PIP-6B : Improvement to a more sustainable and aligned PATH

Title:

Improvement to a more sustainable and aligned PATH :wink:

Author:

Merit Circle DAO core contributors

Summary:

This proposal has the purpose of improving the $PATH token - and preventing the current proposal from happening (which is irreversible and not proven to be effective). We propose to use the proceeds from realized gains on investments across various investments done by the DAO to be deployed in a structured manner. This consists of using one part to re-fill the treasury in USDC, one part buying back $PATH tokens for the treasury and the remaining part burning a part of the $PATH tokens bought back. This is inspired by the MIP7 proposal of Merit Circle, a significant investor into $PATH.

Abstract:

The full MIP can be found here: Further reference and discussion can be found here: MIP-7 - Sustainable future vision - #7 by tervalikmargarin - Proposal repository - Merit Circle. Do note that most information below is copied from the MIP7 on the Merit Circle governance forum, but due to a similar setup it applies to PATH as well.

We propose to use a similar method for $PATH, since our proposal has been tested and deemed effective by both the core team as well as by the broader Merit Circle community. This would result in the following mechanic:

  • 20% of the proceeds will be sent back in USDC to the treasury - allowing the DAO treasury to keep building up its non-native token treasury, and allowing us to maintain one of the strongest treasuries in the space;
  • 5% of the proceeds will be sent back in crypto assets (mostly ETH and WBTC) to the treasury as the harder part of the cash reserve - allowing the DAO treasury to keep building up its non-native token treasury
  • 60% of the proceeds will be used to put a strong support on 10%-35% below the market value, this will be done on-chain and therefore verifiable by everyone - every 7 days the limit order price will be adjusted according to the market price. Bought back PATH will over time be the main source for PATH staking dividend. Additionally, it can be sold to strategic investors with long lockups or burned, subject to DAO governance. The general idea of the bought back stack is to enhance value accrual for the token and maximize the benefit to the DAO;
  • 15% of the proceeds will be used to buy back PATH of the market

Voting options:

• In favor (Yes)

or

• Against (No)

Rationale:

Is there a better solution?

With the information we have at hand today, we believe this is a good solution. However, it would be ignorant to think this is the best solution. That is why, as a DAO, we will keep iterating based on market feedback to find the best solutions, as well as the best ratios in which to split realized gains over different use cases.

Why have you chosen these specific percentages?

Currently, we still have a significant amount of cash reserves from the Balancer sale. Therefore, it makes sense to predominantly use proceeds for direct PATH value accrual, such as buybacks, dividends, and burns. PATH will most likely also have an indirect treasury claim, therefore, any non-native treasury increase also (indirectly) accrues value to PATH. It also has the benefits of providing resiliency and as fuel for treasury (and profit) growth, as USDC, ETH and BTC can be used for new investments, whereas PATH can’t. A tail of crypto non-native assets in addition to USD will enhance the cash position, making the whole of the position more productive and protected against dollar and industry inflation. The idea is to have a very balanced split between native and non-native treasury distribution over time. As long as the non-native cash part is still very big, it makes sense to tilt the split towards direct PATH value accrual uses. By splitting the PATH value accrual mechanisms, different boxes with different benefits are ticked. As a DAO we can always choose to distribute more or less to any specific stream.

Isn’t it more useful to convert realized gains to stable-coins to use for future investments?

The investment pipeline of quality early-stage investments is only so wide. Meaning, it will take some time to deploy all USDC into quality projects, since these opportunities are limited. The general idea is to always be able to scale the investment side of the DAO at full speed. For this there should always be enough USDC, however, there is no use in excess USDC. Not beyond what is needed from an operational and diversification perspective. When the USDC reserve declines over time, we could always opt to re-adjust the split to accommodate the investment side of the DAO.

Budget:

None


Amendment 1

  1. For the 15% used for market buybacks, the tokens will not be burnt but will be stored in the Treasury for future uses (e.g., staking and farming yields, OTC deals)
6 Likes

Thanks!

Following from the discussions on the NFT-Path proposal, many parties are aligned on the need to connect the fundamentals to the token value of $PATH.

However, they have been polarising views on the effectiveness of using NFT as that medium.

The proposal by MC aims to achieve the same objective, while allowing for

  • reversibility
  • easier user experience. Reduced complexity. Ie you can just hodl $PATH and it automatically accrues value without needing to actively manage it actively.

Thanks for the proposal Mark and Merit team.

