Updated Proposal: Uni v3 Liquidity Pool

Liquidity Proposal - this is an updated proposal based on feedback from the original proposal to execute a manual buyback. The main goals are largely the same:

  1. PRINTS tokens are currently inexpensive vs NAV, and buying them back for the DAO should be accretive to value for all token holders.
  2. Allows sellers to easily exit their positions and facilitates the shift of the token into the hands of longer-term oriented holders, helping create a more stable token price
  3. Helps create a more liquid trading environment for the token, which will be helpful as the DAO shifts some compensation out of USDC and to the PRINTS token
  4. As the pool matures, it should also make it easier for new members to join the DAO

In total, we propose budgeting 80 ETH for liquidity.

We propose placing 40 ETH into a Uni v3 pool to provide one-sided liquidity at a maximum price of 0.001 ETH/PRINTS. Uniswap already has a pool with ~14k PRINTS (not provided by the DAO), so buy-side liquidity already exists. However, there’s little to no ETH in the pool currently (and thus no sell side liquidity). Placing ETH into the pool will allow us to achieve the goals above in a controllable environment.

Rationale for the price range - average traded price over the last two months was 0.0011 ETH/PRINTS based on Etherscan DEX transaction data (~25k total PRINTS traded in this two month period).

Rationale for the amount - the OTC desk currently has ~15 ETH of sell orders (at a price ~0.0015 ETH), and the past two months have seen DEX volume of ~25 ETH. It’s extremely difficult to know how much volume will hit the pool before it’s set up, but based on the two datapoints above I’d expect 40 ETH to be sufficient to absorb any selling, particularly with the reserve (discussed below)

NAV as of 9/8/22 was ~0.0019 ETH/PRINTS, making any token purchases by the DAO significantly accretive.

We’d also propose reserving an additional 40 ETH to be used to help manage potential volatility or to be deployed opportunistically to support the pool - eg. if selling pressure escalates, the DAO can step in with the reserve to buy back tokens (essentially fulfilling the same purpose as the original buyback proposal).

I’m going to spend some time seeking out experienced Uni v3 LP operators to see if I can get some insight on how to best structure and operate the pool, as well as potentially get an idea as to whether the amount of ETH and the price range being discussed seem reasonable, and will post updates here.

Edit: I also want to add some detail on how this impacts the treasury. Current balances are as follows:

ETH: 493
Stables: $1,935,402

If the entire amount of 80 ETH were to be consumed via the pool + token repurchases, it would comprise ~15% of our ETH balance. Our stablecoin balance would not be affected.

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I think this is reasonable. The 0.001 as max price looks ok and any major sell pressure would get an even better price for the DAO.

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I’m still of the opinion that, although the transaction is theoretically value accreative to DAO members (as purchase price < NAV), in practice it could be value destructive. 15% of ETH is a significant proportion of our reserves at a time where the funding environment is not kind to NFTs or DAOs in general. Or, to put it another way, in our current world where it is not easy to sell (for ETH) or use (for buying services) PRINTS, we’re significnatly reducing optionality. I think that’s a high price to pay a this time.

I would actually make the opposite argument - times where the market is weak, NFT valuations are declining, etc is a favorable time for us to deploy ETH into repurchasing our own tokens.

If we had other uses of capital to drive value, I would 100% agree with you - but we don’t have many other opportunities for us to invest in, and we have multiple years of expense runway already. So the alternative is just to let our resources/ETH sit idle.

If we have investment opportunities or other ways to use the ETH, I am totally willing to change my perspective on this. Do you have any thoughts on that?

Ah, yep nail on head of our different view!

I don’t have a direct answer to your question of alternative ETH uses, but feel that there are – or will be – some that should generate a mugh higher return than marginal un-dilution for members over the coming months. We’ve seen opportunities to acquire existing works come our way at short notice in the past, any may do again; I hope we will find new works to collect; we’ve got a more formal studio offering that appears to be gathering steam but may require funds for projects; and we’re about to rebuild the whole organisation in a way that offers working groups much more flexibility over budgets for new initaitives. Given the quality of membership – and pace the space moves – I feel we’re better off retaining our ability to explore and act upon these.

In other words – I don’t see our ETH / USDC balances as ‘idle’, I see them as a valuable resource that enables us to be nimble and proactive as the landscape and organisation evolves.

Thanks @glory for pushing this forwards and agree with the rationale, I guess a discussion could happen about uni v3 vs v2 (vs other alternatives) since some are more liquidity and/or manual maintenance hungry than others, some tradeoffs depending on what is chosen.

@bamboo ultimately the landspace is much larger than simply nfts and the evolution of this organization also requires caring for these other areas such as permissionless “freedom to roam” which is critical for existing members and outside ppl interested in entering the DAO, the PRINTS token is an important mechanism and product of this org and also requires care and improvements to its sustainability.

Sorry, I don’t get the “freedom to roam” point. If you mean “freedom to sell” for existing DAO members then yes, I agree, and I’d love more liquidity to be in place – but 80 ETH of purchases at a discounted price isn’t going to move the needle here. Discussions such as ERC721 membership tokens are, IMO, far more likely to produce a meaningful liquidity boost and at less cost to the DAO’s scarce ETH/USDC reserves. Indeed, just promoting our existing OTC counter – despite all its flaws – would be a good first step. Tweeting about it, a how-to guide, promotion of the DAO and membership more broadly… the real issue of liquidity is, frankly, no buyers – not a lack of using the DAO’s own money to buy our own tokens.

