Reduce the total SPOOL token supply and create long-term incentives for core contributors [SIP - 1.35]

[TaxL]

Summary

Reduce the supply of total SPOOL tokens and create team incentives.

Proposal Option 1

Burn 60,4 million SPOOL tokens from the treasury, 14 million builders tokens, and 5.6 million preDAO tokens, reducing total supply to 130 million SPOOL.

Motivation

The current total SPOOL supply is 210,000,000 of which 42,000,000 are allocated to builders and 16,800,000 are allocated to the preDAO that started off the SPOOL DAO as founding contributors back in 2020.

Currently, ~127,000,000 SPOOL tokens are in the treasury, as yet unallocated. Initially, Spool was supposed to release these tokens as liquidity incentives, but emissions ratios have dropped twice since, resulting in the current reserves being able to sustain emissions for many decades to come.

Aside from selling the tokens, there is currently no use for such a large amount of tokens. Since the price of SPOOL is well below the LBP price, and the runway with current spending is secured until 2026 and beyond, there is no need for these tokens to be liquidated in order to support OpEx.

Builder and preDAO tokens have to be re-adjusted as well to maintain the initial ratios of supply owned.

Proposal Option 2

Same as in Option 1 but retain 10 million SPOOL treasury tokens from the token burn (burn 50,4m instead of 60,4m) to incentivize core team members with vested SPOOL tokens in the future, making the new total supply 140 million SPOOL.

Motivation

Thanks to its successful LBP, Spool DAO secured funds to incentivize new team members with good salaries, however, clear token allocations are missing for new hires to align incentives with regard to protocol success. Additionally, the motivation to bring the best for Spool DAO for every contributor is even more incentivised if the salaries include SPOOL token proportions.

Proposal Option 3

Burn 60 million SPOOL tokens from the treasury, reducing the total supply to 150 million SPOOL.

Motivation

The key difference between this option and Option 1, is the removal of the Builder and preDAO tokens from the supply burn. The rationale for doing so is based on the following:

• Precedent: although limited, there is some precedent for simply burning tokens from the treasury or reserves as several recent, successful proposals have done just that (Merit Circle, Klaytn, Floki Inu).
• Ethics: burning tokens granted to the team (in exchange for work) or sold to investors (in exchange for foundational advice and capital) sets a precedent that, absent a written contract, tokens given from a DAO are subject to repatriation or seizure, even in cases without cause or malfeasance on the team or early contributors’ part. Put simply, it could be perceived as unethical and unsettling for a DAO to allocate someone tokens and then take them away – on the other hand, with this option, the total share of the overall tokens from builders and founding contributors would increase as their part of the share would not be burned, which again, could be perceived unethical and unsettling from another angle. This is the optics risk that should be factored in.
• Centralization Concerns: there should naturally be concerns of increased centralization risk, as the burning tokens from the treasury will increase the relative ownership percentage of all current SPOOL holders (both liquid and illiquid). However, if tokens to be burned were not expected to have been distributed for many decades, then they are, in effect as far as ownership and control are concerned, already functionally removed from the supply and simply burning them would mean all things would remain the same, ceteris paribus. Other past and future DAO decisions affecting protocol emissions, special treasury sells, or alike affect this point as well.

Proposal Option 4

Same as in Option 3 but retain 10 million SPOOL tokens from the token burn (burn 50 m instead of 60 m) to incentivize core team members with vested SPOOL tokens in the future, making the new total supply 160 million SPOOL.

Motivation

The same as in Option 2.

Vote Options

With Option 1 you vote to burn 80 million SPOOL tokens from treasury, builders, and founding contributors,
with Option 2 you vote to burn 70 million SPOOL tokens as in Option 1 and retain 10 million from the treasury burn for future team incentives,
with Option 3 you vote to burn 60 million SPOOL tokens from the treasury,
with Option 4 you vote to burn 50 million SPOOL tokens from the treasury and retain 10 million for future team incentives, and
with Option 5 you vote to not burn any tokens and to not retain new team incentives.

_________________________
The vote takes place here
_________________________

If there should be no simple majority reached in this vote (one option gets at least 50% of the votes), a new vote will be held between the main contestants and then the outcome will be set forth as SIP - 1.35.

Discussions and original texts about Options 1 & 2 can be found here, and about Option 3 here. Option 4 is a logical addition to make all options equally comparable.