As also an $MC holder when MIP7 was first implemented I was not so sure about it, I even restrained from voting on it, but as time passed by I understood the quality of the proposal and I am quite happy that it was implemented on $MC, even with the token price falling we can see the effects of this mechanism in inflation of the token and how it brings value to its investors.

Although I think this is can also be a good proposal also for us, the cited “NFT Based Profit Sharing” proposal that is also on table seems to be a more creative one, I understand the complexity and reversibility points raised but I think Ethermage with his alternative suggestion of a RevShare pool with emissions can be more favorable to PATH. Would bring a different approach for our DAO, differentiate us from other gaming DAOs and give a more direct “token to treasury” link for the investors. I can even see both of this ideas being mixed up together to create something really special, like a percentage of the MIP7 inside the percentage separeted for the RevShare pool. I understand the US securities laws risk, but as an DAO in south-asia I don’t think we should care about it. Also the reversibility would be instant as well as there would be close to no complexity since it would be simply a new pool.

Now, my critic is just how long the team this would take to be implemented? Things here seem to move really slow. When MIP7 was discussed in $MC its implementation was really snappy and the team delivered quite fast. A simple bridge to Polygon here is being discussed for months already and in that pace not sure how many months more we would need to implement any of the proposals here.

What does the team thinks it’s better in the longer term? When I raised MIP7 question for the team on discord weeks ago it was specifically said to me that they didn’t think that it had a positive impact, did you guys change your mind or do you think this is a better way forward?

1 Like

Good response. I had indeed a pretty decent conversation with the PathDAO team. In general, the benefit of MIP7 is that it’s flexible, doesn’t require any heavy dev capacity, and is also free from any potential attack vector.

IMO a trial period would be favorable while in the meanwhile they can work on the technical side of the NFTs and see what the sentiment of the community is after 1 or 2 months of a similar model as we currently have.

I think the: “let’s ignore regulation” is something to stay away from. A DAO does not have any direct legal framework, and although the team might be in SEA, doesn’t mean that they have to comply to certain laws/rules.

3 Likes

These last two proposals have been really interesting. This one has changed my view on a couple of things, 1. because it comes from MC, a guild with an incentive to see PATH do well, and 2. because I was really drinking the kool-aid on one talking point in particular that honestly doesn’t make a lot of sense. I’ll explain.

The talking point — buying back tokens “limits our potential growth.”

We have data now, and what that data tells us is that implementing buybacks won’t limit potential growth. It’s all on the PathDAO dashboard. Some back of the napkin calculations here:

We have around $13M left in treasury. In most cases, minimum ticket sizes for guilds and DAOs to get in on seed rounds is between $30K-100K (I know this firsthand now). If PathDAO puts in $50k on 2 games per week, that gives us 130 weeks of lead time. 2 YEARS. Guys, I think we’ll be ok on having enough money to invest in good games.

You can look back over the announcements channel and see that Path often does have 2 announcements per week for gaming partnerships. Sometimes 3. Never 5 or 6. So we’re not limiting ourselves by diverting a portion of funds to buy back. What’s more, if volume comes in on $PATH, that opens the door for many other types of funding opportunities that don’t involve direct treasury funds. For instance, if PathDAO builds out its other arms, it may not have to lay down any initial capital. Games will partner and give assets based on players alone or marketing value alone, or the treasury might be able to actually use $PATH tokens instead of USDC/BTC/ETH if the $PATH price is right.

Critics who use the “no buybacks because stunted growth” should also consider this 2 year lead time also assumes none of the previous games actually start paying us back. Right now, we’ve got 2 years of 2 games per week @ $50K per game even if we get no payback from any game. Like, that’s enough lead time!

Bottom line, if you have problems with buybacks, please don’t let it be because of a fear that investments will be limited, capped, or stunted. That just isn’t the case and that narrative should stop.

I also like this plan because it doesn’t negate the previous one. Implementing buybacks first to get the price aligned with value actually makes the NFT proposal easier. It can be implemented after this one.

And as an aside, PathDAO should be cognizant of US securities law, but not worried at all. This point is purely philosophical and political, not financial, but there is no world in which the US financial overreach can be tolerated in crypto. PathDAO must not operate out of fear of US securities law. We could have a completely other discussion on that. I’ll not belabor the point here.

4 Likes

Awesome! Thanks for taking the time to counter the previous proposal (of which im one of the authors).

Obviously, our proposal is not proven to be effective as it hasnt (really) been done before, although similar systems have been adopted by some node projects. So, what is the proof that your proposal has been effective? Is 3 months really enough to determine the effectiveness of a tokenomics change?

