Operation back to backing

leRaph

DEPARTMENT or DAO: Treasury management

WHY: We have to get our market price back to backing price. Too many things are at stake for us to just patiently wait for the market to realize how undervalued we are. The longer our market price stays far below backing the more we erode our credibility and look like an unsafe investment to outsiders. Furthermore, going back to backing is CRITICAL for Lobis for several reasons:

It allows us to resume selling bonds at a profit instead of at a if we allow bonding right now
Selling bonds above backing means we increase the number of votes per Lobi token which is our primary goal
Showing our commitment to defend backing price makes investing in Lobis safer therefore more attractive to new investors
It allows us to perform D2D swaps at fair value instead of current discount
It allows Lobis to save on operating costs as salaries are paid in sLOBI
Showing our commitment to defend the backing price should create more trading volume around the backing price and therefore more LP fees collected by the protocol

WHO: @leRaph

WHAT: There are several possible strategies to force our market price up:

Option 1 - Big-bang buy back to backing price: This is probably the worst cost efficient option. This will likely trigger a dump of Lobi tokens back to a new level somewhere between pre-buyback price and backing price forcing us to perform a series of buyback until all investors waiting to exit Lobis at backing price are out.
Option 2 - Stealth mini buy backs: This option would have the advantage of limiting the sell off and also would give the possibility of smart investors to help raise the price. This should be more cost efficient than option 1 but may still result in more sell off than new investors.
Option 3 - Operation back to backing: Loudly advertise our upcoming price increase to bet on the psychological effect this may have on the market and let investors pump the price for us. Here are the full details of Operation back to backing :

Set a deadline at which we guarantee the market price will be at backing no matter the potential sell offs and we advertise the shit out of this date, then we commit to defend this price with treasury buybacks as needed so that the market knows our backing price is a rock solid reference point and once this is established, we should no longer have to defend the price ourselves, the market will take care of it. Based on the current state of the LP, in order to reach this target we would need to dedicate a budget of ~300k$ for market buys of LOBI tokens. In order to avoid a “Snowdog-like” scenario, we won’t perform a big-bang buyback at the deadline but instead execute small incremental daily buybacks as needed. This will both give time to spread the word while starting the momentum and also should be progressive enough to reduce the temptation for investors to sell off.

Obviously the real objective of this operation is to heavily be on marketing to trigger market buys so the market itself pumps our price up to backing instead of us having to use too much of the 300k$ budget.

Potential criticism 1: This will mostly trigger market buys from people looking for a quick profit who will dump as soon as we reach backing price so the price will just go back to where it was before
- Counter-argument 1: Even if that was the case, we would be back to square 1 while having collected LP fees and created action around our token so it would still be a net positive
- Counter-argument 2: In this situation, instead of going back to pre-buyback price, it seems more likely the price would oscillate while getting closer and closer to backing:

