Mock SeFi BuyBack/Burn Proposal

Preface: As discussed in today’s Secret Swap Committee Meeting, I believe that all governance proposals should have accompanying forum posts which better enable discussion and specification for enactment. I’m choosing to post this here BEFORE proposing on governance so that as a community we can better understand and weigh the pros and cons of this idea and the practicalities of its implementation before enumerating it in a governance proposal. My current plan is to propose a version of this protocol in detail this weekend, but both the proposal, and my decision to post it are subject to change based upon feedback in this forum.

Purpose : I’ve been requested by the community to author a governance proposal to suggest a buyback/burn mechanism for the SEFI token. Under guidance from the Secret Swap Committee call, this forum post is meant to facilitate discussion before I potentially create said governance proposal on the summation of our combined conclusions and thoughts on this subject.

Goal : The goal of this proposal is not merely as a temporary price flash but is to give the SEFI token non-speculative value. Adding buy pressure without replacing it with equivalent sell pressure does game well theoretically in the short term, but the long-term implications would be for SEFI holders to own a percentage of the volume. This would also incentivize further development of the exchange by means of facilitating volume-based growth for SEFI holders.

Plan Overview : In current ideation, this buyback/burn would work by changing the structure of fees gathered in incentivized pools, so that instead of 0.3% going towards liquidity providers, 0.25% would, and the other 0.05% would be used to purchase SEFI and burn it, permanently removing it from the supply.

Liquidity Providers : The opportunity cost for enacting this comes on behalf of the Incentivized Liquidity Providers, whose fees will decrease by 1/6. This would still be beneficial for them if the price of SEFI goes up however, as currently the SEFI rewards are more substantial than those of the LP fees collected, and a higher price would raise the incentivized APY. Liquidity Providers for non-incentivized pools would not be affected.

Traders : Since the .05% comes from the LP’s section of the fees, trading fees are not raised, and traders are unaffected.

SEFI Holders : SEFI would no longer be strictly speculative but would have its first metric of inherent value which would not be mutually exclusive with any other ideas of further value capture which may be conceived and proposed later on.

Pragmatic Implementation : Implementation of this is likely difficult to decentralize. Ideally we could code all this in directly to the pairs, but would have to organize where and how to get enough gas to process the transactions in addition to other difficulties. It could be time consuming and expensive as pools change as to whether they’re incentivized or not, and it has been suggested this might be more time-consuming than it is rewarding or value capturing. Therefore, while I would like for this to be the case, I currently plan on proposing a less attractive, cheaper and more centralized iteration, with the goal of eventually enabling the former idea should it prove possible and worthwhile.

My current proposal (very much subject to feedback) is for the newly passed SEFI Executive Committee to reach out to and hire developers (ideally the Enigma team) to program into the applicable pools routing the 0.05% of fees to a wallet that could be accessed by the SEFI Executive Committee, and have the committee manually purchase SEFI once per week and sending that SEFI to the burn address on the first of every month with an accompanying public disclosure as to the monthly burn total.

Specific Details :

  • To cover gas the SEFI Execs will occasionally convert received from fees to SCRT, keeping the amount of SCRT in the wallet between 10-100 times the average gas fee (within reason, gas prices change but at times of conversion those would be the guidelines).
  • For initial gas this account could borrow 1 scrt through the secret-pizza section on the discord.
  • Weekly conversions would only be done on assets that had a cumulative value of over $100 in the wallet. If some incentivized pools got very little volume that week, it doesn’t make sense to burn gas and go through the motions. That amount will still be there the next week.
  • Average gas will be used unless special situations require more.

