The following is my personal opinion and not a reflection of any larger YAM core contributor consensus. But I hope that by bringing attention to this issue, I can convince the core contributors and YAM community that it is in the best interests of the long term health of YAM to remove the Great Yam Wall.
Prior assumptions about the relationship between the YAM marketcap and the treasury value have followed the rule that the marketcap should not drop below the treasury value. The logic used to come to this conclusion is that token holders have the power to claim the treasury value via governance votes and therefore should value the token marketcap at parity or above the value of the treasury. We have a mechanism to try and enforce this dynamic called the Great YAM Wall, which would sell a portion of the treasury to raise the token price when the marketcap and treasury reach parity.
I believe that the idea that marketcap must be greater than treasury value, and the Great Yam Wall mechanism, may be conceptually flawed and pose a risk to the project. If the natural or most likely state for the YAM marketcap to be is below the value of treasury holdings*, then this mechanism will do nothing more than delay the inevitable while draining the treasury.
*I’m not saying it will or should be, just that it could be.
Before addressing whether the Great Yam Wall is good policy or not, we must first make some conclusions about the relationship between the YAM token marketcap and the Treasury value. This relationship is heavily dependent on the powers of tokenholders and expected value return for the YAM token. Both of these variables are subjective or partially unknown.
- If it is easy for token holders to extract value from the treasury via governance then the marketcap of the token should not fall significantly below the treasury value due to natural arbitrage opportunities.
- But while this would correlate the marketcap to the treasury value, the marketcap can continue to fall as treasury value is extract by tokenholders. Without inflows back into the treasury to counteract these outflows, this could easily lead to a downward spiral where tokenholders rush to claim some portion of the treasury before it is all extracted.
- I would expect the core team to veto any proposal that attempts to remove funds from the treasury using their Guardian powers. This would be an governance crisis, but it may be in the best interests of the multi-sig signers and other long term aligned constituents to prevent the proposal from passing. “Mutually assured destruction” of the YAM token price hugely benefits the current “owners” of the treasury funds over those trying to claim them.
- If extracting funds from the treasury is difficult for token holders (lots of coordination needed and risk of failure) then the risk of a run on the treasury is limited, but there is no reason to assume that the marketcap needs to be correlated to the treasury.
Expected Value Return
- If we discount extracting value from the treasury, then the YAM token must be valued based on more traditional crypto models. These typically focus on growth potential and revenue potential.
- Much of crypto is sentiment based and prices can be heavily impacted by expectations and crowd dynamics. Are you currently considered the Futur of France or a scam?
- Some projects push narratives of cash flows while others are focused on growth/reinvestment.
- Whether a project pays dividends or rewards, all are valued on their potential future ability to return value, either via paying out revenues, doing burns, or some other model. For many projects, a powerful idea and a model to one day pay out revenues is sufficient.
- If this method is used to evaluate a project, then the size of a project’s treasury has limited impact on its token price, especially if it may take much of that treasury to build a profitable project.
One of the common proclamations about YAM around when it was launched was that the treasury is “community owned.” While it is technically true, it is a vague statement when it comes to what powers it entitles token holders to and the waters are further muddied by the removal of the rebase mechanism, which was used to fund the treasury.
Once the rebase mechanism was removed, the role of the treasury changed from a dynamic entity that levied a tax on price increases to fund itself, to a more static entity that can only grow via revenues from new endeavors or existing investments. When all YAM holders were paying a tax to the treasury on positive rebases, a mechanism to pay tokenholders back made sense. But now that the tax is gone, that mechanism is not balanced.
The treasury now acts in the same way as a typical early stage project treasury where the treasury needs to be carefully managed to ensure that there is enough funding available to continue paying contributors to build out the project. I have not heard of any projects that use this model that also allow token holders to raid the treasury, especially when the project token is liquid and can be sold.
“Ragequit” is a term coined by MolochDAO for a mechanism that allows members to leave with their funds if they do not agree with an investment made. It is meant as a last resort for members who do not agree with a decision and works as a deterrent against unpopular decisions, similar to a hardfork.
When YAM launched, ragequit was proposed as a potential solution for tokenholders who do not agree with governance decisions. It was not implemented for a few reasons:
- As mentioned above, giving all tokenholders the opportunity to raid the treasury when the token price drops could lead to a downward spiral.
- The people choosing to exit are being rewarded for giving up on the project and those who believe in the project are being penalized.