Potential criticism 2: Why waste 300k$ of precious governance tokens when our goal is to accumulate governance token?
- Counter-argument 1: This is a very short sighted argument that doesn’t take into account the value of our token. On a regular basis we do tokens swaps between 500k$ to 1MM$ in value. Example: 500k$ token swap with StakeDAO. If we trade at 50$ we would send them 10,000 tokens. However if we trade at 100$ we send them only 5,000 tokens. Assuming the back to backing operation has cost us 300k$ that’s as if we had paid 300k$ for 5,000 of our tokens: average cost 60$/token, pretty good deal! Now let’s assume we do another 250k$ swap with Angle, we save 2,500 tokens for free.
- Counter-argument 2: Because we trade below backing we had to turn off bonding, how fast would we recoup the 300k$ if we turn on bonds again ? Probably in less than a month so we would replenish the treasury in no time anyway
- Counter-argument 3: When we trade below backing, any buyback from the protocol increases the backing per token so even if the total value of the treasury would decrease, the relative share of the treasury per token holder would actually increase so it’s a win-win for current investors in all cases. This is a critical point to understand, whenever a protocol buys its own tokens below backing it is always beneficial from the perspective of each individual investors.
- Counter-argument 4: We currently farm around 75k$ per week of staking rewards so we could use exactly 1 month of farming rewards for this operation which would leave the treasury untouched, with this in mind the risk/reward ratio seems very favorable.
Potential criticism 3: Buybacks are a sign of weakness and we should focus on delivering value and use cases to attract new investors instead of focusing on buybacks
- Counter-argument: this criticism is very true however, the benefits from going back to backing are too great for us to wait until the market organically brings us back to backing. The opportunity cost of trading below backing is too steep for us not to take radical actions.
Potential criticism 4: Buybacks don’t work, others have tried and it never works
- Counter-argument: There is no 100% guarantee this operation will succeed the same way there is no 100% guarantee it will fail, but we believe the benefits outweigh the risks. What is the absolute worst that can happen ? We spend 500k$ to buy out all fake lobbyists below fair value and we resume building with only real lobbyists and a treasury that’s still looking hella strong at 13MM$.

Let’s look at potential scenarios:

Scenario 1 (Ideal): The psychological effect of guaranteed return within a clearly stated time frame is enough to convince investors to pump the price up to backing before the deadline without us using the treasury. When we reach backing some investors will sell to take profits and others will enter under backing raising the price up again etc… until the market reaches an equilibrium around backing before our deadline. Mission accomplished at no cost. Scenario probability : 20%
Scenario 2 (Good): Market doesn’t bite right away so we need to execute daily market buys for a few days. Market responds favorably to the price action that shows the commitment from the protocol and starts picking up the upward price action allowing us to stop market buys from the treasury. When we reach backing some investors will sell to take profits and others will enter under backing raising the price up again etc… until the market reaches an equilibrium around backing before our deadline. Mission accomplished under budget. Scenario probability : 30%
Scenario 3 (Acceptable): Market doesn’t bite and investors never participate in pushing price up. When we reach backing, some investors sell to take profits and no other enter to compensate so we need to spend extra to go back to backing after sellers exited. Mission accomplished slightly over budget. Scenario probability : 20%
Scenario 4 (Bad): Market doesn’t bite but instead the upward price action shakes paper hand investors who progressively exit their position as we get closer to backing. Once we reach backing, all paper hands have exited and price stabilizes. Mission accomplished at significantly higher cost. Scenario probability : 20%
Scenario 5 (Worst): Market doesn’t bite but instead the upward price action shakes paper hand investors who progressively exit their position as we get closer to backing. Once we reach backing, we see a massive sell off from investors previously waiting for an opportunity to exit the project at backing price. Necessity to continue market buys to defend backing price and once back to backing, new round of sell offs for those who missed the previous window. Rinse and repeat until all fake lobbyists are out. Mission accomplished at the expense of a significant fraction of Lobis treasury but only loyal diamond handed lobbyists remain. Scenario probability : 10%

Risk Assessment: The main and probably only risk of this proposal is to see an unexpectedly large proportion of Lobis investors taking this opportunity to exit their position causing us to drain the treasury more than expected. That would be equivalent to reverse bonds below backing value meaning even though the size of the treasury in absolute value would decrease, the relative share of treasury per token holder would increase. This makes this proposal a win-win for diamond hand token holders: either the dollar value of your bag increases while your share of the treasury stays constant or your share of the treasury increases while your bag remains at the same level.

HOW:

Allocate ~$300k of assets for this operation (mostly farming rewards as possible)
Set a target date of 30 days after this proposal is approved
Define daily targets based on day 1 price and target backing price and only execute market buys if the current market price is lower than the daily target
Only market buy the required quantity of LOBI to reach the daily target
Once deadline is passed, continue daily market buys as needed whenever market price drops by more than 3% under backing

WHEN: Standard governance process: draft 3 days, formal 1 day, snapshot 2 days

plutusIIIIII

My compliments on a very well-considered and drafted proposal, leRaph, but I strongly disagree with the course of action you recommend.