Timeline

Voting period: 2023-05-16T22:00:00Z→2023-05-22T14:00:00Z

[Keegan4RC]

Hi everyone,

Keegan at 4RC (preDAO contributor) here - aggregating some of my responses from telegram below:

There is no guarantee that burning tokens will result in the remaining SPOOL tokens appreciating to offset burned token value for anyone - we run a fund and have a fiduciary duty to our LPs, we cannot vote to arbitrarily destroy LP holdings in the hope that future investors look favorably upon the FDV impact. This isn’t a cash grab - we are simply protecting our purchased interest in the project. We will happily vote for options 3, 4, or 5 - but cannot support voting to burn people’s tokens without their consent.

Decentralization happens naturally over time as early token holders take profits redistributing tokens to the open market. We sent funds over two years ago with no MVP let alone a V2 on the horizon - our larger share of tokens is simply a result of investing at the pre-seed stage where significant risk is priced into token allocations / prices. Call it c-tier VC grifting if you’d like but there is no precedent for involuntary token clawbacks and this would be a huge overstep by the DAO. This precedent could very well deter future investors and urge early investors to claim and dump their tokens to mitigate risk around the DAO burning any more of their purchased holdings going forward.

It is simply inaccurate and misleading to frame burning our vesting tokens as status quo dilution or equate it to a buy back. Dilution would be the case if we minted more tokens for third party investors. While burning our share disproportionately to liquid token holders may achieve the same effect of reducing our ownership % without our consent, this is not your typical growth stage dilution and has no sound precedent to even be proposed via DAO governance.

After speaking with several other preDAO members, while we believe this proposal was conceived with good intention, it will ultimately backfire as setting such a high-risk precedent at the expense of your earliest contributors merely to reduce FDV optics will reflect poorly on the DAO’s acumen as a whole - a bright, permanent, on-chain red flag for any prospective members to participate in meaningful size

[CryptoBroski]

The duty you have is to create the greatest shareholder value to LPs. Which needs to take into account the overall metrics for the protocol

The builders are being aligned (so you are not unfairly cut), you reduce the FDV overhang and you create a more decentralised product by voting option 1 or 2 and therefore provide a pathways for greater value appreciation.

Moreover, new investors coming into the protocol are able to participate in a more market standard way which in turn allows for fresh money and price appreciation in the underlying token.

The lack of precedent is a moot point. In any corporate transaction, a restructuring (say a debt for equity swap or any recap) shares similarities here and is done to maximise value for all holders. The concept of a DAO overstep is far from the truth and you are praying on fears of ‘what will external people think’. In fact, use the same logic and consider what will the external holders think if we end up with option 4, a more centralised and larger FDV.

Keegan’s view is very short term which is not in the best interest of its LPs or anyone else in the token.

[Tech]

Hi Keegan

Thanks for sharing your perspective on the token burning proposal. As an active participant in this DAO and also LBP investor, I appreciate your concern about fiduciary duties and potential impacts on investor sentiment. However, I feel there are a few crucial points that require additional clarification and context:

1. While the role of preDAO contributors like yourself is acknowledged and appreciated, I‘m keen to understand the tangible contributions to the Spool project over recent months. The token’s value has been on a significant downtrend for a year, with its price consistently below the LBP ‘fair price’ for the majority of token holders even after recent positive reversal. There’s a need for active participation and innovative strategies to boost token value and not just preserve a stake.

2. It’s important to note that investing at a pre-seed stage, as you mentioned, inherently involves considerable risk. This level of risk, you assumed over 2 years ago, is an integral part of venture capitalism and you have acknowledged that. However that initial risk is long gone after the release of V1 and from my point of view just risking capital does not warrant such disproportionately big token allocation without any further KPI to ensure the steady growth of the project. Considering your fiduciary responsibilities, it would be also reasonable to assume that the initial investment would have been recuperated by now and therefore the risk you speak of be considerably lower. Of course unless you haven’t and you’re still yet to recoup your initial investment. Let us know, I’m sure all holders are interested to know.

3. I am curious about the measures preDAO members (in general, not specifically 4RC) opposing token burning have put in place to ensure sufficient buy pressure to offset their disproportionately larger token allocations (compared to LBP participants who got diluted even AFTER staking adjustment). Is there a strategic plan to propel growth and token value, or does the focus primarily lie in protecting current stakes?

While your concerns regarding token burning are understood, it seems there’s an underlying assumption that the status quo would perpetuate the same patterns we’ve seen over the last year and a half. It’s important to remember that this isn’t necessarily the case. A shift in token allocation can, in fact, pave the way for a healthier, more balanced ecosystem, which will be beneficial for all stakeholders in the long run. You’re completely misunderstanding how important optics are in cryptocurrency space. The whole influencer „FDV is a meme“ crusade of 2021/22 was just an attempt to find exit liquidity for project/token creators to dump on.

