[1IP-09] Collect 1inch DAO Treasury Revenue in 1INCH Token in Addition to USDC

Natalia · June 22, 2022, 4:03pm

(Yes) In favor of this proposal.
(No) Against this proposal.

0 voters

Simple Summary

This proposal seeks to modify the 1inch Network DAO Treasury’s revenue collection strategy by enacting the following changes:

Switch from buying USDC with Swap Surplus revenue to buying 1INCH when the price is lower than $1.30.
Switch from buying 1INCH with Swap Surplus revenue to buying USDC the price of 1INCH is greater than or equal to $1.70.

Abstract

Currently, the Swap Surplus revenue stream is collected in varying tokens and swapped to USDC before it is then sent to the 1inch DAO Treasury. Once enacted, this proposal will instead swap these tokens to 1INCH as long as the market price of 1INCH is below the $1.30 to $1.70 range (see the Specification section for a detailed explanation). All swaps will be done using the 1inch Aggregation Protocol to ensure the best pricing.

Motivation

Benefits to the 1inch Network DAO include:

Investing the DAO’s revenue stream into the protocol’s governance token while the governance token is lower than it was previously valued.
Potential upward pressure on the 1INCH token as the DAO Treasury will be a net buyer of cheap 1INCH.
When the token is trading at higher valuations, the Treasury will automatically de-risk by collecting revenue in stable coins.
Holding 1INCH within the 1inch DAO Treasury will allow the Treasury to scale its value with the performance of the token.

Specification

This proposal serves as a signal from the 1inch Network DAO to 1inch Labs. Once passed, the 1inch Network DAO calls for 1inch Labs to modify the fee collection strategy with the following changes:

When the price of 1INCH moves is below $1.30, Swap Surplus revenue shall start to be collected in 1INCH.
When the price of 1INCH moves above $1.70, Swap Surplus revenue shall be collected in USDC.

Once the modifications have been made and tested, 1inch Labs shall deploy them. All future modifications to these will need to be done by a 1inch DAO Governance vote.

Rationale

This proposal aims to purchase 1INCH with treasury revenue when the price is lower than ~$1.50. $0.20 bands are used on either side of this buying point in order to dampen the impact that market volatility could have.

This price point of 1INCH that triggers the switch can be changed in the future via a governance vote.

Considerations

Market Risk

The USDC stablecoin composition of the 1inch DAO Treasury puts the Treasury in a very good position during any bearish market cycles — the Treasury constantly grows in dollar value while, in contrast, projects that primarily hold their own token, have had the real value of their Treasury shrink in the last 6 months.

Adding 1INCH to the Treasury composition will increase both the potential risk and potential returns. This proposal dampens the volatility by maintaining a mix of risk-on and risk-off assets.

Added Complexity

If enacted, this proposal will add complexity to the Treasury Revenue collection strategy.

Roxan · June 23, 2022, 8:25am

Concerns -

Price Manipulation because of the Proposed Static Price Point & Governance Friction in doing so .
Series B Funding Rumor

Some users might say that 1.5$ Price floor is choosen to save VC & stuff . I don’t want to hear such things on implementing this Proposal .

Mitigation -

To Solve above points , I propose of Using

A Dynamic Price Mechanic that is Based on 30 Day Moving Average for Buybacks

Or

Buybacks using Dollar Cost Average

With recent price drops, many suggest to DCA instead of buying all together in one swap. Since the bottom is not yet clear, DCA sounds like a good option

tradersnow · June 23, 2022, 2:48pm

This is a really nice proposal.

It is automated: On a basic level, the strategy seamlessly adapts with the overall market.
It utilizes a rough DCA approach, which is a time-tested and historically successful method for capital accumulation.
The price range creates a “buffer zone” that will maximize effectiveness of the strategy, only buying substantially discounted amounts of 1INCH.

As far as a Dynamic Price Mechanic (as @Roxan has suggested), I think it is a really amazing idea; however, there are enough details and nuances surrounding a dynamic price point mechanism that it might be best for its own separate proposal. It might be good to see this first static phase up and running successfully, and then explore adding this dynamic element down the line, which would further increase automation and adaptability to market conditions.

ScaleWeb3 · June 23, 2022, 3:47pm

In our view, this proposal conflicts with the following proposal which looks stronger:

Most important factors to consider:

Build an all-weather-proof treasury
Long-term program that does not add risk to 1inch (Further concentration of 1inch tokens, 1inch price may further drop and you will have worse liquidity than on stable/BTC/ETH-pairs)
Do not enable internal frontrunning

Currently, 1inch has a large part of its treasury in 1inch tokens. Therefore, there is little importance to increase the 1inch holdings to further use these 1inch denominated funds to incentivize and align employees and other contributors. This may change in the coming years.