I agree with your other points, the original proposal would be irreversible and not as easy to implement.

Buybacks/burns have rarely had a positive effect on most projects who have implemented it, but I think short term it would have a positive effect on price and a lot of the total supply would be removed from the market. Eventually, the marginal effect of each buyback will decrease so thats something to bear in mind. Love the idea of building $WBTC and $WETH reserves for the treasury.

Does Merit Circle plan to invest more into $PATH were this proposal to go ahead?

2 Likes

Not sure if the 3 months are sufficient enough to say it’s effective, so far there is a far majority in favor of it (we had a counter proposal with a different structure which got downvoted with 95%). The beauty is that we can just adjust it if in X months of time MIP7 doesn’t seem to be effective.

$PATH is atm trading (fully diluted) not to far above our treasury value, so IMO a clear sign the market seems the current design as broken. For us, we are more and more engaging with the team and advising them where possible. Our DAO has a pretty long horizon, so we are keen to help build the DAO and stay to (or increase) our exposure.

3 Likes

:raised_hands: Makes complete sense. The original proposal takes inspiration from node projects, which have been very successful while running on ponzinomics. Path’s version would be a sustainable model as payouts would be derived from actual protocol profits, not inflationary printing. I would say this shows some proof that it could work. Issue being, its non-reversible.

We are certainly getting there with regards to community engagement and the PathDAO team has been awesome, taking calls and chatting with us as often as possible. We appreciate your input and dedication to the guild space. All-in-all, I’d be pretty happy trying something like this out. Thanks again :slight_smile:

1 Like

I will vote against this proposal because I am against the components of this proposal with a buy back and burn model. For what it’s worth, I’m also against the proposal for $PATH tokenomics made public shortly before this one. I appreciate the thought on both proposals, but I would suggest the DAO let the team continue as-is and then re-evaluate tokenomics in six months or a year with more information about the market and crypto gaming ecosystem.

Some good analysis was provided that even with buy back and burn the team still has two years of treasury for making investments at 2 games/week with $50k per a game. My counter argument is that, instead of buy back and burn, I’d rather the so-called “excess” USDC (1) sit in DeFI earning 8% for the next two years and be ready to deploy in two years, (2) be available for going in with size and conviction on a new project well beyond an amount of $50k if it becomes available in the ultra-bear market we may be about to enter, or (3) be available to double-down where there’s been success on a particular project.

At this very early stage, I’m not willing to weigh down the DAO’s future options with the components of this proposal that have a buy back and burn model. However, Merit Circle mentioned the idea of a “trial period.” If the buy back and burn components of this proposal had a time limit where in 6 months or 1 year the buy back and burn components automatically ended and at that time the DAO would have to re-vote to continue the buy back and burn component, I would possibly be more interested in voting in favor of this proposal.

I think a trial period of 6 months is not so hard to include in the proposal - and makes completely sense for us. Don’t forget that of every $1 bought back, only $0,2 is “burned” and $0,8 is put back into the treasury which can be used to diversify based on OTC sales to strategic parties (with a long lockup). Which improves the USDC treasury position again.

2 Likes

Thanks @Symphonica these are good thoughts. 2 year+ time frame required to allocate current treasury is good point. I much prefer this version and would vote for it - flexibility is key as we are a start-up in a start-up industry, so we need to be able to pivot when necessary.

2 Likes

That’s the beauty of governance. If anyone thinks the model isn’t suitable anymore, we can discuss again :}

1 Like

Thanks for the proposal.

I read the proposal back when it was first proposed at MC, and was surprised that it passed. Now in the context of PATH it makes even less sense - imo you can’t take a cookie cutter approach and apply this here :slight_smile:

For MC there was a case to be made that you raised an abundance of funds and at a 100m+ treasury there was a lot of excess capital where the opportunity cost of burning it was a 19% Anchor return at most. You had plenty of capital to invest in any opportunity that came your way. This is not the case here. We do not have that much excess capital, meaning the opportunity cost for PATH is a lot higher than a 19% Anchor return. This means burning tokens has a way too high opportunity cost in Path’s case and I will always vote against it in this phase.

Additionally, the rest of the proposal is simply a treasury management strategy. I assume the Path team already has one in place and would have to compare the current one to the proposal to make an adequate decision on whether the USDC % and ETH/BTC % of investment proceeds that you propose are better.