FAQ’s – Concerns that have been actively voiced and should be publicly considered and addressed:

  • Auto-burning part of inflation would be an easier way of lowering supply
    • This is true, but it is specifically the Buyback section of this proposal that gives SEFI holders non-speculative value for their token. The burn is simply so that that given value is held permanently and not balanced by equating the buy pressure with sell pressure
  • There are better ways for developers to spend time on SEFI
    • This may be the case. The current suggestion which is centralized and not ideal would require less dev-work per my understanding, but the enactment of this protocol wouldn’t be mutually exclusive with other value capture mechanisms. The more the merrier as far as I’m concerned, and community members have made it clear to me that they didn’t want to sit on their hands hoping on other undisclosed value capture methods.
  • This is a lot of effort for very little reward
    • This is also possible and should be considered. At the time of writing this the Secret Swap has had $300M in volume, most of which has been in incentivized pools. If all had been and this proposal was in place the entire time, a total of $150,000 would have been used to buyback/burn SEFI ($500/Million). That’s not a substantial amount in and of itself. As bridges continue, liquidity grows, price goes up, and volume increases however this proposal has the potential to grow into being substantial, and that growth would directly transfer as value to SEFI holders. It’s a way of SEFI holders to bet on themselves and their platform. It is also an easy to understand first step towards value capture.

Full Disclosure : I believe that as of the Secret Swap Committee meeting this morning, I am to hold one of the SEFI Executive Committee Community Seats (the other belonging to Iowascero). With that in mind this could be read as a means of me trying to give myself more power. As contrary words are meaningless without action, know that I am committed to transparency with the community and am genuinely open for discussion and don’t get easily offended. Please shoot all concerns my way, I’d rather them be properly addressed than become rumors or welling discontent. It’s entirely possible (which is why I so detailed this enumeration) that many may only consider enacting this protocol if it were to be fully automated. Even as a committee member I would prefer this as well but think that this more manual iteration would be an easier transition to early enactment, and also a compromise based on the warranted FAQ that considers this too great an expense on the opportunity cost of developer time.

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I would suggest that you just leave things alone if this cannot be done in a decentralized way, i.e. that does not require human intervention. Could you imagine if bitcoin or monero was designed to allow a small committee of individuals to tax everyone’s transactions into a private account with just a promise that they’ll burn it?

You seem to be recreating the open market operations of the federal reserve, where the SEFI committee is akin to the (un-audited) federal reserve.

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My understanding is that the Executive Committee is voted in by governance so seats on it could potentialy be changed by governance or the committe removed completely if it is not acting in the interest of the community.

Eric, thanks for writing this up. I support this proposal. I think it is more of a good marketing opportunity to reach new SEFI investors. I know Enigma said they are working on something that would have more impact, maybe we could get more details on that on a new post or in the chat before we proceed with this proposal.

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While the committee could have oversight here, it is not they that would institute this as a tax, but would more so oversee this if it was truly desired by the community, as indicated by governance. I share your concerns. This is a conversation that does need to take place however, we’ve already seen short ideation versions of this hit the governance proposal list.

I’m also open to methods of proving good action. The monthly buyback report could be more detailed? I’d like whatever conclusions were reached, if reached, to be practical and not super difficult or time consuming for the committee. I’m already proposing gets this as an extra task and responsibility for them without yet consulting them directly.

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I’ve heard that as well and would love to hear more suggestions. They’re more than welcome to comment and address why this shouldn’t go forward or would be ineffective. I don’t want to pursue this with great effort if that’s the case. The community (myself included) has put plenty of hope in this idea In the mean time it is my current belief that enacting a buyback/burn wouldn’t be mutually exclusive with any other value capture mechanisms, and only the time spent by Enigma developers (hopefully not substantial with this iteration) is a competing opportunity cost.

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As I mentioned in the meeting, I will vote against this idea.

For a minimal burn amount, we will have to change the contract code of every pool. Relaunching the pools, forcing everybody to migrate their liquidity. This creates a risk of losing LPs.

The supply restriction/demand that this burn will create is minimal and continuous. Markets don’t move by a trickle effect, they move by events.