If funds were collected in 1 inch tokens and later-on given out again (potentially + vesting) to contributors, this would only have short-term positive price effects.

Long-term, we look forward to 1inch value accrual mechanisms. Collecting fees, to exchange in 1inch and burn would not be our preferred option in that regard, we prefer reinvestment & building.

Roxan · June 23, 2022, 4:13pm

DCA is something that I think 1inch should Include as a Trading Tool too , Anyway For Allocation I would forward 1IP-09 Voting that boasts a Major inclination towards allocating 10% of TREASURY in 1inch tokens

I wanna know who & what decided this Range . How we got there as conlusion ? Have you looked into other factors to Mark this price range suitable for buying ?

Natalia · June 23, 2022, 8:36pm

hey @ScaleWeb3 thanks for the comment,

I’d say the conflict between the proposals is intentional. I am personally a big fan of the [1RC] Simple diversification mechanism for 1inch DAO Treasury . Overall posting [1RC] Collect 1inch DAO Treasury Revenue in 1INCH Token in Addition to USDC allows to gather more feedback on community’s expectation and their vision for the treasury’s future development.

In more detail, both strategies if pass can easily co-exist, the @zumzoom’s idea is not to swap spread surplus assets into USDC if they are in those top currencies ETH, WETH, WBTC, DAI, USDT, instead to accumulate them in the treasury.
Swinging between 1INCH and USDC mechanics can still be applied to the rest of the spread surplus assets. That way, I clearly see how both can be pretty much complementary.

I’d allow myself a few remarks:

Currently, the 1inch Treasury is collected in USDC only.

Great point, I assure you many things have being cooked right now, stay tuned!

ScaleWeb3 · June 24, 2022, 11:07am

Thanks for the explanation.

After considering your reply, we agree that the 2 proposals could co-exist but would add that we are not yet fully convinced of the long-term value-add of this second proposal in its current shape

We took a look at the treasury and the overall token distribution and saw that 1inch core + community sit on a lot more 1inch tokens:

Are those tokens in specific baskets untouchable or is there flexibility in using them for different purposes?
Do you have an up-to-date overview of the different budgets and links to the Eth accounts?

We would really appreciate it to build a quality 1inch profile for DeFi-Reporting.com, engage in this governance process with the same up-to-date knowledge you have and consequently provide the best possible input. Thank you!

Roxan · June 24, 2022, 3:21pm

The Community Allocation is totally in the Hands of 1inch Foundation that has nothing to do with DAO although it sounded like Dao has direct control over those community incentives but i think they are reserved for farming , gas refunds etc .

I doubt that DAO can signal foundation to invest 1inch in DAO treasury if voted .

IT"S Really not that diffcult actually to calculate the 30 D averages price of 1inch & trigger 1inch buybacks .

My simple view was that instead of taking current price of 1.5$ for buybacks we should take atleast 30D Average price to get rid of price manipulations .

Querying 30D Avg Price is not that difficult via Oracles

0xBaer · June 27, 2022, 2:59pm

GM @Natalia, this is a long-due proposal, and I was also thinking about Strategies for the treasury to accumulate 1INCH tokens, So we have a positive exposure as the network grows. Implementing the swap surplus conversion will give systemic buy pressure and might be enough to offset the selling pressure on the token price.

Before going further, let me add my concerns to this proposal.

The Ultimate intention of the proposal.
. From reading the proposal, I’m unsure if I get the proposal’s actual intent. Is it about treasury diversification, a buyback campaign for 1INCH or if it is a way for the DAO to have exposure to the 1inch network development. your 1RC is giving a missed impression, which would even be bad for the token in the long run.
the Arbitrary price range of 1.5$.
The price range between 1.30$ and 1.70$ seems to be arbitrary. It would be great if we could know the reasoning behind choosing those limits.

The proposal is signalling that the fare price of the 1INCH token is around 1.5 dollars, and anything below will be under price and DAO should buy back those tokens and support the price, and signals that anything over 1.70$ makes 1INCH over prised. This would, in my opinion, affect the token in the long run and suppress the token as we move. The best approach, in my opinion, is to convert 1inch tokens at arbitrary time points, which are not influenced by the price or Dollar-cost averaging.