Lastly, the notion that token burning equates to ‘involuntary clawbacks’ appears to be a mischaracterization. The proposal doesn’t aim to penalize early investors, but to realign incentives, encourage active participation leading to long-term growth and leveling the field just a bit with regards to other stakeholders of this project. This is not about setting high-risk precedents, but about innovating and adapting to market realities for the collective benefit of ALL members of the DAO. Option 2 is outlier in this space and goes to show that Spool core team cares about their stakeholders, and rather take a cut to make SPOOL token more attractive for wider audience from token metric/economic point of view, than keep a massive FDV to steadily dump on unsuspecting investors who’re keen on what Spool has to offer.

I appreciate you speaking your mind Keegan, and I just wish more preDAO members would do the same, so we all could understand a bit more who preDAO members are, what they’re thinking and what are their contributions that warrant such big token allocations.

[jtwdisco]

Selfishly, burning the most tokens improves my % share of tokens. This is my selfish, short-term thinking.

Ultimately, my interests align with a strong team building out spool. So option 2 supports that from my perspective.

Spool v2 sounds like it is going to be incredible. And if it’s incredibly successful it’ll become the go-to enterprise level defi middleware for the ethereum ecosystem.

A strong team will be required to keep it the go to option because with success will come many competitors, some potentially funded by very deep pockets. We’ll have to stay ahead by continuing to build.

Also the future seems to be omnichain. If spool finds success with the ethereum ecosystem, either we, or a competitor will arise to try and claim the omnichain throne. It should be us!

I want to ensure the growth of an already strong team continues. Aligning the teams incentives with spools success is critical.

[Keegan4RC]

Thanks for the thoughtful questions and professional dialogue here - we appreciate the tone as 4RC is not a multi-billion dollar fund in an ivory tower preying on retail, despite that pervasive connotation around venture investors in crypto. We regularly invest in pre-seed DAOs without investment contracts (a risk that may be realized here given Spool’s lack of an industry-standard immutable vesting contract), put out public goods and educational resources on a weekly basis, and have been active participants in Spool for years - details below.

1. Our primary role before the launch of V1 was focused around customer discovery - as early DeFi power users and educators we met with the team to advise / provide feedback on yield strategies, risk scoring, tokenomics, legal, UI / UX, and BD. When Spool went live, we marketed V1 to both retail and institutional audiences (see DeFi Dad’s 45 min youtube tutorial with Phil: “How to Create Automated DeFi with Spool” and our written newsletters on Spool in The Defiant and Wealth Mastery). Most importantly, we’ve authored complex custom models leveraging Spool for large third party funds to deploy institutional capital (actively working on these relationships today as Spool approaches institutional allocation requirements). We plan to continue these same marketing, education, and BD efforts to materially increase TVR for V2.

2. This is the talking point that doesn’t follow guys - we are actively staking large quantities of SPOOL and have not executed a trade in excess of 2% price slippage. That is the extent of our ethical responsibilities on profit-taking - the outstanding risk here is not maximizing return for our LPs by allowing our purchased holdings to be burned because the DAO retained the keys to our vesting contract (again not industry standard). We are in the business of earning profits here just like LBP participants - if FDV is the honest and genuine concern of this proposal then the fair and rational measure would be for all holders including LBP participants to burn 1/3 of their tokens (to be clear, we’re not proposing that). The notion that this proposal is decentralizing ownership is again inaccurate and misleading - it is relatively increasing LBP ownership percentages but the result is an overall increase in centralization given the treasury cut, that math is straightforward. We get that this is a great deal for LBP participants - no hard feelings, but it’s naive to frame as fair or benevolent for all holders.

3. Believe I covered these questions in bullet 1, but happy to provide additional detail where possible.

Finally, while I disagree that we don’t understand FDV optics (we advise on tokenomics for a living), this proposal does directly penalize early investors by burning our tokens. This is not a reverse stock-split in which the token price will programmatically update per the exact supply reduction ratio as a stock price would upon market opening, or some sort of last resort emergency action (poison pill / bankruptcy). This is simply prioritizing the requests of a few paid shillers (KOLs) over the token rights of SPOOL’s earliest contributors. If this passes, we obviously hope the market does quickly and efficiently price it in - our point here is that’s not guaranteed but more importantly represents a critical overstep for DAO governance - proving that a centralized core group can and will use Spool’s DAO governance to literally slash token holder interests on a whim.

