This is a quick analysis we composed with the help of community members, to try and make more tangible sense of wag’s original post, and feedback on twitter these past few weeks.
Our hope is this analysis will help voters in their decision making and discussions.
We’re available for any feedback, and especially to any corrections or additions community members think we should make. Find us on twitter @davidbrai and @eladmallel.
Different calculation approaches boil down to the analogy of dilutive purchase of shares at current valuation on auction (see below).
Implementation feels feasible, no need to agree on the exact approach now (gut leans towards explicitly allocating shares on auction settlement to make it super explicit).
To do this well the DAO would need to value all its assets in ETH, requiring oracles for every asset it holds or wants to hold - adds complexity to new assets, which might incentivize the DAO to hold fewer assets and avoid NFTs.
Nounder rewards: give those nouns zero shares or allocate them shares per some average (see more below); it's a political decision, technically not hard.
Splits voting and financial shares, creating new incentive risks that require further research.
Feels legally concerning at initial gut reaction; legal advice needed.
Assume the treasury currently has 990 ETH.
New auction is settled, Alice bought a noun for 10 eth; Treasury now has 1000 ETH.
At this exact moment, if Alice ragequits, she should get 10 ETH.
Then say the DAO spends 10% of its funds, and now has 900 ETH; all nouners’ redeemable value should be reduced by 10%. Alice’s redeemable amount is now 9 ETH, so she maintained her 1% redeemable value.
Then say Bob buys a Noun on auction for 10 ETH; Treasury now has 910 ETH.
Bob’s redeemable value is 10 ETH, which is 1.0989011%.
Alice’s redeemable value should still be 9 ETH, which is now 0.989011%.
Another way to model this, is that each time a noun is sold on auction, it’s like a fund raise at current valuation.
Let’s imagine Nouns have shares, call them NS (Nouns shares).
Whenever someone buys a Noun on auction, new shares are allocated to that Noun, proportional to its auction’s ETH contribution to the treasury.
So if the treasury currently has 990 ETH and there are a total of 1M NS created, and Alice buys a new Noun for 10 ETH, Alice would get 10101.01010101 NS.
Alice’s share of NS determines what % of the treasury she can redeem.
Somewhat similar to tokenized vaults (EIP-4626).
If the DAO has assets other than ETH, as is currently the case with stETH and soon rETH, we need a conversion rate oracle to know what the value of the treasury denominated in ETH.
If the DAO buys an NFT, it also needs to be able to be valued in order to determine the new ETH contribution to treasury value.
In other words, if we want to evaluate the ETH contribution from an auction we need to be able to value all the DAO assets in ETH.
Disclaimer: our understanding of wag’s idea has not been verified with wag; we’ll update this post if we learn we misunderstood.
Is there a different approach with the recursion formula from wag’s post?
The formula: rd(day+1) = rd(day) * nc(day+1) + rd(day), where
“days” are settlement-delineated
nc = % Change to Treasury from post settlement balance to EOD
rd(day0) = Noun Auction Price
daymin (first calculation)= Noun Auction settlement day + 1
daymax (last calculation)= ‘current’ day - 1
For a particular Noun, at the moment it was purchased from auction, the redeemable value (rd) is equal to the amount of ETH it was purchased for.
Then to calculate the value of the next day, you need to calculate `nc`, which is the % change in treasury value during that day. It’s a way to decrease or increase `rd` proportionately to the change in treasury value.
Seems like auction sales are not considered change in treasury value.
Seems like there’s no real reason to do this recursively; a simpler way would be:
T0 = Time of acquiring a Noun
TRQ = Time of doing ragequit
rd(TRQ) = nounAuctionPrice * (TreasuryValue(TRQ) / TreasuryValue(T0))
In words: a Noun’s redeemable value is equal to that Noun’s acquisition price, multiplied by the relative change in the DAO’s treasury assets value between day of acquisition and day of ragequit.
In this case we still have the problem of needing to be able to evaluate the treasury assets in ETH, i.e. `TreasuryValue` returns a value denominated in ETH.
While this approach avoids explicit allocation of shares, redeemable value ends up being the same as the fund raise at current valuation described above.
How are nounder reward nouns valued?
They could be valued at zero. Meaning that they get 0 if they ragequit. This can be a problem for those who purchased them on secondary, and is discussed below.
They could be assigned an “average value”. If we use the idea of shares, it could be:
Average shares per Noun across the board:
If there are 1M shares outstanding, assigned to 100 nouns. So each noun has 10,000 shares on average.
A nounder reward is minted, it gets assigned 10,000 new shares.
Average shares per recent auctions, making it more responsive to the market:
Take the last N auctioned Nouns and the shares they acquired (e.g. last 7 auctions)
Give the newly minted Nouner reward Noun a share count equal to the average of those last N auctions
Existing nouns will suddenly have different value on secondary markets. Owners who bought nouns that were acquired for relatively low values will object to this change.
We could assign all existing nouns the same number “shares” as a way to bootstrap this.
What if the DAO holds NFTs that don’t have oracles to assign value to them?
It means that if someone joins the DAO when the DAO is holding that NFT, they get assigned shares as if that NFT doesn’t exist.
Later, if the DAO sells that NFT, the new member of the DAO will have a high % ownership of that Noun because it will be considered like income.
If there’s enough value locked in an NFT, it will attract actors that will want to join the DAO, sell the NFT and then ragequit with the revenue from that asset.
Economic and voting shares are split.
Anyone can buy as many economic shares as they want at any time, diluting everyone else.
Anyone expecting Nouns to receive an influx of non-auction revenue in the near future can steal as much of it for themselves as they have capital.
Those with cheaper voting shares will be incentivized to pass proposals for their own benefit, rather than for Nouns' collective interest, or at least will have less risk of spending.
The main challenge is to value all the DAO assets in a single denominator (e.g. ETH). This would require having oracles for all assets. Even if there are oracles, they could be potentially manipulated.
Another concern is that treating Nouns this way could significantly increase regulatory risks (this is a dev gut feeling, legal advice is needed).
The economic incentives seem worrisome and require further thinking to potentially mitigate new risks.
Capital Accounts in LLCs and Partnerships, a doc wag linked on twitter.
A definition of capital accounts.
“At the most elemental level, then, each owner’s capital account reflects how much the owner has a right to receive from firm equity”
“They [capital accounts] usually reflect a mix of hard cash entries and entries that involve estimates of the value assigned to assets or, on occasion, to services.”