Our last blog focused on SIZE's two planned auction types: sealed bid and multi-unit dutch auction. Now, let's explore a use case: treasury diversification.
SIZE makes treasury diversification easy by improving market participation and price discovery. It's also all on-chain.
What does this practically mean? Some thoughts and then let's check in on Lido's latest treasury proposal to give some context.
More Money, More Problems
We don't know how long this bear market will last. What we do know is that most protocols are focused on surviving and building. In order to survive and build though, protocols need money.
Today, the market cap for DAO tokens is ~$21 billion. Protocols are sitting on billions of dollars. This is risky in general but especially in a prolonged downturn. It's not surprising that recent headwinds reinforced the importance of:
- diversifying treasury to hedge risk.
- creating liquidity to protect operating runway.
So, what does this look like? Well, it's not great. Protocols need to: pass a governance proposal (usually), find buyers, agree on a fair price and execute the trade safely.
Needless to say, this process is risky, manual and time consuming. In short, it's a pain in the ass. Over the last two months, Lido has had a front row seat to this mess.
Let's dive in.
Lido Just Wants Liquidity
On June 3rd, two months ago, Lido put forth a governance proposal to diversify its treasury. Lido proposed selling 10k ETH for DAI to cover 2 years of operating runway.
People weren't thrilled. The proposal was met with mostly negative responses. Most people felt the proposal was rushed. Others were just pissed that Lido didn't do this before ETH price dropped. Helpful.
Part of the issue with the first proposal is that it didn't follow the OTC execution metagame. The proposal didn't have the parameters of a standard OTC trade. It had gaps and the community was rightfully confused. You have to remember that most OTC is done in private telegram chats. Without a shared understanding and process for OTC, communities will naturally struggle to reach consensus.
Back to the drawing board.
When Things Fall Apart
On July 18th, two weeks after the initial proposal, Lido put forth a revised proposal to sell 2% of the LDO token supply from the DAO treasury. This would mean selling 20M tokens at a 7-day rolling average plus a 50% premium. I know, we're struggling to keep up too.
So, what would that actually mean?
- $1.45 USD per LDO for a total sale of~$30M in DAI.
- Dragonfly would buy 1% of the token supply.
- Tokens would be unlocked.
People didn't love this either:
- Some people were worried about no lock-up period.
- Other people wanted to diversify buyers outside of VCs.
- Selling price was a sticking point (below execution price).
Valid points.
Cobie and DegenSpartan pretty much highlighted discrepancies between the Lido DAO proposal and traditional OTC practices. Their points started to corral the conversation and push people towards consensus.
People still weren't thrilled. Getting closer though.
The proposal was pushed to snapshot and rejected.
Let's Try This Again
At this point, speed of execution was an increasing concern. Markets are volatile and buyers can always walk. So, a month after the initial proposal, Lido drafted a third proposal.
Huge props to JBeezy who wrote all three proposals & seemingly has the patience of a saint.
But back to the new proposal.
Lido would only sell 1% of the tokens which was half the initial sale supply. Dragonfly would buy that 1% (10M tokens for ~$14.5M). The tokens would be locked this time around.
What does that mean? There would now be a 1 year lock-up vesting period. The deal was cut in half. Oh and the buyer would be Dragonfly Ventures not Dragonfly Liquid. Dragonfly Liquid can't do lock-ups apparently. Confusing but good pivot?
Proposed sell price would be the higher of:
- TWAP price + 50% premium (~$1.45).
- A 7-day backward looking TWAP + 5% premium.
People seemed happy.
This third proposal covered the main OTC parameters. Community had more of a shared understanding of the OTC mechanics.
As you can see, there is a metagame for OTC that VCs, protocols, governance can align on. It's a matter of standardizing, adopting and following it.
Deal Or No Deal?
On July 28th, almost two months after the initial proposal, the vote was pushed to snapshot.
In the clear right? No— anything can happen in crypto. Just look at the Nomad food fight last week. Snapshot doesn't mean much, TWAP hadn't been calculated, markets were choppy.
Luckily, by August 4th, the snapshot passed. Final price: $2.427232.
At the time of TWAP, the price of LDO was hovering at $2.60. So, Dragonfly was looking at a ~7% discount to market price. Dragonfly agreed to the terms.
Good right? Maybe yes, maybe no. It's hard to Monday morning quarterback but:
- If the first proposal had passed, Dragonfly would have bought 20M LDO for $29M. That market value would be $50M today.
- Due to forum, debate and vote the market was able to front-run the purchase and push the price from $1.45 to $2.50.
- While Lido got the amount of cash they initially wanted, the deal was risky. Lido could have lost a buyer if Dragonfly had pulled out.
- Similarly, if the markets had dumped, Lido would have sold more tokens for less money.
Things Are Darkest Before Dawn
Today, the deal looks pretty locked in. But it's really just a handshake that hinges on trust. The vote still has to be pushed to Aragon and the funds need to settle.
So, where does that leave us?
While the price might be fair (is it?), the cost was pretty steep.
The deal took ~2 months, 3-4 amended proposals, a ton of back and forth. The community struggled to reach consensus. The proposal needed revising to better cover standard OTC parameters. The trade was exposed to risk and uncertainty.
This probably isn't an efficient way of disclosing that a fund wants to buy tokens and then facilitating that process. Treasuries should just run a public auction and let people sealed bid!
Looking ahead, it looks like Lido will get some liquidity and secure its operating run rate. Dragonfly will have a nice bag of LDO. JBeezy probably has planned a well deserved vacation.
TL;DR
Bottom line: this took way too long and took a ton of operational work. The community struggled to reach consensus. The proposal needed revising to better cover standard OTC parameters. The trade was exposed to unnecessary risk.
Let's be clear, SIZE doesn't solve DAO governance inefficiencies.
BUT SIZE does provide infrastructure that solves OTC pain points while providing a clear OTC framework for communities to follow and participate in. If communities understood and followed the OTC metagame, it would expedite proposals and trade execution.
What's Next?
Well, Lido is figuring out how to execute the trade trustlessly. Lido also may still have another 10M tokens to sell. So, I guess we do this all over again.
How will that play out? We will see.
In the meantime, let's continue to survive and build.