PIP-50 : Plan to reduce $PSP total supply - Revoke and burn DAO vesting of year 3

Governance Proposals
1

Authors

Xut, Albist

Abstract

This proposal addresses a key aspect of our protocol’s evolving tokenomics, particularly in the context of the changes post-Social Escrow (SE) introduction. With a maximum PSP supply set at 2 billion and 870 million allocated for DAO treasury over 4 years, the current reward mechanism has increasingly shifted towards $Eth yields, reducing $PSP’s role to primarily covering gas refunds.

Given this shift and the fact that the DAO currently holds approximately 5.5 million $PSP and will claim the ~283 million left from years 1 (~ 83M) & 2 (200M) in January.
This proposal suggests burning/revoking the vesting $PSPs tokens planned for year 3 (200M of $PSPs) which were primarily intended for the PSP1.0 incentive program.
This move will reduce the maximum supply of $PSP from 2 billion to 1.8 billion.

Considering the average gas refund expense of 1.5 million $PSP per epoch (30 million per year), and rounding up to 40 million annually to account for new users with constant gas/token prices, the DAO will have sufficient funds to cover expenses for the next years.

Goals & Review

Objectives

  • Realign the Protocol’s Tokenomics: Adapt token distribution to align with the current reward distribution strategy post-Social Escrow (SE) introduction and reducing its maximum supply from 2 billion to 1.8 billion.
  • Ensure Economic Sustainability: Align token supply with actual usage patterns and rewards distribution for long-term stability.
  • Alter Diluted Supply: The current diluted supply of $PSP stands at 38%. This proposal, by reducing the total supply, will increase the diluted supply percentage to approximately 42.02%, enhancing market perception and valuation.

Success Metrics

  • Achievement of a reduced maximum $PSP supply from 2 billion to 1.8 billion.
  • In the long term, reduction in the quantity of $PSP distributed for gas refunds due to an increase in value.
  • Increase in the diluted supply from 38% to approximately 42.02%, indicating a healthier market status for investors.
  • Positive community response, endorsing the strategic changes in token distribution.

Potential Risk Points

While this proposal aims to strengthen the protocol’s economy and the value of the $PSP token, it’s important to acknowledge and plan for potential risks :

  • While it is unlikely, there is a possibility that the market could perceive the sudden reduction in the total supply negatively. This concern arises despite the fact that the tokens in question are DAO funds, as it still represents a significant change in the tokenomics.
  • A crucial consideration is the relationship between the amount of $PSP rewarded per epoch and the token’s market value. By reducing the DAO’s treasury in $PSP tokens, there is a risk that, should the token price not increase as anticipated, the protocol may eventually lack sufficient tokens to continue the gas refund rewards as planned. However, it’s important to note that the remaining ~289 million $PSP in the DAO’s treasury, based on the current distribution rate of approximately 1.5-2 million $PSP per epoch, should suffice to provide rewards for several years, mitigating immediate concerns regarding reward sustainability.

Means

Revoking vesting token will send them to the vesting contract owner (which is the DAO treasury) :

  • Revoke year 3 vesting (200M $PSPs receive) : 0xb074094d2E858b25D129989644248F9F6946e081
  • Transfer 200M $PSP to 0x000000000000000000000000000000000000dEaD address. (address zero is blocked by the contract)

Implementation Overview

Implementation Steps:

Coordinate with DAO’s signers to execute the revoke and burn of the specified years.

Future Considerations:

Potential future adjustments in token supply on economic performance and community feedback.

Estimated Timeline: The full implementation is expected to take 1-2 weeks after approval.

Voting option

  • Yes - Revoke & Transfer year 3 vesting to Dead address
  • No - Don’t burn
  • Abstain

Edit 1 : update the proposal to only focus on year 3 instead of year 3 & 4

14 Likes
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For. You have all my support

4 Likes
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For ,let’s go for the revoke & burn year 3 & 4

4 Likes
4

Good proposal guys.

Let’s see the result of the vote, even if I have no doubt that the burn will be applied

4 Likes
6

Thank you for the proposal,

Using the current market rate, the price of this proposal would be the equivalent of spending ~8 Million USD of the DAO treasury for this proposal. Because of this reason, I think it’s important to look at such an idea thoroughly before pushing such a decision. It’s true that most of the recurring budget right now is mostly spent on gas refunds, but that doesn’t mean we should assume this is the spending maximum.

For example, Protocol Owned Liquidity can lead to a significant increase in token usage, and without it deploying staking on Optimism would not have been possible. Spending 20% of the entire supply on a single proposal might affect all proposals in the future, and for this reason extra care has to be put on such a vote.

Considering that the purpose of the PSP token is to assist with the decentralisation and governance of the ParaSwap protocol, I would be interested to see previous examples where burning ~20% of the token supply lead to a successful development of such actions. Could you link to examples of previous DAO decisions where such a decision was taken and the results were positive based directly on this action? If possible, proposals from other DeFi protocol DAOs would be especially useful.

Personally ,I don’t think DAO resources should be spent on such speculative and high-risk maneuvers, when the reality is that the DAO will succeed if we spend our energy working on developing the protocol and usage of it. Increased protocol revenue is also directly beneficial to the DAO, as enables more ETH to enter the treasury. Without a successful and competitive protocol, no amount of tinkering with the supply will help impact the final state of the DAO’s success.

2 Likes
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To change the perception and outlook of PSP, we’ll need to take some really drastic steps (like a burn or airdrop). While the importance of development cannot be overemphasized, we need to wake up to the reality that we need to attract more people to drive the price of PSP.

No amount of Quest or marketing will suffice if people continue to speak negatively about the token. It’s worrisome that the protocol has millions of users yet the DAO cannot boast of 1k active members (snapshot recorded is proof).

I understand Oxy’s concern and I believe caution should be taken but we don’t necessarily need an example of a project where similar implimentation leads to growth. The proposal established that we do not need a 2B supply to be successful. The 2B tokens won’t matter if we fail to change the narrative this cycle.

People in this industry are like sharks, Once they smell blood, they bite.

I’m in full support of this proposal.

3 Likes
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I find it amusing to talk about $8m when we know full well that this amount of PSP is illiquid and will be for many years to come.

You ask for examples of the uses of these PSPs by taking the one you created, the Optimism pool, which is… A failure. Another point that I find relatively amusing.

If I go back over my 2+ years on this project.
I can’t think of a single proposal paid for in PSP that would be useful, apart from maybe AURA finance (we’ve had no news and no-one’s updated us) and the latest version of Troopers.

In any case, millions of dollars.
I should add that the two proposals mentioned above could have been funded via layer 2 grants, but we gave them to the core team.

I’d like to finish by pointing out that for the last 1 year, the Year 1 Claim has been possible from the DAO’s PSPs, but it hasn’t been done…

That’s how useful these PSPs are.

I’d rather see them burned personally. That can only be positive, that’s for sure.

2 Likes
9

As seen by the dashboard, the active users matric is not 1000, but instead somewhere between 8000 and 10000 daily users! Snapshot voting activity is not as good of a protocol indicator in my opinion, and it can be influenced by many factors, such as the technicality of the votes, time since the DAO’s inception or delegation.

Even if we wanted to increase this metric, I do not see how this proposal would address it directly compared to incentives to increase delegation and participation, where we can also set clear metrics of success.

While good concepts and arguments can be a good starting point for a proposal, when it comes to higher costing decisions (such as 20% of the entire supply of the token), a pragmatic and data-based approach is essential to be able to refine the effectiveness of a proposal and avoid mistakes of people who in the past tried to make something similar.

A very good example of this can be seen in the PSP-IP: PSP 2.0 - ParaSwap ve80/20 Proposal . Although ve80/20 was not used by many protocols other than Balancer before this , the analysis on emission savings , liquidity gain and potential sell-off risk help give specific projected goals and cause-and effect mathematics. If this amount of care was put on what at the time was ~ 6M PSP/year, it’s only normal to expect at least this level of thoroughness for 400 000 000 PSP, especially because in this case the decision would be permanent.

This is just to provide a value of the resources this proposal is asking, as quantification is important when taking such major decisions. Feel free to suggest alternative cost values for 400 000 000 PSP you find to be more accurate.

Could you show previous case studies to reaffirm this positivity, especially in major DeFi protocol DAOs?

1 Like
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The less than 1k active DAO members mentioned refers to active DAO participants not protocol users. We currently have about 3.6k PSP stakers in both sePSP1 and sePSP2, many of the said stakers have never contributed on forum discussions or voted on snapshot. For a DeFi protocol with between 8k-10k daily users and over 5M total wallet interactions, one would expect more participation especially since the token in question is a governance token.

I do understand the need for caution as I said earlier but the argument here is that max supply of 2B tokens makes sense with the old tokenomics model but certainly not aligned with the new model.

Instead of a one time burn of 400M PSP suggested, we could make it a 4 month linear burn where 100M tokens are burned monthly for the next 4 months. This will give us the necessary data to measure the impact of the burn and if after burning 200M tokens, it was determined that the burn has zero impact, an express proposal for termination could be made.

11

Gm

Thanks for the effort in making this proposal up.

I think that this would be one of the most critical decisions since PSP inception, so I’d rather take all necessary time to build a data driven case and not rush at all.

The thing is: if you burn 20% of the supply, there will no longer be any coming back, it’s done once and for all; so it’s not something to be taken lightly and we should not make it about enthusiasm and subjective arguments. This is a topic to be highly built with careful strategy and real data.

Generally speaking, I don’t believe in token burns, I haven’t seen any project successfully making such a critical and expensive operation. The narrative around the supply is interesting but over the test of time, the space now understands that the value is more about the demand and less about the supply.

I suggest to transform the category into research instead of proposal and take the next few months to discuss the effectiveness and long term value of burning tokens in general. Token engineering researchers can be contracted to dig dive & provide deeper insights.

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Thank you for this proposal which is interesting, and relevant.
I also read all the replies and opinions shared, which leads me to write something.

First of all, I have to highlight the clarity of the proposal, and its willingness to point out risks as well as benefits.

While I understand Oxytocin’s fears, I do not share its point of view.
A burn cannot be considered as an expense, nor as a resource.
It’s an irrelevant shortcut.

Otherwise, we can take another shortcut:

  • burning 20% of the supply will increase the $PSP value by 2B/1.6B = 25%
  • at a current market rate of 1 $PSP = $0,04
  • the DAO will claim 83M + 200M $PSP (see DAO wallets update)
  • it means it increases the value of 283 $PSP + (the PSP already claimed and unspent) by 25%
  • so at least 283M × 0.25 × 0.04 = $2.83M for the DAO

Therefore, if year 4 is burned, and not year 3, the figures are (200+83+200) × 0.25 × 0.04 = $4.83M for the DAO, which compensates the 8M / 2 = $4M Oxytocin mentioned. So +$830K for the DAO! Love those calculations!

Of course, @Xutyr you have my support.

1 Like
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I don’t understand why this proposal should be sidelined. I don’t think it’s up to you to decide whether or not we should go further with research and section modification.

The DAO now has 20% of the revenue from the protocol. That’s what we need to capitalise on and not at all on PSP, which is given for yield.
The mechanics of Paraswap have changed, and it is normal to burn at least 50% of the tokens in the DAO’s possession.

This liquidity is poison and you know it.
The protocol will earn enough if it is efficient. If it is not, the sale of PSPs will lead it to its downfall anyway.

This burn doesn’t need data, it’s a guarantee for investors. A guarantee that no one will get their hands on a windfall initially intended to reward investors. A windfall that, if used, would demonstrate the failure of Paraswap.

This decision is not so complex after all. It has to be done for years 3 and 4. And possibly, in time, for years 1 and 2.

It can never be used, that’s a fact, and there’s no data to contradict it.

The data that might be of interest to us is the funding requirement for the core team, which is a service provider that we are now paying for. See the proposal where we gave the OP and ARB.

Because apart from the core team which, as you said, is the only useful body for Paraswap to ensure its continuity, the other service providers will now be swept under the carpet.

Provide us with your data and we will be able to use Claim 1 and 2 to determine our longevity outside the ETH reward.

14

PSP 1.0 was designed with an initial supply of 2B tokens, of which 870M attributed to the DAO to run and reward Stakers and Market Markers via the distribution of $PSP tokens since the DAO at that time had no revenue and no other liquid assets in treasury.

Since then, that changed with the introduction of PSP 2.0 aka Social Escrow Model 12 epoch ago. We now have enough hindsight to say that the Social Escrow model is a success!

In my opinion, it is therefore the right time to take the logical step of burning the tokens dedicated to the rewards of the PSP 1.0 model which are no longer needed.

Like @Lup I’m not a fan of “marketing burn” either, but that’s not the case here, it’s a “logical burn” since the supply was designed for a version of tokenomics which were based solely on the distribution of $PSP tokens and at a time where the DAO didn’t had any income nor treasury. Thanks to PSP 2.0, It’s no longer the case today!

One way to know at what stage of maturity a project is at is by looking at its supply distribution. The less the supply is distributed, the more uncertainty there is regarding potential future inflation, even though there should be no uncertainty at this level for PSP. ParaSwap is a mature and profitable protocol.

Less uncertainty directly leads to reaching more potential holders/stakers/investors, an increase in demand, favorable price action, greater interest in the $PSP token and therefore ultimately greater decentralization.

The burn of 20% of the supply (which in the current format has no reason to be distributed in my opinion) should in the short to medium term lead to a token price increase and the Foundation by owning ~272M of $PSP will be the first beneficiary of it, providing even more cash to finance future developments of the ParaSwap protocol.

The only doubt therefore lies in a potential lack of tokens for the DAO in the far future.

But despite gigantic/grotesque inflation during its first year, we did not even manage to use all of the 280M tokens during the first 2 years. In fact in 2023 (Year 2) we claimed 0 vested tokens.

Even though we have just gone through a year of bear market with low volatility and volumes.
If we had not had a distribution error for epoch 3 (resulting in the burn of 86.96 ETH), the DAO would hold over 166 ETH in its treasury, of which we used none.

I am therefore in favor of this proposal which, I believe, will reduce uncertainty, display more maturity, and at the end be beneficial to everyone.

9 Likes
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I followed the discussions here and on Discord and this my 2 cents: I see a lot of enthusiasm but no demonstration of why and how the burn can add value to ParaSwap. I agree that no project has been able to add value after burning a lot of their supply, because crypto simply a demand and attention game.

I’m in favor of making this a research topic instead of a governance proposal as it lacks the right data and strategy

1 Like
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Hello!
I took the time to read everything. :sweat_smile:
Glad to see the activity. :blush:
I understand your concerns, @0xYtocin, @joebro, and @Lup.

I could agree, but at the same time, every protocol has its own tokenomics and situation.

Regarding protocols that burn their supply, you can find many examples: Binance, Luna, Looksrare (since a few weeks ago), etc. But none of them are in our situation, so I don’t think we can compare, as:

  • we completely switched to the SE model,
  • we provide real yield,
  • we switched the incentive token from $PSP to $ETH,
  • we have profitable DAO revenues.

@enerow and others described the situation well: the DAO neither claimed the $PSP of this year nor 41% of the first year (and during this year, the previous rewards system was still active).

I also want to add that:

  • Grant proposals were most of the time in $, then converted to $PSP.
  • Paratroopers’ revenues are in $, converted to $PSP.
  • Liquidity will be in $, converted to $PSP.

So at the end, everything is linked to the $PSP market price. As a bonus, it will also simplify the coordination for transaction execution (as we all know, it’s almost a full-time job).

I fully agree with you.

Not really, after years 4 the DAO can mint 40M of $PSP per year

For the first four years of PSP existence, a set reserve of PSP has been set apart to cover the DAO’s needs. After the first four years, a minting function becomes available allowing up to 2% of the total supply (40M PSP) to be minted per year.

Regarding:

(Why) These tokens are “useless” due to the $ETH treasury income from the SE model, plus the $PSP held by the treasury for years 1 and 2. Additionally, these $PSP tokens will not be released anytime soon. (How) It’s a good marketing move to push on X with official communication to bring confidence into $PSP and its DAO.

The main question is: Do you think that DAO revenues received at each epoch, plus the ~290M$ of $PSPs, will be enough for the next 2 years? In my opinion, it will be more than enough.

4 Likes
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What data was used to arrive at the 2B max supply at the inception of the DAO even though the competition (1inch) only has a total supply of 1.5B?

The enormous supply was needed for the tokenomics model of that time which we all agree wasn’t good for the token because of the excessive emmission and sell pressure.

We now have a proven and sustainable tokenomics. If Social Escrow Model was adopted from inception or early enough, I believe we would have attracted more stakers and users because of the price action.

Why exactly do you think 1inch is ranked top 120 coins on CMM while we take 600+ position. Why should our immediate competition have over 30M token trade volume while we cannot boast of 1M volume despite having superior tokenomics. Why should their token worth 10x of ours?

Rather than looking for non-existent data to justify the need to burn 20% of supply, perhaps we should be asking for justification for need for 2B supply.

That said, I do not expect the burn to create immediate positive price action as the said token is not yet in circulation. Such a drastic step will however send a positive message of assuarance to potential investors which will ultimately lead to positive price action.

I believe the recent appreciation in the price of the token can be directly linked to the Social Escrow tokenomics. There’s basically no sell pressure on PSP right now, so the price move in the direction of Ethereum mostly. With a little push, we should see significant improvement.

3 Likes
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Thanks for your reply

Not the same thing. Those are buy-back and burn, which is very different from burning 20% of the total supply… There are few recent innovations recently that we can look at (Synthetix, Injective…)

That’s 2% max /year, so it will take 10 years to get back the 20%…

I also disagree with calling ParaSwap a mature and profitable protocol. This is factually not true, ParaSwap fees don’t pay for its development (yet) as more established protocols like Aave, Maker, Lido… ParaSwap is still figuring out its best plays in a highly competitive vertical. Removing 20% from its supply without an in-depth professional study and a well-crafted strategy means no more than removing any potential leverage the DAO may have in the future.

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Burning half the DAO treasury to increase the price on the short term seems extremely short sighted.
Think of it this way: would you rather have +20% now, correcting in 6 months or have 200M PSP to distribute as incentives when Paraswap finds a strong market fit it can accelerate on?

Currently ETH yield is pretty high for sePSP2 and pushes many holders to believe it is undervalued. Burning money (even if illiquid today) will not solve this marketing and maybe risk perception problem.

5 Likes
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I appreciate this proposal. It appears to be heading in a win/win direction, which is favorable for establishing a positive feedback loop.

If the proposal to burn 20% of the $PSP supply is accepted and implemented, several significant impacts could materialize in the short and medium term.

  1. Impact on Price:
  • The reduction in supply could potentially exert upward pressure on the $PSP token price. A more limited supply, combined with steady or growing demand, may create a favorable environment for price appreciation.
  1. Attraction of New Investors and Confidence of Current Holders:
  • The prospect of burning a portion of the supply may draw the attention of investors, especially those sensitive to asset scarcity. This measure could bolster the confidence of current holders by demonstrating a commitment to token value appreciation.
  1. Influence on Perception and Adoption:
  • The decision to burn tokens could alter the perception of the protocol, potentially positioning it as a mature project attentive to optimizing its tokenomics. Improved perception can lead to greater notoriety and increased adoption among users and developers.
  1. Financial Benefits for the Foundation:
  • The destruction of 20% of the supply would free up considerable liquidity, providing the Foundation with additional financial resources. These funds could be actively used to support future ParaSwap development, finance strategic initiatives, or even be redistributed to the community in the form of rewards.
  1. Monitoring Community and Market Reaction:
  • It is imperative to closely monitor the reaction of the community and the market to this proposal. The acceptance or rejection of the proposal, as well as the response from holders and market participants, will have implications for the governance and decentralization of the protocol.

In conclusion, the proposal to burn 20% of the $PSP supply presents significant opportunities, but it requires careful monitoring to assess its real impact on valuation, community trust, and ParaSwap’s overall positioning in the DeFi ecosystem.

1 Like
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While I won’t delve into whether burning tokens is beneficial for the ecosystem, I’d like to shift the focus to the implementation aspect of this proposal, which Figue also highlights:

I believe that if this proposal’s purpose is to influence price action and serve as a marketing tool, executing it presently is not advisable. The protocol still has significant potential for appreciation without resorting to a burn.

Instantly removing 20% of the supply is not the most effective way to achieve the intended goal. If we were to implement this, I suggest prolonging the burn period over 2023-2024, with regular updates and communication, similar to how Paraswap announces epoch fee distributions. A structured schedule should be developed to distribute the burn over a 1-1.5 year period, focusing on periods of high market movement.