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:
- Replace ORCA staking rewards with ORCA buybacks, until
further notice.
- Enable ORCA that’s actively being used in ways that bring benefit
to Orca to participate in Governance.
- 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]