So to sum up

  • A cool Twitter post about a neat feature
  • No expectancy of price impact due to continuous effect
  • Forced migrations to new pools, such disturbance is never good > risk of losing liquidity
  • Developer hours spend on reworking contracts that could be spent on creating more impactful demand.
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Thank you, this is excellent feedback!

I had not realized this would necessitate moving LP to new pools which is something not to be taken lightly. I will certainly emphasize caution with that regard in a gov post, as it might not be the best look for an early swap.

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I agree with @Stefan-001. These are exactly the points why we ended up not implementing this mechanism. Clearly, if the buy pressure it would lead to would’ve been substantial, then that would change things, but given that that’s not the case, it’s probably not the best course of action and we should think about other value capture mechanisms that have a stronger effect.

One alternative is to take a more ‘centralized’ route initially as a pilot. Specifically, we could allocate a contract that takes X% of the monthly/bi-weekly fees as a proxy and distributes it to a multi-sig (the executive committee maybe)? The committee will use that to buy back SEFI.

This should be easy to develop and realistic to manage, and requires no LP migration. It would also allow us to measure how useful a buyback mechanism is.

I saw some conflicting thoughts about whether this (a more centralized approach) is something we should consider, and so it would probably be best to put this into a governance vote.

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is this possible to create a contract that creates its own account. In other words, it creates a public/private key and keeps it secret?

You could then send a command to the contract that would interact with secretswap and do a “market buy” and burn all within the same contract?

Ya absolutely, as I understand it this is exactly what I’m proposing.

First let me say that @guy 's described mechanism sounds fine to me; I don’t think it’s worth it to invest tons of dev time up front for what will probably be meager buying pressing.

I do strongly agree that sefi should capture some share of the platform revenue but I tend to think it’s better to raise the swap fees by 5 bps than to take from the LPs. Traders get cshbck anyway which, though it’s been lowered, does offset a fee raise relative to the standard 30bps you see on uni/sushi.

I also am pretty firmly in favor of not burning the bought-back sefi but rather distributing it to sefi stakers. This sort of mimics a dividend and focuses the new income stream on the sefi stakers. Why is this good? Well for one, eventually sefi distributions will end and we need a longterm income source for stakers (LPs to sscrt/sefi already have a longterm income source in the form of the 30bps swap fees). But also, distributing the platform revenue only to stakers rather than LPs also would result in the two income streams and corresponding risks being disaggregated. That is, LPs get (a majority share of) swap fees on their pool while sefi stakers get a (smaller) share of swap fees on all pools.

So my suggestion is:

  1. Put executive committee in charge of a multisig or a similarly simple-to-implement solution as per @guy
  2. Raise total swap fees to 35 bps.
  3. Use 1/7 of system wide swap fees to buy back sefi.
  4. Semi regularly distribute the bought back sefi to stakers
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I discussed this briefly with @guy in the Exec Meeting, and it seems like his idea was to route a section of rewards directly to a burn address as opposed to setting up a buyback at all, which I’m strongly opposed to. The buyback is NECESSARY in order to capture value.

I disagree with giving that SEFI back to stakers though. What permanently captures the value is having what is bought back, burned. This way the buy-side pressure is not matched by sell-side pressure. Some platforms will redistribute it to stakers after a long lockup, which I’m open to, but wouldn’t prefer.

Lastly, the sentiment with the Enigma team was that setting up a buyback would take substantial amounts of time and resources, rendering it unpragmatic at this time. That’s very disappointing to me as so far it is the ONLY proposal I’ve heard that gives explicit value to the SEFI token. Alas I will not put forth this governance proposal right now, but if any other capable dev teams are available and willing, I’ll gladly support this, and there’s a dev-pool for the purpose of paying out for work. I think long-term the sooner we get this instituted the better. Would we have had this from the beginning we would’ve already bought and burned over 2 Million SEFI, and the price and therefore APY’s would be higher.