Just to put the scale of this in context, at a 0.001ETH/PRINT value there are 7000 ETH worth of PRINTS tokens available. Purchasing 80ETH of our own tokens at 0.001 ETH/PRINT value provides, say, 40 ETH of net value to DAO token holders (as we’re buying at half NAV valuation). So absolute best case we’re providing a return of 0.57% to DAO token holders. If we really can’t spend 15% of out ETH treasury getting a better return than then I’d say we have bigger issues.

I agree with this proposal.

The main reason for my support here is not the ROI for this (buying x of value for 0.5x) but the fact that we will be able to enable a new feature for the PRINTS token.

The beauty of Ethereum composability is that once you have a (relatively) liquid asset, there are many different ways people will be able to interact with the token (staking, borrowing/lending, and yes, speculating more freely) that they’re currently able to.

Another benefit is being able to pay people in PRINTS, something that seems to have widespread support.

I like @adrianleb’s point on PRINTS being essentially a product of the Fingerprints DAO.

Spending the equivalent of a single acquisition (like Mutant Garden Seeder recently, ~80 ETH spent) to enable this feature seems like a decent use of 80 ETH – especially given we have a USDC budget for operational expenses covering more than 2 years of burn. It’s only 5% of our liquid assets (USDC + ETH).

Finally, my understanding of the proposal is that this will not be done in a single shot – the finance team will deploy the funds in a way to optimize our resources, and not simply give exit liquidity to sellers at prices that would be disadvantageous to the DAO, leaving the pool without liquidity.

This is the part that makes me supportive of this – if this was simply a 80 ETH buyback I don’t think it would make sense

@bamboo I understand your concern, but let me invert the question: if we can’t spend 80 ETH (1% of our mkt cap using OTC prices and 0.5% of our estimated NAV, 30% of an Autoglyph :slight_smile:) to experiment having a liquid token I’d say we have bigger issues and we’re trying to hide them with the illiquidity (like a lot of DAOs are currently doing).

On the contrary, the lack of buyers is partly due to a lack of instant access liquidity and the high friction in the current OTC approach, permissionless freedom to roam in this case just means not having to ask permission or being blocked by the lack of a present counterparty to make an OTC trade at any given time to get access to the rest of the DAO.

And I’m sorry, I don’t get how moving away from a fungible (and ideally liquid) governance token to a membership nft will solve anything here other than satisfy the preference of a few members.

Thanks both, good points.

I agree that demand is limited by the current high friction appraoch, I hadn’t really thought it through from this angle enough. Personally, I believe that moving to a dual track (fungible token and full-membership NFT with swapping between) approach will massively lower friction (quite simply, OpenSea is a liquid marketplace) – but let’s keep that discussion in the other topic.

Going back to the original proposal, I suppose I’m saying that I don’t agree with goals (1) or (2).

(1) I just don’t think is true, I don’t think a buyback is value accreative in its own right (magrinal ‘profit’ from the transaction more than offset by a reduction in useful reserves)

(2) I don’t think really matters tbh and 40-80 ETH probably won’t move the needle anyway.

However – I can get on board a lot more with (3) and (4). (3) is the most compelling especially if we are going to move to PRINTS compensation. A functioning pool is a necessity here. I’d prefer if pool and compensation change were enacted together – the latter would force us to make the best go of the former. Where are we at on this change, @luiz ? And I can see the benefit of (4) more clearly as well, now, thanks @adrianleb.

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Cool! fwiw, I also don’t really buy into goal (1) and don’t expect (3) and (4) to get solved overnight, but IMO these steps set us up for success in the long term.

And even if we do at some point experiment with membership nfts, I don’t believe deprecating PRINTS is a smart thing to do, we’ve barely scratched the surface of the benefits a liquid governance token can bring to the DAO.

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The compensation changes were already enacted, this month we will spend 40% less USDC compared to August. That should be offset by PRINTS (we’re still discussing tax implication with our advisors, how to operationalize lockups etc).

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ah thanks @luiz , i’d missed that some changes had already been made. do we know how quickly we can get advice on PRINTS compensation sorted (as in is it weeks or months)?

@adrianleb agree even if we did go membership NFTs that the token shouldn’t be deprecated – it’s good to have the flexibility for either approach. I’ll try and find time to throw a few more thoughts into that thread separately.

Just to be clear, I’m on board with this now – thanks for taking the time to discuss.

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Thanks for the discussion all.

I’m going to try to set up some calls with individuals at other protocols/DAOs I know who have gone through the liquidity process themselves so that I can pick their brains on best practices.

If anyone here is experienced in setting up Uni pools, please DM me, I’d love to chat and benefit from your knowledge.

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sounds good @glory. I’ve seen SquiggleDAO struggle with the same liquidity issue – $SQUIG is currently trading at about 20% of the NAV of the DAO – may be worth seeing if we can share anything with them as part of your calls.