Proposal: xOrca v2 - Treasury Shares

[ogre44444]

This is an amendment to my earlier xOrca proposal.

The main criticism was that the Orcas being bought back aren’t being used productively. I took this criticism and came up with a small modification that I think dramatically improves the first proposal.

Currently, Orca has a treasury in the form of LP tokens on its various pools. These are accrued from the protocol’s share of trading fees. As I’ve stated previously, Orca holders should see value accrue to them through the protocol’s success, however we must also maintain a treasury.

Here is the original proposal:

• Protocol profits will be used to buy back Orca
• Orca will be stored in a new “xOrca” treasury
• Users will be able to buy xOrca, which represents a share of that treasury
• xOrca is redeemable for the underlying

I had envisioned Orca sitting passively, backing everyone xOrca tokens. This is how x-tokens generally work.

Here are my amendments to it:

• The DAO will be able to vote on adding different assets. For example, xOrca might be backed by Orca initially, but we may add some percentage of Sol over time. The DAO would control this.
• The DAO can vote to use the tokens in the treasury. It can be used for grants, or bug bounties. Or it could be lent out, earning exogenous yield for xOrca holders.
• Lending xOrca would be done by the DAO, but there would have to be some kind of contract address whitelisting by the team or some veto mechanism, to prevent this becoming an attack vector.

FAQ
“But if we have a treasury of diverse assets, why not just LP them in Orca itself like we do with the current treasury?”
LPing our treasury in our own pools absolutely makes sense. Constant product pools are a great way to earn passive income.
However, we are migrating away from constant product pools. Whirlpools require the depositor to take an active view on pricing from day to day or hour to hour. Therefore, I do not feel that our current system of treasury management is feasible in our Whirlpool future. If passive vaults do appear from third parties on our whirlpools, then those could be an alternative to lending as a destination for treasury funds.

“Why create a new treasury?”
Maybe we wouldn’t need to, but it feels like it might be cleaner to have a fresh start as we experiment with this new model. And as this is unproven, let’s not put the existing treasury into our experiment.

[yutaro]

Hey all, thanks for putting this proposal, along with the previous one. It’s great to see community members proactively taking part in shaping the protocol!

Seeing the discussions has given me a lot of food for thought. After much consideration and numerous discussions, I’ve formed the following opinions (which are mine alone):

1. At this current time, the protocol should not implement xORCA
2. Instead, I propose that the fees accumulated from swaps thus far could be used for the following:
   • An insurance fund used to protect tokenholders in the event of a smart contract hack or other costly events of the protocol
   • Reinvestment in growth through hiring

Why not xORCA?

• Value accrual for tokenholders makes sense for a mature product, but does not improve the core product itself. Competition is fierce in the Solana ecosystem, and Orca should focus on adoption of the core product.
• The common argument for xORCA is that it gives a reason for tokenholders to not sell. However there isn’t strong evidence that redistribution of treasury funds creates long term value for the protocol.
• An initiative like this would take a significant amount of resources, even if handled by an external team (the resulting code would still need to be reviewed by the team, as you can imagine). I believe this time is better spent on improving Orca’s product.

Why an insurance fund?

• A barrier to adoption for a new product is smart contract risk. An insurance fund can give early adopters of Whirlpools additional assurance, leading to faster adoption.
• Setting aside money for this and other costly events will give the protocol funds for a rainy day.

Why reinvest in growth through hiring?

• There remains a huge opportunity to capture retail users through new product development, which will ultimately provide the reason for large whales and institutional capital to want to own part of the protocol. We have lots of ideas here, and we’re sure the community does too.
• Orca’s current dev resources are needed to maintain and improve Whirlpools, leaving little left over for new product development given the current 20% ORCA allocation to the team. Using the treasury on hiring additional dev resources will turbocharge product development.
• Hiring is competitive for DeFi. There must be ORCA available for compensation increases for existing team members to avoid losing them.

These are currently my thoughts, but am always open to having my mind changed. Please feel free to continue the conversation!

[ogre44444]

Currently the treasury is in the form of LP tokens in Orca’s constant product pools.

What are the plans for treasury management once we’re 100% whirlpools?

[yutaro]

What are the plans for treasury management once we’re 100% whirlpools?