[Keegan4RC]

This is intellectual honesty and I absolutely appreciate that. It is no doubt a sweet albeit short-sighted / lopsided deal in favor of LBP participants whose entry timing unfortunately coincided with the precipice of a brutal bear market - no hard feelings there. We too are extremely excited for V2 and wish you the best.

[CryptoBroski]

Appreciate the thoughts Keegan. I strongly believe the FDV optics paves a clear path forward for significant token value appreciation - some short term (theoretical based on equalising FDV to today) and some more longer term (new holder entrants and metrics).

I think of the vote as a proxy AGM / minority drag along to a newly capitalised vehicle. While we disagree on governance overstep, we all are in the same boat of finding ways to help develop the protocol, add TVR and increase value to all shareholders.

Regardless of which way the vote goes, I personally, and other Spool holders certainly look forward to your continued support.

[Tech]

Hi Keegan, thank you very much for responding to me. So if we’re having honest conversation here, then I would just like to touch on point 2 a bit.

1. You are comparing not maximizing return (you admittedly already took some profits), i.e., no actual drawdown, and the actual drawdown of most token holders. I’m sure you see what I’m getting at and how this appears when written publicly.

2. Your purchase is cut in absolute numbers, but the proportion remains the same, except in relation to LBP participants or, perhaps, the circulating supply, which is roughly 16% right now, and that’s a very low float.

3. With regards to LBP participants, I have to grill you on this a bit. Your initial risk is nowhere near as bad as you make it out to be. For those participating in LBP, for example, there was no product available for at least 5 months after LBP either. Moreover, the “share” per dollar for LBP participants was drastically lower than yours, I’m sure, which also significantly increases the risk. Asserting that a fair and rational measure would be to cut LBP participants too is also not a very honest counter-argument to what Option 1 and 2 of this proposal are trying to achieve. The reason being that LBP was essentially just a DEX with a tweaked AMM, which means it was an open market purchase, adding additional risk to LPB participants.

Lastly, I entirely disagree with the last paragraph. As your locked tokens are burned proportionally, not absolutely, there is no penalization unless you don’t believe the SPOOL token price should appreciate. In that case, I invite you to help the Spool team or rally preDAO members to shill Spool more. Blaming this vote on KOLs is also not very sensible, as any presumed KOL would have a similar deal to yours (unless you have heard of any KOL who ever bought on the open market). According to your line of reasoning, they would be shooting themselves in the foot too (they wouldn’t, see above).

Overall, I think this whole proposal has been widely misunderstood, and the only pushback it has received is from people who think they are getting a haircut in their allocation, which they are, but only in relation to LBP participants who got a really bad deal anyway and you are the only one who’s publicly honest about being ok with shafting them.

[Keegan4RC]

In order for LBP holders to get back in the black, SPOOL will need to be an institutional-grade product with an enterprise war chest and a track record of sound governance - burning the treasury, team, and early investor’s tokens directly undermines that goal.

Looks like that is about all the productive dialogue we’re going to have here, guys. Like I said, the proposal has clear short term interests for LBP participants and we’ll harbor no ill-will toward those that act on them.

We have no interest in shafting anyone. Ideally the DAO would be putting proposals forward that align and coordinate the interests of its members - unfortunately this particular zero-sum approach happens to put us at odds. Best of luck, everyone - that’s all I got.

[emiliomag]

Hey Tech,

Appreciate the response here. I feel compelled to weigh in on a couple things:

• A realized drawdown on token holdings directly correlates to reduced returns. Say you have 10 tokens and 3 are burned. Even if the price goes up 10x, your maximum potential return is still 30% less than before the tokens were burned. Rationally, and out of fiduciary duty, we cannot support handicapping our potential returns.

• Our initial risk was significant in that there was no certainty that there would ultimately be a token or liquidity event, therefore our initial risk was 100% (with no middle ground). Many projects have taken capital only to fail before a token is launched, thus is the nature of early stage venture and we have had multiple such losses. In Spool’s case we contributed capital and then carried that risk for 18 months prior to the beginning of our vesting schedule, which is clearly ongoing. I’m uncertain what you mean when you say there was additional risk to LBP participants: your tokens were fully liquid and there was an active market in which you could dispose of them, meaning your risk was mathematically less (if you can sell a token and I cant, then I have more risk - the longer mine is illiquid, the more risk there is, a Nobel prize was awarded for quantifying that risk). So to paraphrase what I believe your third point to be: because we paid less, we deserve to have our tokens burned?

We have been told that the motivation behind the proposal is to address continuation of negative feedback regarding the ratio between circulating supply and FDV. If there is concern around the negative optics of the supply ratio, it is reasonable to imagine there will negative optics when the DAO burns tokens that were purchased and locked into a vesting schedule.

This is in no way meant to position us against you, as we are entirely aligned in our desire for this project to succeed and the price to increase. I apologize that you feel you overpaid and got a bad deal in the LBP; we’ve done some bad deals ourselves, and fortunately thanks to the hard work of the team this wasn’t one of them. Regardless of entry price, we both purchased tokens, we were just told that we would have to wait a bit for ours; it seems unreasonable to suggest only ours be burned simply because we paid less and were told to wait. That is the crux of the concern: tokens that we purchased are being burned without our consent, and the fact that you feel motivated to defend yours because you purchased them hopefully means you should be able to empathize and see that.

Thanks again for contributing your thoughts and being open to reading ours.

[jtwdisco]

I’ve put together a view on the ownership proportions for each party under each option (Option 5 is the original Amount/Propotion as no change).

In all cases, the Founding DAO are retaining their ownership proportion. In fact, in all options, except option 2, their ownership proportion is increasing.

What this says to me is that the Founding DAO are not being disadvantaged under any of these options.

[Tech]

Hi Emilio,

1. A large part of your issue with this vote likely lies in your assumption that all of your locked tokens have current value and should be treated as such. You completely disregard factors such as liquidity, the PA trend, and the fact that low-float, high-market-cap projects typically yield lower multiplier returns. In other words, you’d prefer to take 100% of your tokens at a 10x return rather than 70% of your tokens at a 20x return.

2. Before you rely on Nobel Prize-winning theorems as your cheeky crutch, ensure that you don’t use fallacies in rest of your message. The idea that your initial risk is 100% is absolute nonsense unless your investment strategy is utterly asinine, or you’re outright gambling. Your risk was proportional to your relative supply of tokens with a fixed price you purchased, among other things. This includes being a preDAO member, which comes with substantial voting power from getgo. We are choosing to vote for the burn, not because you made a purchase at MUCH lower cost, but because tokenomics were formed in a toxic environment where VCs pushed for low float projects. They could dump these on unsuspecting retail investors and get away with it due to the mania in the markets. Now, after a sufficient cool-down period in the markets, many SpoolDAO stakeholders can see that low float and high FDV seem unattractive to potential new investors at best, and seem like a downright scam at worst.

3. The argument that burning is bad optics because it destroys purchased tokens is also beside the point. Referring to what jtwdsico posted, at worst, you retain your proportional ownership, and actually increase it with other options. If you counter this with the idea that you cannot dump as much in absolute terms, then you should stop making any further arguments from a position of authority. Particularly if you knowingly or unknowingly disregard factors such as liquidity, the number of market participants, the number of token holders, market trends, project hype, etc. If you think your returns are constant or simply calculated by the number of tokens times the current price, then I hope your investors or the individuals you’re advising don’t see this SIP.

4. I must admit, many of us who bought in LBP are not happy about the price action. However, it is extremely patronizing to apologize on behalf of me or anyone else who made this decision. It’s hypocritical coming from individuals who have been MIA the entire time and show up on discord for the first time ever with a passive-aggressive message and an old video featuring an influencer with a fake following as a proof of “contribution”. Don’t fall back on the argument Keegan made, that you have “direct channels to team” and no time to “chill” on Discord, you should understand now there are a lot more stakeholders now than before, and you choosing (or beign lax) to ignore them may backfire, as it likely will now.

All these posts suggest one thing: you’re extremely troubled by the prospect of losing a deal that’s substantially better than what the majority of token holders have, because that’s the ONLY thing that will change—the proportion of preDAO vs LBP holder supply.

By the way, you consented to this vote by ignoring pre-SIP discussions on Discord. And again, if you claim to have “no time”, then perhaps it’s time to realize how large of a stake you have and whether it’s appropriate to ignore other stakeholders, this is a DAO afterall.

[TaxL]

The vote concluded with Option 2.
More about the outcome here.

Thanks for the thoughtful discussion in here!

[TaxL]

Little update on these matters:

Given the involvement of smart contracts, we have devised a method to ensure the best outcome for all parties involved.

Here is an overview of how the token burn will be carried out:

1. The entire amount (70 million tokens) will be burned from the Treasury.

2. The Builder and preDAO token vesting will continue until two-thirds of the tokens have vested. During this period, they will retain the corresponding voting power.

3. Once the two-thirds vesting milestone is reached, the addresses associated with the vesting contract will be changed to the Treasury, and the remaining 19.6 million tokens will gradually flow back into the treasury over time.