Stepping back and taking the high-level view, what you’re proposing is that we:

take governance assets we originally exchanged for LOBI at a discount to market, then:
use these assets to buy back LOBI at market price, so as to support that price by reducing supply (incurring fees and slippage in the process) and,
turn around and distribute more LOBI back to stakeholders, thereby once again increasing supply.

In other words, we’re handing-out LOBI to stakeholders at the front door, and then re-buying those same LOBI from them at the backdoor, and paying fees and slippage in between. How does this make any sense? Why would sensible market participants not just keep walking around that “house”, collecting LOBI at the front and then selling them back to us at the rear for a quick a profit?

Frankly, if one feels an urgent need to “do something” to support price, and is equally certain that restricting supply is the right way to accomplish this, it would make much more sense to simply stop paying rebase rewards for a time, than it would to add a buyback mechanism while simultaneously continuing to distribute new rewards.

This is crypto. It’s not the first time we’ve seen extreme price movements and it won’t be the last. We have a good treasury balance, no debt positions, and a monthly income that is at least triple our monthly expenses. We will be okay. I understand and sympathize with the urge to take dramatic action, but the correct approach here is to just keep focusing on executing on our plans and building value for the long term.

leRaph

plutusIIIIII

I disagree with a few things:

The main purpose of the operation is not to support the price by reducing supply, it’s to make a statement to the crypto world that LOBI trading at 10% discount is a guaranteed 10% return. I want people to Ape like crazy whenever they see LOBI trading below backing. Will this work ? I can’t say for sure but if it does the benefits would be huge and I dare say it’s possible
The walk around the house strategy sounds like the rebase sellers strategy. Which is not a bad strategy when you’re at ATH but rebase selling at backing price is NGMI. If people want to do it let them do it, it’s part of the game but since it’s not a good long-term strategy I’d be surprised if a significant proportion of stakers chose to take this route.
My main concern is you are not addressing the opportunity cost. Yes maybe this operation will prove more costly than we would have hoped for but if it brings us 2x the value in bonds or in token swaps or in long term operational costs it would still prove profitable. I would like someone to refute my proposal by explaining why it is more cost efficient to stay under backing for an extended period of time rather than doing buybacks and raise our value.

CMill
Sorry I can’t update the poll, if we do move to formal proposal I’ll make sure to update though.

ETH33

I agree burning LP would be a preferable solution if our Liquidity wasn’t already so thin. In the current situation I would rather preserve our LP. The problem with the floor not being the backing price is that OHM will potentially always trade below our backing meaning we may still not be able to reopen the bonds.
Your comment about reputation is a very good one, I’d argue that some assets we would chose not to sell such as TOKE/Angle/SDT because these are from our true partners. CVX we earn from our staked CRV don’t fall under this category, Convex will never be our friend so they are probably not expecting us to diamond hand their tokens. FXS are more problematic but in the long run if we sell FXS to be able to reopen FXS bonds at a higher value we may still be a net positive for Frax in terms of buy pressure.
I’d be curious to know how expert traders would be able to take advantage of the buyback ? As long as we do it in small daily increments the best they can do is buy low sell high but from our perspective their sell would just offset their buy with us taking a little bit of LP fees in the middle: see my “potential criticism 1”

shawncrosseyes
I would answer the same thing I said regarding opportunity cost. Trading below backing is impeding our growth and the more we wait the more we get behind where we could have been in terms of bonding new assets, doing more D2D swaps at fair value etc…

Again thanks guys for your comments and engaging in the discussion but you still haven’t convinced me that the opportunity cost of staying under backing isn’t greater than the price we would have to pay to climb up to backing and maintain it.
And just so you know I would love for you to convince me because I would feel better about our current price instead of always trying to find clever ways to raise. If you do prove me wrong I’ll be a much happier man so please keep going!