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@guy said “Specifically, we could allocate a contract that takes X% of the monthly/bi-weekly fees as a proxy and distributes it to a multi-sig (the executive committee maybe)? The committee will use that to buy back SEFI.”

How does this mean “no buyback, only burn”? I agree that burn is pointless without buyback. The whole point is to redirect platform revenue (revenue, as in swap fees, not LP rewards) to create buying pressure for sefi.

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I’m also a bit confused here, but his comment in this thread enumerates exactly what my proposal is. He says here that it wouldn’t require LP migration.

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I dont really mind VVegas suggestion about the 35 bps and the 1/7 distribution if that is what splitting the difference were to look like.

Rather than re-distro to stakers, I was curious if it would make sense to create a General Fund by which could be governed and managed on behalf of the community?

Not so unlike Monero’s CCS Proposal system:

https://ccs.getmonero.org/how-to-ccs/

The only more immediate way to create value, is to have value to manage. However this would imply a degree of trust as those proposals would need to be delegated and managed in good faith to be executed on behalf of and to the benefit of the SS ecosystem.

I’m not quite certain I am seeing the endless opportunity to make meaningful progress toward creating value if all we are doing is poking percentages and the like.

Though I would find it interesting to vote on taking some burned SEFI + allocating that to new DAPPs building on SCRT as a early adoption / reward mechanism for interacting with the platform.

For example, interactions with Secret NFTs, Heros, Auctions and so on can be distro’d SEFI into a smart contract to open up rewards to for key interactions.

Per the above: successful sales of NFT’s, achievement unlocks, completion of auctions and so on. I think you can understand what I am driving at.

Overtime this could create mutual benefits to the broader ecosystems, as well as initiate an “invisible” buyback-like pressure because not everyone who receives SEFI will actually swap or stake them.

Kinda like the concept of gift cards to some degree if you want to think of it that way. Sometimes you just have a little bit of change on the card and you never really do anything with it. That’s captured value for the business.

Just my 3 cents. But I’ll take any critiques.

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I respectfully oppose this proposal:

  1. We should be encouraging liquidity providers to provide more liquidity. Reducing the fees would discourage them. Reduced liquidity would also mean less incentive for traders.

  2. Too many structural changes in general are a bad sign for more conservative traders and liquidity providers who want to see stability and consistency. We already have another upcoming proposal to change snip-20 tokens into snip-22 which is a major change and may require restaking of liquidity pools.

  3. The market will take care of itself. The best way long term to grow the value of SEFI would be to make SecretSwap the best it can be, and encourage its usage. Cashback reduction was a good proposal which passed recently, and elimination of it entirely might be a good idea as a way to decrease inflation of SEFI.

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Update: I did not write proposal #14. I do support the buyback/burn and will vote yes on this proposal.

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While it would lower the amount received in terms of the pooled tokens, it would raise the price of SEFI which would raise the APY of the SEFI token and make up for the difference.

This model or something similar is utilized on most successful exchanges. Sienna Swap will do .28% feels for LP providers with a .02% buyback/burn. Sushi does buyback/burn. Literally almost every AMM has some sort of token buyback to create explicit value.

I agree we should (and are) focusing on making Secret Swap better and more useful, but that won’t innately capture value with the SEFI token without accompanying tokenomic-focused mechanisms.

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On the topic of this proposal basically requiring redeploying all liquidity pools and staking contracts:

Since there is another motion to migrate all SNIP-20 tokens to SNIP-22 which would also require redeploying all those contracts, I suggest that if this proposal passes we would at the very least wait with its implementation until after a decision is made on the topic of token migrations.

If both proposals pass, then it would be wise to batch both improvements in one upgrade. This change is effectively a SecretSwap V3 upgrade and we should aim for one major update rather than two.

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The reason why I said no, is because what I read on proposal page and what get so far, collectively here, idea wise. Is not clear enough, to me.
Another iteration could be put forward?
Grateful I voted

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