Dollar-cost averaging. ensures that the treasury has 1INCH tokens regardless of the token price and will act as the real buying pressure for the 1INCH token rather than someone’s bag holders.

RoundElephant · June 28, 2022, 10:53pm

I helped brainstorm this proposal so I think I am qualified to answer some of these questions.

From reading the proposal, I’m unsure if I get the proposal’s actual intent. Is it about treasury diversification, a buyback campaign for 1INCH or if it is a way for the DAO to have exposure to the 1inch network development. your 1RC is giving a missed impression, which would even be bad for the token in the long run.

I don’t think any of these motivations are mutually exclusive. I think my response to the rest of your comment my clear up the line of thinking.

The proposal is signalling that the fare price of the 1INCH token is around 1.5 dollars, and anything below will be under price and DAO should buy back those tokens and support the price, and signals that anything over 1.70$ makes 1INCH over prised. This would, in my opinion, affect the token in the long run and suppress the token as we move. The best approach, in my opinion, is to convert 1inch tokens at arbitrary time points, which are not influenced by the price or Dollar-cost averaging.

I viewed this proposal as a temporary treasury management strategy that is designed to take advantage of the depressed token prices that this bear market has left us with. I expect this to be modified in coming months, but I can see your point as, in its current form, it could almost be seen as if the DAO is saying “1INCH is worth no more than ~$1.50” – this was not the intention.

Potential solution for this proposal

I think, in the long run, it makes a lot of sense to collect some treasury funds in stable-coins (we’ve all seen how our treasury is basically the only one in all of DeFi that is larger now than it was 6 months ago). We have plenty of USDC reserves right now in the treasury ($14.6M), so, I think we can afford to be a little riskier with the revenue stream for the time being.

What if, instead of using the market price of 1INCH to determine if we’re collecting revenue in 1INCH, we just set a time period that we’ll collect the revenue in 1INCH instead of USDC? Let’s say we do this for one annual quarter (three months)? I won’t edit the whole proposal before getting feedback, but the Simple Summary would read as follows:

Simple Summary

This proposal seeks to modify the 1inch Network DAO Treasury’s revenue collection strategy by enacting the following changes:

Switch from buying USDC with Swap Surplus revenue to buying 1INCH.
Unless renewed or modified by 0:00 CET on the 1st of October, 2022, the treasury will revert back to collecting revenue in USDC on that date.
This proposal can be renewed, modified, or repealed at any time via the normal 1inch DAO governance process…

Thoughts on this modification? I like it because it forces us to re-evaluate in the next 3-months and does not depend on market conditions.

RoundElephant · June 28, 2022, 11:10pm

Longterm, we might not even run into the issue of when to start, or stop, buying back 1INCH…

Hypothetically, if the DAO voted to implement some sort of staking return with a set % of the treasury’s revenue, the DAO would always be buying 1INCH and distributing to stakers (probably best to structure it this way as stakers would be receiving increase governance power ). For the fraction of revenue that doesn’t go towards stakers, we could continue to collect that in whatever makes the most sense (like USDC + that simple diversification method being proposed.

Yes, we’d still run into the issue of the 1inch DAO holding very little of its own governance token (if that is even to be considered an issue seeing as most DeFi projects are in the opposite boat and it is quite the predicament). However, there would at least be a sustained buying presence of 1INCH that scales with protocol usage.

Roxan · June 28, 2022, 11:52pm

How much amount of treasury supposed to be spent on buyback ?
Doing Daily Conversions to 1inch will cost gas fee on eth chain ?

RoundElephant · June 29, 2022, 12:09am

How much amount of treasury supposed to be spent on buyback ?

The total amount currently used to purchase USDC (unless the other diversification strategy is already live, then we wouldn’t be swapping the ETH, wETH, wBTC, DAI, and USDT).

Doing Daily Conversions to 1inch will cost gas fee on eth chain ?

Yes, but we already do this when we swap the collected revenue to USDC. So that cost should be the same.

Natalia · June 30, 2022, 8:39am

Hey @ScaleWeb3 it took me a while to get back to you. Thanks for getting into detail of the distribution scheme and thinking over the long-term value of the proposal.
I am happy to answer your questions:

The Community Funds (remains ~225M 1INCH) are under 4 year vesting and getting spent gradually for different purposes.
The Growth Funds (remains ~ 52.8M 1INCH) have a different vesting schedule due the Round B token sales.
Do you have an up-to-date overview of the different budgets and links to the Eth accounts?

