PRINTS buyback and DAO-managed OTC Desk

[luiz]

The recent NFT/Crypto-wide drawdown had a lot of PRINTS holders looking for liquidity. It is known that our OTC channel has not been the best mechanism for price discovery and for matching buyers and sellers. Some of the issues:

• No permanent record for order (orderbook-style). The seller/buyer needs to constantly be broadcasting the buying/selling orders
• Doxxing, given members have to broadcast orders under their name
• Puts the onus of communication and negotiation between buyer and seller on the members. This can be costly and frustrating

Most collector DAOs don’t have any liquidity mechanism, so, despite being imperfect, the OTC mechanism is at least a solution.

As an intermediary step before addressing liquidity in an automated, long-term sustainable way, an OTC desk managed by the DAO could be a step in the direction of organizing the demand and supply, and taking away the burden of being the “salesman” from the members themselves.

Paired with some ETH provided by the DAO to execute a buyback to start the market-making, I believe we can have a sense of how the PRINTS market should evolve.

The key decisions here would be:

1. OTC desk mechanics
2. Size of the ETH budget for buyback
3. Price of the buyback

On (3), I believe the DAO should always be willing to buy PRINTS at NAV or below. That would be equivalent of us increasing our exposure to our existing collection. However, PRINTS have historically traded above NAV, so it would be interesting to get input on this point.

[f1cken]

I recently purchased some PRINTS from the OTC channel and have a few thoughts:

1. Playing Market Maker in illiquid markets is potentially lucrative.
   1A) Instant Liquid for the seller needs to be discounted to a level favorable to the DAO.

2. This buyback should not result in a repricing of the asset to the detriment of the DAO.
   2A) If I, f1cken with liquid, can go out and get an OTC deal of .002E/PRINT. The DAO should not be disadvantaged and be asked to pay more than any market participant. This would require a decent amount of due diligence to determine where others will step in as buyers from the OTC channel.

3. Having an option which removes the uncertainty of purchases / swaps for new members and buying from a known source is valuable.
   3A) The same can be said for the certainty created as a seller. Not only are you selling to a known entity instead of johnny I have a discord account, you are also backstopped in your ability to exit.
   3B) This certainty must result in a discount to the DAO in pricing above.
   3C) This can play hand in hand with the new membership options previously discussed.

I looked to PRINT Swaps to get an idea of pricing when I bought 26 days ago. Currently an imbalance in net sellers, see #OTC channel chat activity, favors buyers. This is also demonstrated in my swap being the latest one tracked on 0xtracker. So buying at NAV might actually result in sellers to the DAO getting a sweeter deal than they would be in the OTC market.

With that in mind, my biggest question would be: how does the DAO prevent net sellers (as of now) from repricing their tokens knowing this buyback is happening?

-f1cken

[glory]

I have been working on an OTC market maker proposal in Notion - I’ll re-post it here to see if it spurs any discussion. This was my take on what a design could look like:

Context

The DAO’s governance token, $PRINTS, currently has very thin and intermittent liquidity, making it difficult for any individual to buy or sell the token, even in very small size as well as creating a significant barrier for prospective members to join the DAO.

We believe that step 1 to improving this situation is implementing a relatively simple, lightweight OTC program and having the DAO itself provide a small amount of capital to the desk each month to act as market maker. This will allow for some movement in the market, as well as providing a default bid and ask for a market to coalesce around. Subsequent steps could involve building out a more efficient and user friendly interface for other market participants to also participate.

Proposal

The MVP of this project can be very simple. Each week, Fingerprints will have a published Bid & Ask quote in the OTC Discord channel, and will fill orders as they come in as long as budget is available for the month. For example, the weekly post/quote could look something like this:

Bid: x.xx
Ask: x.xx

ETH available: X
PRINTS available: Y

In addition, the Finance Group can maintain a simple spreadsheet of orders posted by members - ONLY active sudoswap or airswap links will hold their place in the orderbook. Inactive links will be purged regularly.

As orders come in, users can either take the other side of active Sudoswap and Airswap orders, or the manager of the OTC Market Maker Program could fill orders at the published levels (again using Sudoswap or Airswap). Each week, the DAO bid/ask levels would be reset to reflect any movement in the market or material movement in NAV.

Specifications

• The OTC market maker program will be operated out of a hot wallet that the Finance Working Group controls. The address will be updated and published to the DAO if this proposal is approved.
• The Finance Group will appoint one member to manage the program and the OTC workbook. Glory can manage this to start but new managers can be voted on by the Finance Group.

[glory]

I think a way to possibly manage this is to manually manage the Market Maker program so that we are never buying or selling when we’re not the best bid or offer. For now, this will be largely a manual effort, but I can envision once dedicated platforms are released (Airswap is working on one now) then it should be a little easier to manage.

[glory]

I wanted to bump this - I think an MVP of this is very do-able. My questions (which I would love other opinions on) are as follows:

1. If FP makes a market in OTC, does it achieve our strategic goal of cleaning up sellers and making it so that communication to new buyers occurs with the DAO rather than with outgoing members/sellers?

2. Would it deliver at least as much value as we’d be expending in capital, or do we have superior uses for that capital?

3. How much capital do we think would be required to operate this successfully?

If we get consensus that we should move ahead with this, I can design an MVP and maybe we can start the program in a limited-way, with a small amount of capital to start.

[terence]

Having the DAO maintain otc to have a constant portion of circulating prints available for member entry is the only way to ensure quality of members joining the community.

If the DAO controls entry into the community we have more opportunity for greater quality DAO members and better chances at a sustaining an active group that works together efficiently.

