Discover more from Govern This
Cash Flow and Governace, DXdao raises 624 ETH & plans to fork Uniswap
Plus Maker/Compound forums and Synthetix Community call
What gives a token value?
The age old question. The monetary premium that Bitcoin and ETH enjoy is certainly one way for a blockchain’s native token to gain value, but there’s a limited supply of networks that can maintain a monetary premium.
“Utility” was the next bet. Almost all of the 2017 ICOs promised that token holders would have access to products and services through their token, and where MV = PQ proliferated as a way to value these tokens.
Of course, this has not played out as planned. There are no prominent examples of value accrual to utility tokens. Instead, two token models have emerged: governance and cash flow. At the moment, tokens are either one (Compound) or the other (BNB), but in the future, almost all tokens will have some feature of both – as MKR does now.
As DeFi and other services emerge, it’s increasingly easy to generate fees from the economic activity happening on the blockchain. Monetization is happening on a smaller scale than it did in the advertising-enabled web world.
TokenTerminal has started tracking the revenue of DeFi protocols:
Bankless has had two recent pieces that dive further into cash flow tokens and how on-chain revenue affects token valuation. A small transaction fee is a simple way for networks to capture the value it creates.
The growth of cash-flow tokens and networks with transaction fees is driving the governance renaissance of the last few months. Actual business models now exist on the blockchain and investors and developers need governance solutions to fund the resources needed to develop a cash-generating network.
Compound, Uniswap, dYdX will all soon follow Maker, Synthetix, Kyber in launching cash flow generating tokens, and all of them have existing governance structures or plans to start one - as Balancer Labs did today with the announcement of $BAL. Heck, even the personal tokens are adopting the cash flow token model.
All of the DeFi projects with on-chain revenue started in 2017 or prior, raised money from large VCs and before cash flow tokens that need governance was a thing, so how would a project fundraise for a cash-flow token now?
DXdao raises 624 ETH launching DXD cash-flow token
DXdao has been advancing critical DeFi infrastructure like Mesa.eth, a recently launched frontend to the Gnosis Protocol, and Omen.eth, a soon-to-launch prediction market platform. The DXdao is also involved in developing Mix.eth, governing DMM, and maintaining the DutchX trading protocol. In order to bootstrap these efforts and broaden its stakeholder base, the DXdao recently voted to launch a public OpenRaise campaign. The campaign will facilitate liquidity for DXD tokens which entitle holders to a portion of the DXdao’s future revenues. In the future, DXD holders will also have access to premium DeFi services, such as gasless transactions, feeless asset anonymization, and reduced trading fees.
DXD is similar to BNB, but whereas BNB is tied to the off-chain revenues of a company that says it doesn’t have any offices, DXD is tied to the on-chain revenue of the protocols governed and owned by the DXdao.
But like BNB, DXD is a cash-flow token, not a governance token. Binance is controlled by CZ and Binance’s other shareholders, whereas DXdao is controlled by those who have earned reputation (REP) from the DAO. The first way was the ETH lock drop in June 2019, but contributing to the DAO in all sorts of ways give you voting power over the DXdao.
Separating governance tokens from cash-flow tokens may seem complicated, but isolating these two core token functions could lead to better innovation on the governance and attract better investors and token holders by isolating revenues. Equity valuations are clouded with EBITDA and other accounting shenanigans that encourage manipulation.
DXdao launched Mesa.ETH.Link and plans to launch Omen, a predictions market platform, and Mix.ETH, a privacy-enabled DeFi skin - all of which require significant resources to develop but could generate on-chain revenue in the future, a portion of which will go to DXD holders.
DXdao used the Fairmint model and set at least 10% of revenue to go to DXD holders for the next 5 years. Its continuous fundraising model has a bonding curve for minting new DXD tokens from the DXdao’s DXD reserve, which has 100k DXD pre-mint tokens that are vested over the next three years. There is a set price for the first 250 ETH (0.05 ETH) raised and a linear bonding curve that determines the price - denominated in ETH - it costs to print new DXD tokens.
90% of ETH goes to the DXdao while 10% is retained in the reserve for DXD liquidity. After the fundraiser hit the 250 ETH threshold, the funds were released but the fundraiser is still ongoing; an additional 374 ETH has come in since the threshold was met for a total of 624. You can still mint new DXD tokens right now for 0.1612 ETH.
There is already a secondary market for DXD on Uniswap, where the price is much lower (0.0658) than the minting price. There has been some new minting of DXD even at the higher prices, because the ETH proceeds go to the DXdao as opposed to the Uniswap pool. People may not know about the Uniswap pool too.
With a higher price to mint than it is to purchase on the secondary market, DXdao will need to generate interest in DXD or see cash-flow from its DeFi protocols before it would make financial sense to mint more DXD.
What’s next for DXdao?
DXdao sees its existing decentralized governance as its core strength. Where Compound, Uniswap and others promise to decentralize in the future, DXdao already claims sufficient decentralization now. It just need sto improve on its ability to fund and incubate useful products.
Where could a decentralized governance structure add value in DeFi today?
In existing DeFi protocols implementing transaction fees without on-chain governance. Just this week, the community announced plans to fork Uniswap v2 and launch DXswap, a Uniswap v2 AMM where the contentious “protocol fee” is governed by the DXdao.
