The purpose of this CIP is to gather feedback and support within the community to consider a modified version of the “ve” token structure that will protect the COW token.
- Sell pressure on the COW token destroys treasury and project value
- Forced selling at all-time lows is a sure fire way of destroying value
- Similar to the “ve” token model, CowDAO can implement revenue-share tokens
- Revenue-share tokens can be expressed as transferable ERC-20 tokens
- ERC-20 revenue-share tokens give CowDAO a way to reward contributors, customers, and liquidity providers without putting sell pressure on the native token during a bear market
CowDAO has 1 tool (the COW token) but 2 types of holders: short-term (looking for immediate yield (namely liquidity providers and some customers)) and long-term (core team and core community). By using the COW token to incentivize long-term and short-term stakeholders, the COW token is exposed to unwanted sell pressure by the short-term holders, especially in a bear market. Using revenue-share tokens gives CowDAO a tool to reward short-term stakeholders that are in search of yield while protecting long-term holders from value destruction as a result of COW token sell pressure.
The CowDAO treasury is made up primarily of the COW token. The value of CowDAO as a project, and the project’s runway, depends on the value of the COW token. Unfortunately, this is what has happened to the token since inception:
The COW token is currently the only tool CowDAO has to manage the project. This applies, among other things, to customer incentives and liquidity provider incentives. Unfortunately, not all stakeholders who receive COW tokens are long-term believers in the project. For example, it is well documented that liquidity providers sell their native token rewards back into the pool they provide liquidity for (Pool 2 rewards). While having COW listed on DEXs is useful for price discovery, rewarding liquidity providers in COW can be overly costly in dilution and sell pressure.
A proxy for expected price reduction is slippage, which as we know is the “loss” incurred by liquidity providers as a result of the price of the assets moving relative to one another in liquidity pools.
1inch is a DEX aggregator that can be used to estimate the slippage from native token emissions. In his post (link) on Affiliate Program Incentives, @middleway.eth suggested 600k COW retroactive rewards to customers that participated in the referral program. Based on the illustrative transaction in 1inch below, these rewards could push the price of COW down another 30% if they are all sold (note that I strongly support @middleway.eth and his proposed incentive program, I am just using this as a current example to illustrate my point):
When stakeholders that do not believe in the long-term potential of CowDAO receive COW tokens, excessive sell pressure becomes costly for the project in terms of value destroyed and lost runway.
This problem has become so acute that we’ve seen DAOs across DeFi experiment with various strategies to mitigate token selling. The “ve” model popularized by Curve incentivizes native token holders to lock their token for a portion of protocol revenue (and locking means they cannot sell) [link]. “POL” or protocol owned liquidity, a model popularized by OlympusDAO, was designed in response to mercenary liquidity providers in Pool 2 liquidity pools with the goal of reducing the sell pressure on native tokens [link]. DAOs recognize they need to diversify their treasury but they cannot afford the market slippage, so they are opting for asset swaps instead [link]. Finally, DAOs are experimenting with vesting schedules for customer rewards [link].
All of these potential solutions are designed to improve the long-term outlook of the treasury by diversifying assets or by redirecting native token towards long-term holders. However, these solutions remain anchored in the idea that the native token is the only tool DAOs and protocols have at their disposal.
It seems to me like there is an alternative solution that would be easy to implement.
Taking example from Curve’s “ve” token revenue-share model, CowDAO could implement a revenue-forwarding mechanism to holders of a specific revenue-share token (this could take the form of a transferable ERC-20 token).
For example, 600k COW is currently worth $81,600 ($0.136/COW). Rather than issuing 600k COW tokens to customers that will likely sell them into the market (again, just an example for now), CowDAO could mint revenue-share tokens. The revenue-share tokens could have the following structure:
- 10,000 ERC-20 tokens (1 basis point per token)
- CowDAO forwards 20% of revenue to wallet addresses that hold revenue-share tokens
- Revenue-share tokens are distributed the same way the 600k COW would have been distributed
- Tokens are burned and revenue-forwarding ends after ~$85,000 is received
Structuring a temporary revenue-share agreement this way allows CowDAO to pay for things without exposing the COW token to unwanted sell pressure.
By using the ERC-20 standard, revenue-share tokens would be easy to understand, easy to transfer across all existing infrastructure, and easy to manage across all existing tools. CowDAO could reward customers and incentivize liquidity providers with non-dilutive revenue-share tokens instead of continuously issuing COW tokens.
As mentioned in the Summary, the crux of the issue is that CowDAO has 1 tool (the COW token) but 2 types of holders: short-term (looking for immediate yield, namely liquidity providers and some customers) and long-term (core team and core community). By using the COW token to incentivize long-term and short-term stakeholders, the COW token is exposed to unwanted sell pressure by the short-term holders. Using revenue-share tokens gives CowDAO a tool to reward stakeholders in search of yield. The COW token can be used to incentivize believers in the long-term potential of the project.
Further, being a forced seller of any asset in any market represents a sure way of destroying value and leaving money on the table. Using the native token to pay for things in a bear market is extremely damaging to the runway and value of the project. CowDAO would benefit greatly from having another tokenized asset at its disposal.
Finally, with something like revenue-share tokens, CowDAO could develop more sophisticated treasury management solutions. It is easy to imagine a scenario where CowDAO purchases or sells revenue streams for other project assets with the dual purpose of (i) generating attractive returns and (ii) adding a diversified currency to the treasury.
I look forward to discussing this proposal with everyone.