I don’t have the overview you are asking for consolidated in one place, all transfers are pretty much readable from the main 1inch Foundation Multisig.

Roxan · June 30, 2022, 9:49am

Does DAO has direct/indirect ability to control or suggest the spending of these funds or not ?

Natalia · June 30, 2022, 9:58am

My understanding it that no, only Treasury funds are under DAO’s control

Those Community Funds are for marketing and pr campaigns, event sponsorships, farming, gas refunds, charity etc.

Roxan · June 30, 2022, 10:01am

Can we do this -

Switch from buying USDC with Swap Surplus revenue to buying 1INCH when the 30D Avg. Price of 1INCH is GREATER than Current Price
Switch from buying 1INCH with Swap Surplus revenue to buying USDC when the 30D Avg. price of 1INCH is LOWER than or equal to Current Price

Explaination -

If 30D avg Price is greater than current price = 1inch in bear area

Summary

This text will be hidden

If 30D avg Price is lower than current price = 1inch in bull area

Summary

This Method seems a Lot Better to me

Any Drawbacks ?

Natalia · June 30, 2022, 10:15am

The 30D Avg. or DCA is a solid approach and I agree a better method. I just think that in current market condition, we have to react fast (well even discussing this proposal takes a long while haha). The method implies implementing of more complex logic which takes more time and cooperation with the 1inch Labs.

But yeah I see this being implemented in the nearest future as a more defined strategy.
Thanks for the comment.

RoundElephant · July 1, 2022, 3:23am

~~FYI – this proposal is live on Snapshot:~~

~~[1IP-13] Collect 1inch DAO Treasury Revenue in 1INCH Token in Addition to USDC~~
(see edit)

I know this is unorthodox as we didn’t have a Phase-3 temperature check. I posted my thoughts on the matter here: [1RC] Simple diversification mechanism for 1inch DAO Treasury - #18 by RoundElephant

Edit – The phase-4 vote has been cancelled and won’t resume until the proper phase-3 temperature check vote has run its course.

0x7751 · July 1, 2022, 12:20pm

We believe that highlighting the risks this proposal presents in its current state is important:

Market Risk. The DAO earned ~800k USDC last month, which is about average according to Zerion. Forgoing USDC revenue for a quarter will come at an opportunity cost of ~2.4m USDC in favour of the equivalent amount of 1INCH. It’s possible that we stay in a bear market for another 12-24 months and that 1inch and the broader market drops another 50-90% from here. If the DAO treasury’s purpose is to help fund innovation and growth of the protocol, USDC is likely to be able to facilitate that in this environment and this loss of purchasing power seems like a more serious risk than has been discussed here.
Risk of Losing a Competitive Edge. 1Inch DAO’s USDC-denominated treasury is a competitive advantage that sets the protocol apart from its competitors. It’s not clear what advantage is gained by changing the fee collection strategy, so it’s difficult to assess what the risks are here.
Possible Conflict RIsk. Similarly, there may be conflicts of interest between the 1Inch Foundation and the DAO that are not straightforward or outwardly knowable such as expiration of vesting contracts.

For each of these risks, we’d suggest a method to mitigate:

Use War Chest to Build in Bear Market. Fast-track the creation of the grants committee which seems to have stalled. Start backing projects at opportunistic lower valuations in the bear market. This is the best time to build, and building will help to shed light on how exactly much good 2.4m USDC might do for the protocol’s development.
Limit 1inch Purchase to Keep Competitive Advantage. If token holders do want to proceed with this proposal, we suggest capping the amount of 1INCH the DAO can buy in USDC terms at 1,000,000 and once that number is hit, immediately switch back to swapping fees for USDC (and potentially implementing the Simple Treasury Diversification Plan). This puts an approximate time frame and an exact dollar value on the opportunity cost of this proposal, as well as guaranteeing that the competitive advantage of a USDC-denominated treasury remains intact.
Alignment Stakeholder Interest. Align interests between the DAO and the foundation. Would the foundation be willing to buy back 1INCH tokens with their treasury 1:1 with the DAO? If not, visibility into the foundation’s balance sheet, runway, token vesting schedules etc would be helpful in evaluating the risk of a conflict of interest here.

1Inch DAO is in the enviable position of having a stable treasury from which to fund projects that grow the protocol. Arguably the protocol is in a better place than every single one of its competitors in this regard. This change should only be made with a full understanding of the risks it entails.