Uniswap v2 was announced in March and is already on testnet and plans to launch on mainnet in Q2 with a change:
To open a path to self-sustainability, the code for Uniswap V2 includes a small protocol charge mechanism. At launch, the protocol charge will default to 0, and the liquidity provider fee will be 0.30%. If the protocol charge is switched on, it will become 0.05% and the liquidity provider fee will be 0.25%.
This feature, including the exact percentage amounts, is hardcoded into the core contracts which remain decentralized and non-upgradable. It can be turned on, and directed by, a decentralized governance process deployed after the Uniswap V2 launch. There is no expectation that it will be turned on in the near future but it opens the possibility for future exploration.
As a DXdao community member said on Thursday’s call, “The Ethereum Foundation funded the development of Uniswap, and now VCs are trying to attract network liquidity before they extract fees from users.” [Rough summary and edits by me, full call on Youtube]
DXswap, the Uniswap fork, will still have a protocol fee to fund development, but given it already has an existing decentralized governance process, it will use DXdao to govern DXswap’s protocol fee and potentially implement more governance and fee structures specific to liquidity pools (much like Balancer is trying to do with the $BAL token). There’s already a pull request and presumably DXdao will decide an extremely low or 0 fee.
Of course, governance doesn’t create liquidity. DEXs are successful because they can attract assets. The migration from Uniswap v1 to v2 is a great time to launch a competitor, but much of Uniswap liquidity comes from large whales. Regardless, it will be an interesting experiment to follow, and as cash-flow tokens proliferate so too will governance models on how to manage them.
Disclosure: I own a small amount of DXD
On the DXD docket:
Tweet of the Week: The source of the DAO renaissance
Sad, but true?
On Maker’s docket:
Lower WBTC’s stability fee - an onchain poll barely favored 0% (54%) over the current 1% stability fee (46%), and a new executive vote is currently underway. If it passes (and it should), stability fees for all Maker collateral will be set to 0%
MIP14: Protocol DAI Transfer - the first MIP outside of the original 13 that established the process. Proposed by governance facilitator LongForWisdom, it would allow the Maker protocol to transfer or send Dai. Now the off-chain Maker foundation does most funding and the ability for an on-chain treasury to transfer Dai is surely the first step in creating an on-chain funding process.
MIP13: Declarations of Intent - another new MIP, which sounds like a way to create a “Maker stance” on certain issues. Tough to codify.
In Maker’s forums and calls:
More collateral applications, most notably LEND by Aave, which could either be viewed as a Maker partner or competitor
Covid Crash: Emergency Governance Summary - an initiative by LFW to document the events of Black Thursday and thereafter and create a canonical location of all the activity of the volatile day.
Head of Risk Cyrus Younessi on auctions in MakerChat “our auction setup is not integrated with larger dex liquidity pools because it wasn't designed to be. i'm not entirely sure why. but one reason might be that when the auctions were originally specced out, dex liquidity was a tiny fraction of what it is today. fwiw, the auction design is modular and i completely agree that they should be optimized for the current environment”
Do process related changes require executive votes? And if not, how should Maker balance two different governance cycles. Lev asks if forum polls can be hacked and edited.
TUSD collateral application, but many wonder if PAX is a more suitable second-choice fiat-backed stablecoin.
Presentation on bringing real world assets into MCD by Lea Schmitt and Lucas Vogelsong of Centrifuge. The presentation has been posted online, but would be a complete reimagination of Maker collateral (debt-based) and require a different set of keepers for collateral auctions, but Maker will need to onboard many markets if it hopes to scale.
On Synthetix docket:
In Synthetix forum and calls:
Community is trying to separate initiatives for Synthetix.Exchange and Mintrs. Synthetix hopes to market the exchange to a specific audience (and trade pairs) with intention to enter Korea.
When Oil? With fluctuations in the oil market, discussion centered on how to get that exposure on the Synthetix.Exchange. Kain did not have a quick-fix because there is not a good data source for oil. Instead, the team is trying to come up with a more long-term solution for bringing futures contract data on-chain, leveraging long-time SNX holders, Chainlink and OTC desks.
Docket: Compound Proposal to Deprecate Sai - the proposal would kickstart the eventual delisting of Dai from the platform by
Setting Sai’s reserve ration to 100%, which means lenders cannot earn interest on Sai
Lowering Sai’s collateral factor to 65%, which means borrowers will be able to use less as collateral, encouraging them to close their positions.
Forum: Following the Sai shutdown, the Maker chat pinged Compound’s Robert Leshner on how the protocol would respond. After initially, tweeting there would not be any change, the Compound community forums were quickly discussing possible solutions to phase out Sai. It will be interesting to see how Compound’s community forums develop as they don’t have the robust forum culture of a Synthetix or Maker.
Other Governing Things:
Valuing Governance tokens, looking at token supply and LivePeer [Jake Brukhman/CoinFund]
Safely Unlocking the Synthetics Era [Allison Lu/Bankless]
Aragon DAOs [Joel Monegro/placeholder]
That’s it! Feedback definitely appreciated. Just hit reply. No MIP process overview but will get back to it. Suggestions and feedback welcome. Written in Brooklyn.
Govern This is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.