Screening entry offers opportunity to build out our core team and fill roles (that we might not even know we need yet) with the most value from within rather than having to expend capital later on a contractual basis.

[bamboo]

Think this is a good short-term proposal. Ideally I think a decentrallised orderbook a-la what Airswap are apparently building would be a better solution, but I don’t know how long that will take to deliver – will chase for an update.

[glory]

Thanks for the feedback - here are the primary questions I think we need to answer.

1. How much ETH should we devote to this monthly?
2. How should we price the bid and ask?

[Klamt.eth]

1. I think we should first have visibility on the supply of $PRINTS being offered in the OTC. The we can propose a reasonable turnover ratio.
2. I would only organize the ask prices so buyers can easily use the airswap links to complete the transactions. To include bid prices could potentially create a chaotic environment with investors trying to “fish” for deals way below “market prices”. Regarding the liquidity provided by the DAO, maybe we could set a price range in which the Finance team would have autonomy to buy $PRINTS respecting the monthly budget. That way we won’t set a price to influence the OTC. It could be a broad range too, like 0.0020-0.0055 ETH/$PRINTS.

[terence]

Sorry if I’m not understanding correctly but as long as theres an upper bound to the range what would incentivize anyone to ask the min? (ie .002 vs .005)

A floor makes sense, similar to how irl social clubs have a cost of membership I believe we should have some consensus at this point as to what it costs to be a member of FP in dollar terms.

Naturally as we grow along with our collection and treasury this membership value will need to be reevaluated.

[terence]

The orderbook hasn’t been updated in some time, at last update
there were over 50k PRINTS with asks.

Roughly skimming discord starting 3 months back it’s pretty close to that still, there looks to be about 40-46k PRINTS being offered, or in total 9 full 5k tier memberships.

[glory]

I don’t have a very good way to rationalize this, but in my mind I always figured 1 full membership of PRINTS per month, so 5k PRINTS per month could be held for sale from the DAO. That would result, if there were no buying PRINTS on the other side, in about 1% dilution of tokens outstanding per year. But I’m mostly pulling that out of thin air, I don’t have much rationale to back it up.

[Klamt.eth]

IMO it should function as a sustainable market making operation. The Finance team should acquire tokens at a price that they could sell at least at the same level in the future. I believe spread/profit should be a KPI in this activity and having recurring losses would make it unsustainable.

The idea of having a range is to avoid setting a specific price. If we set only a floor price we would probably push the token price in that direction.

[glory]

Would a helpful (and simple) first step just be for me to start keeping track of OTC orders again in a workbook like Proper used to do?

[terence]

In an effort not to waste time tracking past otc orders right now, could we start by proposing a snapshot to y/n a buyback and determine a purchase range?

I think our problem isn’t so much that we are lacking a managed OTC system, FP wasn’t meant to be liquid or traded. We have a situation where we have members looking to exit, lack of buyers at the moment, and those that are looking to enter are largely priced out.

If we evaluate whats mutually beneficial for the DAO and it’s members, we want improved ease of entry/exit without providing complete liquidity, a method of onboarding that ensures quality of community, decentralization of governance, profitability for the DAO.

The DAOs treasury can easily handle offering periodic buybacks to sustain liquidity for members ease of access and community growth.

If we are screening all members for access at the 1k tier, the DAO should always prefer to buyback governance share and control that access, rather than let prints into open market or to new members via exiting members.

Buying back PRINTS in tranches over 1k and redistributing only to 1k tier new members would offer at minimum 100% community growth. By the DAO purchasing PRINTS specifically for distribution to new 1k tier members it will alleviate concerns of centralization the DAO faces.

[Assuming the DAO purchased the ~45k PRINTS available from 9 members at 5k tier, with the intention of redistribution to only 1k tier members, the Fingerprints community would gain at minimum 36 new members]

We should determine the amount of PRINTS being offered (as mentioned seems to be ~45k) and the volume of PRINTS the DAO will purchase on a semi-regular basis.

Members would gain regular opportunity for timely exit, the DAO would gain PRINTS for redistribution with the potential to 5x community size (likely at profit…) and the metaverse gains a slightly less centralized, now 80% more accessible DAO.

Once there has been sufficient redistribution we wouldn’t need to sustain buybacks, at that point an OTC desk (hopefully airswap released) could be managed by a member just to streamline matching bid/asks like Proper used to but right now not sure if that will help us.

[terence]

for reference, PRINTS holders over 5k

[terence]

and holders below 1k

[glory]

I’d be on board with this, but I would only really be comfortable with the DAO making a market OTC with a wide spread - eg. buying at a discount to NAV and selling at or above the last round price.

[luiz]

@terence this is great info and feedback.

IMO the changes we’re making at Fingerprints, taking it down the road to decentralization and increasing the importance of PRINTS as a governance token and a way to get exposure to the DAO will actually increase the demand for sub-5k lots.

To get a sense of the size of the internal sell pressure we’re dealing, I would propose a smallish (sub-50 ETH) first tranche of buyback at a low price (at or below NAV). This will not only ease some of the pressure but also give us an adequate view of the market.

Going forward, I would also test out the idea of directing a fixed portion of revenues to buybacks

[glory]

Considering the current market environment and our goal to maintain a robust balance sheet/treasury, as well as the fact that this is really only a trial run to get a sense for potential sell volumes, I think we should keep the first run quite limited - 10 to 15 ETH, or somewhere in that ballpark. We can always expand the program if we feel it will add significant value.

Current NAV is slightly above 0.0016 as of 6/10/22 - I’d be ok setting pricing for this trial run at 0.0016.