Finally, to compare this proposal with the previous one: In both cases the author argues for a way to decrease the investors’ risk and/or increase their upside. Here it is through a manipulation of the token base to increase price over time, in the other proposal it took the form of direct profit sharing. Whatever turns out the better approach, in the long-term p2e DAOs will very likely have to figure out a way to adopt a measure that let’s DAO participants share in the upside of successful investments, both in order to close the valuation gap between market and intrinsic treasury value, and to encourage participation. But does this have to be now, in the early growth stages of the DAO and the industry? In a stage where opportunity cost is huge? I don’t think so.

It’s great that we’re already discussing all of this, and I definitely encourage first experiments with the above, and would love to help figure out what a good first step is to test either of the discussed measures, but I will vote against any lasting foundational measure whose main target is the appeasement of impatient investors that are not seeing their return come in fast enough.

Edit: Actually would love for you guys to argue the “Why Now” here - happy to be proven wrong.

3 Likes

I think we have to see the proposal as something other than a price pump. The investors who are in that emotional state are honestly not to be considered, because they will leave regardless of what pumps the price. I was against buybacks in total until I thought about how the most successful companies in the world do things. 100% no buyback is now a non-starter for me because we have the example of Berkshire Hathaway, which routinely does buybacks and sits on a mountain of cash while everyone around Buffett critiques him sitting on it. But he consistently outplays the market and Berkshire is doing ATHs while everybody else flounders in the bear. Eerie how that situation resembles PathDAO.

An example: If we get a 25% return on an investment, but could buyback our own tokens @ 0.7x of value for a 30% return, the buyback is the better play. It earns the DAO more money. PLUS, as I will argue below, you gain the potential for a positive multiplier on investment capital, which nothing but the native token can achieve.

I don’t prioritize buybacks. My hope would be we simply include our own buybacks in the dealflow and pull the trigger when the buyback is the most profitable trade.

We must also consider that a sustainable $PATH creates a potential multiplier for investments. We’ll never be able to trade/invest using 10X of the USDC or ETH value we have, but if $PATH is trading at a multiple, then we ARE creating the potential to invest exponentially more PLUS creating utility for the token because others are validating it by accepting it as investment capital.

I believe the missing metric is onboarding cost (OC). OC = how much marketing money must be spent per $PATH token purchased? If we can find this, we can put it in an equation (Path.price - OC)Path.float / treasury value = true multiple. If this true multiple is higher than the average percentage gain of our investments, its sustainability should be prioritized above any investment that does not bring us that investable capital. This is assuming that investors will accept $PATH tokens as investment capital, of course, but if the multiple can be sustained, I think they will.

For instance, if investing USDC brings 25% per month (avg.) but that same money used buying back and marketing can create a 2X multiple in $PATH over treasury value, and devs are willing to accept $PATH as investment tokens, then the play is obvious.

It’s one thing to focus on investing in games, but I think it’s been proven we can’t do that. A pro DAO must simultaneously be investor, marketer, and banker. Thoughts?

2 Likes

Hi ser wutwut

Get your point on opportunity cost. Based on our experience in the past 3 months, it will take at least 6 months to fully deploy our dry powder (now standing at 13M USD) in the most aggressive manner. And this is assuming that we don’t exit our investment positions at all.

Imagine a world with 6 months runway (which is the most aggressive case), we have enough time to restock our dry powder by doing the following:
(A) Change our current proposal. The team and community can always put up another proposal to revise the buyback mechanism by either tweaking the percentages or removing the scheme completely, based on the dry powder level (say 5M USD)
(B) Raise funds from treasury tokens.

I want to call out some side benefits of higher token price (beyond financials) with this proposal narrative

  1. Better branding presence leading to deals. There were a few occasions in which we could not get allocation in some big deals, simply because we were perceived as a micro-guild. A higher market cap will also lead to in-bound deal flow, as compared to current state in which our team has to work hard to hunt deals.
  2. Future treasury raise (for both capital and more importantly, reputation). We have gotten interest from a few Tier 1 VCs who are keen to invest in PathDAO via OTC deals. Tokens bought back coupled with Path tokens in allocated to “treasury” could be sold at a better price. The signalling and support from Tier 1 VCs is invaluable coupled with a strong community support.
  3. Stronger community. Lots of community initiatives with $PATH incentives will see stronger support with better token price

The question on “why now”. The FDV of Path is close to treasury value, and every day postponed there’s an opportunity cost based on the points above

3 Likes

Thanks, and yes the part about “increasing token price to get into better deals” was something that I hadn’t factored in on my calculations. The way I see it now is that it’s partially a budget exercise that determines if buybacks are a good option. It could look something like this. Chose 18 months bc that’s a good runway proxy in startups:

Path 18m budget: (Expected number of game investments * Expected ticket size) + Operating costs + Strategic Investment/incubation costs

Path 18m income: Expected realized gains from investments + Expected funds raised from investors

Path buybacks: Expected realized gains from investments * Buyback %

Brand multiplier: A proxy for price impact of buybacks and how that increases your ability to get into good deals and improve ROI. E.g. trippling the price will get you in 20% more rounds with an avg. 40% higher ROI. Up to you to ballpark that. This number is directly correlated with Path buybacks, and could look something like = Path buybacks * Price impact * Brand multiplier. For example you buy back 100k, each share bought back increases price by 0.0001% which is a 10x in price. A 10x in price gives you 20% better chance to get in deals etc (this one is finger in the air guessing).

Reserve multiplier: Assume that your budget calculations are off and add a e.g. 20% reserve/cushion to your calc.

(Path 18m income - Path 18m budget * Reserve multiplier) * Brand multiplier > Path buy backs

If you can prove that the left side is always higher than the right buybacks lose their opportunity cost issue. Can we model this?

2 Likes

Thanks for posting this!

I agree buybacks can be useful. But the case of BH it’s difficult to compare. They sit on piles of cash and have very high standards for investing, often creating a time where there’s no relevant investment targets out there for them. Our situation is different, we don’t have much cash, and there’s an abundance of opportunities.

Another assumption that is tricky to take is that buybacks can easily be liquidated to create an ROI. That has a negative price impact in the future, and if investors expect that you engage in this behavior, your stock price gets discounted to begin with. So trading your own shares is very tricky.

Btw what do you mean by “devs are willing to accept $PATH as investment tokens” ?

Also what do you mean by “It’s one thing to focus on investing in games, but I think it’s been proven we can’t do that”? There’s new investments almost every week

1 Like

Hey,

Well, you can’t really have the critique for what I’m saying if you agree with what weekee is saying. We’re saying the same thing. Like exactly. If we’re coming from different angles on it, that should make the final conclusion that much more powerful.

Bottom line is higher token price leads to better deals. We said it in different ways, but it’s the exact same thing. And what’s more, the higher token price brings a potential multiplier that USDC/ETH/WBTC can’t achieve.

So me saying “devs are willing to accept $PATH as investment tokens” is the same thing when you said to weekee when you said ““increasing token price to get into better deals” was something that I hadn’t factored in on my calculations.” Maybe my language was off, but exact same idea.

I don’t want to get caught up arguing about the example, so forget the Berkshire stuff. Less important to explain that than to get to the core, which is that weekee’s analysis and mine about token price increase is the same. And you seem to agree when you say “it’s partially a budget exercise that determines if buybacks are a good option.” That’s exactly the math I was trying, perhaps badly, to explain in my previous comment. When I said “I don’t prioritize buybacks. My hope would be we simply include our own buybacks in the dealflow and pull the trigger when the buyback is the most profitable trade,” a budget exercise was exactly what I meant.

The brand multiplier calculations you did in your comment could be used alongside mine once we get a quantifiable grasp of how effective marketing is when making people buy tokens. That’s what this equantion is about (Path.price - OC)Path.float / treasury value = true multiple. Once we get OC and the true multiple that subtracts marketing costs, we can 1. move forward fearlessly on marketing because we know what it will bring us, and 2. quantify what you were saying when you said “10x in price gives you 20% better chance to get in deals etc (this one is finger in the air guessing).”

As far as investing in new games every week, I want to agree with your statement with a slight tweak — I think there’s new GARBAGE almost every week. The good stuff is few and far between, and I think that good investments will become less prolific, not more, as AAA starts to drain the swamp of the hobbyists creating overnight Axie/Pokemon clones and lame RPGs. We’re, all three of us, also in the same place when it comes to recognizing our runway is plenty long. We can and should implement other tools to increase price alongside increasing treasury, which will exponentially increase our opportunities. I think the major issue here is whether to market to retail to buy $PATH or stick to marketing to devs/VCs. And I’m happy to have that discussion.

2 Likes

Ok great, then let’s move towards a model where we can calculate this! Will make it much easier to take these kind of decisions. Good discussion!

1 Like

Just curious to know where the buyback will be done? In order to minimize impermanent loss LP stakers should be advised to move to single staking right?
There is more than 2 million dollars liquidity in Uniswap pools combined which is mostly from staking and as they pull out price impact will be higher.
I expect volatility to come once people start voting yes and hopefully price bounces up to 20 cents

1 Like