Switch from buyback and burn to Rari Smart Pool

jai

Summary:
A proposal that outlines the creation of a Balancer Smart Pool (--> Rari Smart Pool) that will receive earnings instead of a buyback and burn. This pool would serve similar purposes but would provide much better long term alignment between token holders, protocol users and the value derived from each.

Background:
Rari's goal is to deliver sustainable yields to users for years to come. For that to happen, we need to ensure two things: 1) The $RGT needs to have a clean model and 2) The protocol needs to be ready to sustain itself for years. This proposal aims to innovate on both of these ends and drive the Rari Protocol forward in many directions.

Abstract:
Rari Capital currently allocates earnings to two different locations: 50% to buyback and burn and 50% to funding the Endaoment DAF. While the buyback and burn has proven to be fairly efficient in its two occurrences thus far, I question the long-term viability of running a buyback and burn. Many different parties have pointed out similar concerns, culminating in Placeholder VC even writing a piece called, "Stop Burning Tokens – Buyback And Make Instead." The following describes a mechanism that we can switch to that creates a much more efficient model for our token (heavily inspired by the Buyback and Make model created by Placeholder).

By reducing the number of outstanding shares, buybacks improve certain valuation ratios (e.g. earnings per share, etc.) for all remaining outstanding stakeholders in the market. This justifies paying a higher price per share. But actually destroying treasury stock after a buyback is not economically useful. The buyback alone does all the work because what affects the price is how many shares participate, not how many exist – and treasury shares don’t participate. [by placeholder]

I propose creating a Balancer Smart Pool to serve as the basis for the new Rari Treasury (--> Rari Smart Pool)
This pool will be a 80/10/10 split between RGT (Rari's Governance Token), RSPT (Rari Stable Pool Token) and ETH. This pool would serve as an automatic buyback machine and is where 50% of where earnings would go. When earnings are added to the Balancer pool it will buy RGT (and RSPT and ETH to maintain indexes) from the market. With no sellers, this would mean a higher RGT price. The smart pool can establish a high trading fee (somewhere between 5-15%, ideally dynamic and editable by the DAO) to discourage buyers as this would also be serving Treasury functions.

This sets us up perfectly for any potential future issuances / inflation which can be conducted on behalf of the smart pool. Additionally, now we have a treasury that is accumulating true value and can be deployed in various different ways (ie restarting liquidity mining without inflation, spending on dev talent, etc.)

Motivation:

Creates a treasury that helps long-term protocol sustainability
More liquidity on RGT / ETH / RSPT (since you can always trade against the smart pool)
Price appreciation for RGT

Next steps?
For: Create Balancer smart pool and redirect buyback and burn funds there
Against: Keep buyback and burn

LMK YOUR THOUGHTS!!

Osprey

Seems like a great solution to the current buy back process based on your description. Also seems like a fairly safe "first action" from a governance perspective. Will keep an eye here for any criticisms/potential drawbacks from other members. Cheers to Jai and the team for starting some conversation here 😀

jai

One thing I will add to this conversation is that I think that the fees should be re-assessed to be able to kickback a certain X% of revenues to the strategy creator. I think that the strategy creator can choose what X% is and then this will be factored into a rebalance. This will ensure a competitive landscape in the market of strategy creations. All current strategies could be defaulted to 0% as the base. It can be anywhere from 0-100%. Likely a post for a future proposal, but should be important to note in this conversation.

yinxiang

In support of this suggestion, destruction will not bring long-term benefits to the agreement. We should establish a good model for the long-term survival of the agreement, and use the token model of $rgt to convert some speculators into long-term holders. Conducive to the long-term development of the project. And we should consider a governance model that is conducive to long-term contributors to the agreement, and try to avoid the adverse effects that speculators may have on project governance. Therefore, it is recommended to pledge $rgt to obtain non-tradable voting governance points tokens according to the length of pledge time to participate in governance voting for future agreements.

don

I agree that burns are wasteful, but I think the bought back tokens should be used in a different way. Although its true that burns do increase (relatively) vane metrics like EPS, they also remove for sale tokens (weak holders) from the market, which is a much stronger driver of price increase. This is the beauty of the buy and burn, that it both adds demand in the short term and removes supply in the long term, and these elements should be preserved in my opinion. The smart pool proposal would add demand in the short term but returns that supply right back to the market by providing it as liquidity, which reduces the tokens ability to appreciate (more demand required).

I propose using bought back supply as a staking reward. This would reduce supply available for sale, since there is an opportunity cost to not staking/locking tokens, and safely transfer repurchased tokens to strong hands and active participants rather than return them directly to the market. Distributions should occur retroactively (i.e. to earn week 1 rewards, you must be staked weeks 1-3). If technically possible, the share a holder earns should be some function of (holdings staked * participation) to encourage voting and governance contribution. This kind of builds off of what yinxiang says above about mitigating the influence of speculators on governance and creating a token model that encourages long term holding and participation. Since tokens are being distributed, there would also be the ability to, through proposals/votes, divert some repurchased tokens toward future liquidity mining and development participation, which I think is a great idea.