserves. You can do this either by raising VC funding or by designing tokenomics which will boost token price for the benefit for all.

Good financial health of the team and of the project is the most important thing at this time. And lets remember that market is not going to turn good anytime soon.

2 Likes

This is similar to my thinking. We should go to market asap with the platform and tokenomics as the team intended. Let’s at least give it a chance to get off the ground and succeed in its original form before we start making changes.

I would be more open to voting for this to move to a full vote if we had some decent time running the platform in its original guise, with metrics etc. before we seek to change it. Revisiting 6 months after CXD (Phase 3) is live would be my vote. Until then I have voted no on this.

2 Likes

Just to be clear…this proposal is solely focused on reward distribution (not voting, locking or governance).

To date, 8,436 3CRV tokens have been distributed to members with staked CXD. Of that, 3,677 (44%) have been claimed, which means 56% has been inefficiently deployed.

The current 24 hour trading volume according to CoinGecko is $128.

Regular token repurchases would increase the value of CXD, and financially benefit all token holders. By showing relative strength, rising in value during a down market, I believe it would draw in more participants.

Is there anyone who can make the case that the current fee distribution mechanism is drawing in new participants? Yes, I’m aware that more CXD is being locked, but is more CXD being purchased?

1 Like

In my opinion, the biggest problem on the previous project was that the TVL was too low. So, the focus shouldn’t only be on the CXD price, but on growing the TVL, which will put more money directly into the DAO’s treasure. Also, the weekly fee distributions will increase significantly. A bigger TVL will atract institutions who need more liquidity to even consider CortexDAO indexes as an option.

Finally, we have to think in the overall platform usage, which could end up favoring a price increase on the governance token. This time the CXD token has more utility, a big difference with the APY token, so trying to take away the fee distribution doesn’t seem like a good idea to me. Disagree.

1 Like

I’m for buybacks, but I think our total supply is too small to burn tokens.

1 Like

If YFI can burn tokens when they don’t even have 50K I guess we can surely burn tokens without any injury :grinning: