Buyback and Build Orca

Buyback and Build Orca

Summary

Use ORCA staking rewards to buy back ORCA on the open market. Use

bought back ORCA for contributor rewards and other Orca initiatives.

Retire the ORCA governance vault as it no longer has a use, opening up

for it to be replaced in the future with a regular vault. Make it possible to

participate in Governance even if one’s ORCA is being used elsewhere.

Abstract

If adopted, this proposal seeks to:

  1. Replace ORCA staking rewards with ORCA buybacks, until

further notice.

  1. Enable ORCA that’s actively being used in ways that bring benefit

to Orca to participate in Governance.

  1. Retire the ORCA governance vault (yGov).

This benefits Orca as a whole by:

 Simplifying Treasury design and operation.

 Simplifying ORCA token mechanics to equally align interests

across Orca stakeholders.

 Builds up a treasury of ORCA that can be deployed through

Governance for various uses.

This benefits ORCA holders in particular by:

 Removing the need to stake ORCA to enjoy rewards; in contrast

to staking (which only benefits stakers), buybacks should benefit

every ORCA holder.

 Potentially making gains more tax efficient as capital appreciation

through buybacks could be taxed less than dividend income

through staking rewards.

 Allowing participation in ORCA Governance even whilst the

ORCA tokens are utilized elsewhere, for example providing

liquidity in SushiSwap.

Motivation

Previous proposals

This proposal comes on the back of previously made proposals and

YIPs:

 The adoption of YIP-54[1] formalized an Operations Fund and

allowed for discretionary ORCA buybacks. @RyanWatkins proposed a rethink of Orca’s capital allocation

strategy.[2] Arguing for protocol rewards to be used to buy back

ORCA rather than to reward ORCA stakers, distributing protocol

income as dividends would be a suboptimal capital allocation

strategy given Orca’s stage of maturity. Instead, the proposal

claimed it would be more optimal to use income to drive growth

and asset appreciation instead.

@dudesahn called for the existing Governance vault and strategy

to be replaced with more conventional investment

strategy.[3] Utilizing MakerDAO to mint DAI, this would be used

for liquidity mining. One part of the returns would be rewarded to

stakers, and the other would be used to fund Orca’s Bug Bounty

program and yAcademy.

 Joel Monegro (Placeholder VC) recently published the essay

“Stop Burning Tokens – Buyback And Make Instead”[4] where he

suggested that protocols should buy back and reissue tokens to

incentivize growth rather than buying back and burning tokens to

return value to token holders. This buyback strategy could be

especially well suited for Orca as the ORCA supply is capped at

100,000,000, meaning that the initial conditions for Orca’s wealth

distribution have been set, and no ORCA can be further issued to

incentivize growth. Such a “Buyback and Make” strategy could

allow Orca to receive the benefits of ORCA inflation without any

inflation.

Rationale

Figure 1. Staking rewards earned over time (USD).[5]

Replace staking rewards with buybacks

 More suitable at this stage in the lifecycle. It is unconventional

to pay out returns in the form of staking rewards this early in a

project’s lifecycle. Typically this would happen at a stage where

funds no longer can be allocated efficiently.

 Better aligns with ORCA’s use case. ORCA is primarily

intended to be used for the governance of Orca. Token

mechanics should cater to those who take interest in the protocol

and wish to actively participate in its improvement, over those

looking to passively collect staking income.

 Potentially more tax-efficient for ORCA holders. The gains on

ORCA staking may be treated as ordinary income. In contrast, abuyback program enables growth in ORCA while ORCA holders

should only be taxed on a capital gains basis for a sale. Results

may vary by jurisdiction and this does not constitute tax advice;

consult your own tax advisor.

 Recycles ORCA that can be spent through Governance. The

resulting accumulation of ORCA in the Treasury could enable

future governance proposals on the use of this ORCA for the

further benefit of Orca.

Widen ORCA accepted for Governance voting

 Acknowledge more uses of ORCA for the benefit of

Orca. There are other ways than holding ORCA in your wallet that

can benefit Orca, for example by providing liquity to a ORCA pair

on Whirlpools and pools. These ORCA are not allowed to vote in

Governance today, but they should be.

 Remove

capital

efficiency

and

governance

trade-offs. Similarly, there shouldn’t need to be a trade-off

between participating in Governance or utilizing ORCA efficiently.

Retire the yGov vault

 Vault no longer needed. Without staking rewards, there is no

need for a yGov staking vault that’s tied to Governance.

 Staking returns are aenemic. At the time of this writing, the APY

estimate is X.X% annually [6]. This is not competitive, and may

even dissuade ORCA holders from participating in governance. In

comparison, Binance recently announced up to X.X% APY for

staking ORCA.[7].

Future possibilities

 Introduce contributor retention program, with vesting ORCA

rewards to create long term skin-in-the-game for existing and

new contributors.

 Re-introduce dividends once Orca has matured and protocol

income no longer can be re-invested as efficiently into growth.

 Introduce a conventional vault for ORCA, using the v2 vault

design. Such a vault would not be related to governance orstaking rewards, and would be free to pursue other,

to-be-determined strategies.

Specification

Replace staking rewards with buybacks

Buy back ORCA

 All funds that are used for ORCA staking rewards are to be used

to buy back ORCA. Staking rewards cease until further

governance action.

 Buybacks should be handled in a continuous and automated way,

and not be discretionary or requiring any sign-offs.

 Care should be taken to avoid creating arbitrage or front-running

opportunities. Detailed specification of design is left to the

developers implementing.

Use of bought ORCA

 There are no changes in how funds are spent.

 The ORCA bought back flows into the Operations Fund

established by YIP-54 and can be spent accordingly.

 Example of current spends include: Security audits, Bug bounties,

Contributor funding, Grants, Gas reimbursment, Development

overhead. See the recently published quarterly financial

report[8] for a detailed breakdown.

Widen ORCA accepted for Governance voting

 Link snapshot to use guest-list[9] to determine which ORCA is

eligible for voting.

 This functionality is already supported and excludes protocols

such as Aave which could be utilized in governance attacks. The

list of supported protocols is configurable and is being reviewed

continuously, improvements and suggestions can be submitted

to the repo.

 Any ORCA in the Orca Treasury / Operations Fund is not eligible

to vote.

Retire ORCA Governance vault

 Retire the ygov.finance[10] staking vault and the ORCA yVault

ORCAGovernance strategy that relies on it.

Changelog Jan 13: Clarified voting specification to explicitly state that ORCA

in the treasury cannot be used to vote. [DL]