Mr_E

all the points plutusIIIIII said are my concerns. The market sharks will eat us alive. Small protocol with finite resources are perfect bait to be cornered once the buy-back is established. This seems like a potential loss of a 1 month of resources with little lasting effects to our price.

I’d explore inverse bonds, reducing supply expansion, other mechanisms that are not de facto buybacks and come back in 3 months and reevaluate.

CMill

Can you please update options to be Option 1, Option 2, Option 3, and do nothing?

ETH33

I agree with Plutus on this. We should never sell any GOV tokens imo. We should have a diamond hands repuation.

I also agree that we should try to go back to backing and it is not an healthy situation to be below for so long.

OHM is Lobis’ ‘DAI’ so we could use LP / burning mechanism to set a floor.

For example guruantee that 1 OHM = 1 LOBI is a floor (Like 1OHM 1DAI, 1BCT 1KLIMA, etc).

shawncrosseyes

I kind of echo the same sentiment that Plutus mentions. The whole market is down, investors are waiting on Bitcoin to see if the cycle will continue. So it’s not just Lobi that’s down which I think needs to be made known to investors. We’re all so tied to BTC’s price and until there’s a decoupling, it’s just what it is.

I say we just ride the storm if the treasury is safe, focus on marketing and getting more partnerships, eyes on the project and when the market returns to favorable conditions everyone will be happy again.

ETH33

A few more comments:

Note that OHM has never sold any token from Olympus PRO revenues or bonding. This repuation is very important for future swaps / partners imo as other protocols will know that giving tokens to LOBIS = essentially removing them from the suppy.
Instead of protocol selling GOV tokens we can introduce reverse bonds with limited capacity. This provides investors a ‘real’ part of the treasury.
A better option imo is to use LP and burn LOBI and set a floor in terms of OHM. This can be a good middle way. I am not in favor because liquidity is already low (maybe there is way to loan from OHM to increase?) but it’s better than selling GOV tokens imo.
There are many expert traders that can take advantage of the buy backs. It’s not guruanteed to work and we can just the 300K without any advantage.

I think that we should do something to increase price to backing but selling gov tokens should be the last resort.

leRaph

Mr_E

Can you please explain how “sharks can eat us alive” ? I’m dying for someone to run me through the mechanics of what could go wrong with something clearer than just the walk around the house analogy and actual numbers.

The way I see it what can those sharks do ? Buy LOBI ? ok then the price will increase. Sell rebases ? ok but for that to have any impact on the price they would have had to buy so much that they will bring us to backing by themselves. I really don’t understand why we would all of a sudden be vulnerable by doing small daily buybacks

plutusIIIIII

Another aspect of this question that I don’t think has been fully explored is the downside risk of action (i.e., going forward with this plan) versus “do nothing” (stay the course and give market forces time to work). In other words, “what’s the worst that can happen?” from each approach.

As I see it, the downside risks are:

1. Operation Back-to-Backing burns-through 1 or 2 months worth of earnings, produces little or no lasting effect on price, and creates the impression in the marketplace that Lobis is taking risky steps with its treasury out of “desperation” to support price.

2. On the other side of the balance, the downside risk of the “do nothing” approach is that MC remains below TV for an extended period, limiting our ability to grow the treasury through bonding. However, throughout that time, the treasury will continue to grow at a steady clip from earnings alone , while the core team continues to explore alternative options to accelerate the accumulation of governance tokens.

So, from the “meta” view, option 1 carries the implied risk of further accelerating a loss of confidence in the marketplace and exacerbating the price decline, while option 2 allows the treasury to continue to grow slowly (worst case) in the expectation that the value will eventually become so compelling that the market will “wake up” to that fact, causing price to rebound.

tomatosoup

Yeah I agree with most. It’s not an easy problem to solve at all. We should focus on building for the long term instead of futilely trying to fight the market.