- The molochDAO style of ragequit works well when members bring their own funds and their investments are not liquid. This is not the case with YAM because it is fungible and there is a liquid market for it.
- No upside value.
Ragequit is a flawed mechanism for YAM and while the Great YAM Wall is an improvement on it, it still suffers from many of the same problems. Not to mention that token holders can ragequit right now via sushiswap by selling their tokens.
Based on the above, I think it is reasonable to assume that Tokenholders should not expect to be able to easily extract value from the YAM treasury. If this is taken as a given, then YAM should not be valued by looking at treasury value, but instead by looking at long term prospects for the project.
For reference, there are numerous other similar projects whose marketcap is lower than their treasury value.
- DXdao has a marketcap of ~ $12MM and a treasury value of ~ $42MM (or ~$50MM if you include their own tokens). https://etherscan.io/tokenholdings?a=0x519b70055af55a007110b4ff99b0ea33071c720a
- The Gnosis token has a marketcap of ~$225MM and their DAO has a treasury value of ~ $300MM (~150,000 ETH). They also own 8.5MM GNO tokens, or $1.2BN worth. Last year ARCA, a crypto hedge fund tried to strong-arm Gnosis into doing a buyback of the GNO token and were generally unsuccessful.
- PieDAO has a marketcap of ~ $7.5MM and a treasury value of ~ $11MM (or ~$38MM if you include their own tokens). https://client.aragon.org/?#/piedao/0x34ca726d39eae3c8007d18220da99a3a328cba35/
These examples do no imply that the marketcap of a project should be lower than the treasury, just that marketcap does not need to be higher than treasury value. And if the treasury value is not directly correlated to the YAM price, then any mechanism that we design around trying to maintain this relationship is bound to fail.
The Great YAM Wall, as specified and voted upon, would sell 11% of the value of the treasury for YAM in the event of the YAM marketcap reaching parity with the treasury value. This is intended to be a positive for YAM holders, but there is little evidence it will be. Other projects that have done large one-time buys of their own tokens with treasury funds have had minimal impact on the token price beyond giving traders and those already looking to exit a good deal. Sushi’s buyback was a disaster. DXdao has been buying back DXD for the last few weeks and it has had almost no impact on the token price.
Selling a large portion of Treasury ETH for YAM when sentiment is particularly poor (which one would expect if the marketcap of YAM his parity with treasury value after being well above it) would only give an opportunity for those who are looking to sell their YAM. This sale would do nothing to solve or improve any underlying conditions that are causing the price drop. The Treasury would be worse off in the short term because it would be less capitalized (It can’t sell the YAM it just bought) and the remaining tokenholders would be in the same fundamental position.
As I have shown above, the treasury holdings of many DAOs do not directly impact the token marketcap and therefore the “fair” valuation for the YAM token may be lower than we have been assuming. If this is the case then a mechanism that sells part of the treasury above this level would serve no greater purpose than an investment into the YAM token by the treasury.
I recommend that we remove the Great YAM Wall as a mechanism and instead focus on better explaining and building on what is valuable about YAM. The ability to claim a portion of the treasury without doing any work is not a value proposition for the token that we should promote.
We removed the rebase mechanism to pave the way for a better YAM. We should do the same with the Great YAM Wall.
The problem that we should be solving for is liquidity and not token price. We already have a “ragequit” mechanism in place, which is our sushiswap pool. There is a risk that this pool dries up if there is a significant bear market, penalizing investors who want to exit with high slippage.
While an AMM is in theory infinitely liquid, significant selling into a low liquidity pool can cause significant problems and oversized price drops. If we as a community are committed to having a liquid sushiswap pool to allow for exit liquidity, then we can set a threshold in which we add additional, vested YAM rewards to this pool in order to attract long term supporters to LP in exchange for juicy APRs.
If the liquidity in the sushiswap pool drops below a certain threshold (1MM USD?) we can continue offering the same liquid rewards, but add additional YAM rewards that are vested for a year, or whatever amount of time we feel is necessary for the price and sentiment to rebound. This would be an emergency action similar to the Great Yam Wall, but would benefit the most aligned YAM holders and would not sacrifice the treasury.
Many LPs do not like vested rewards, and I understand that sentiment, but if we kept the existing rewards as-is and added vested rewards then this would be strictly better than just the existing rewards.
This would require a governance action to mint more YAM for this purpose and we would need to discuss how much would be optimal.