To provide some more context, the old pools have a 0.05% protocol fee (0.04% for treasury, 0.01% for impact fund). This was a sensible decision at the time, but Orca hasn’t had to tap into the treasury since then. In addition, the program doesn’t allow the protocol fees to be adjusted on the fly.

Whirlpools, on the other hand, allows the protocol fees to be adjusted for each individual pool. As more trading volume is routed through Whirlpools, governance will be able to decide whether or not to add protocol fees.

[ogre44444]

That isn’t quite what I meant.

I mean, the existing treasury is sitting there as LP tokens. This works because our constant product pools are a good passive investment product.

But when all our pools are whirlpools, what happens to Orca’s protocol owned LP tokens? Will they be cashed out into something? Will they be converted into LP tokens on the whirlpools, which the protocol would then have to actively manage?

[kbX9]

I’ve initially created new topic, before seeing this one. My bad.

@yutaro

I’d like to criticize current approach as destructible for the community behind protocol. Your approach assumes that ORCA token will not be linked to protocol itself in foreseeable future, while successful protocols (any of them) used it’s token inside their protocol since day 1. Separating the two - is clear mistake, as crypto startup is the same as any other startup, it has to build community, trust, brand and the product. For now you lost community, you lost interest in the protocol (we don’t even use UX anymore, we use agregators and other applications), and you ended up with the technology. Below is the text which I prepared for separate topic. I’d like to ask you to re-consider your approach and split usage of treasure funds between all those tasks, if bear market continues there will be no tokenholders except treasury itself (every token will be dumped to AMM, which will consist of treasury funds only).

Community

The only way for tokens issued by protocol to have value above 0 is usage of tokens inside protocol. Tokens which are disconnected from the protocol can be used in different forms of tokenomics, hence in the long run it’s still zero.

Below I’d like to criticize current approach for ORCA token by the team, discuss briefly potential pivots and conclude with the only solution visible for the current situation.

1. Usage of ORCA token as governance token

• 100k of tokens for the proposal, so in order to propose something someone had to spend ~$200k, propose it and sell it back (as token will be zero anyways), given that team is non-responsive currently to the community - this doesn’t seem like a good idea, mostly vasted monies

• For the long term holders (I am the one) - we’ve lost hundreds of thousands of us dollars already and didn’t have any understanding and commitment from the team towards commnity, so we actually feeling rekt

• Overall old and non rewarding approach to anyone except the team, i.e. this is actually suicidal as investors, users and community will definitely be dissapointed with no fundamental value idea provided by the team

2. xToken approach (buyback + distribute)

• In case of ORCA it will support token price and reward community and believers tremendously, especially if team finally decide to reward those who hold their token for months through pumps and dumps

• Hence in the end this model support “dump first” approach, as those tokens will be dumped in the end, and we’ve seen it many times, then token gets cheap, then there are some new entrants and then they dump again

• This model increase volatility (hence both way, not down-only volatility), provide some value and can be used by community to cooperate and hodl in this case - this is good

• Practice shows, that this model in case of buybacks > emission, will support the token price, but will result in heavy dumps, when and if trading volumes goes down

3. veToken model

• Actually win-win situation for users and protocol, as there will be a lot of protocols build on top of veModel in

• The negative side is that in order for the model to work - community have to believe in team commitment and have long-term vision for protocol and blockchain it has been build on

• Negative side here is that it still dependent on token emissions without reduction in token amount

• In case of ORCA and in case of SOLANA this approach just won’t work in the short and mid term (I’d say 1-2 years) and this will create community of people who lost it all on ORCA. Just wanted to remind that tokens are worth zero if there is no community behind it.

4. Buy & Burn - hated and oldest one

• Pros: if Buy & Burn tokens amount equal to or bigger than ~ 1/2 of emission - token going to fly, it will re-engage community and create new set of believers in the prospects of protocol and this spiral will create initial traction, necessary for future pivots, going to create hodl culture for the community

• Negs: reduced emission, potentially (but I wouldn’t be worried for now) reduced decentralization (currently this is out of the question, as no one wants to have a thing which goes to 0)

• Small calcs: Let’s say, that protocol generates $25k in profits per day - if all that is spent on buybacks and burn it is going to remove ~100k ORCA tokens per week at current prices, which is approximately 40% of weekly emission, so if community decide to stick to their holdings - this is actually creates buying pressure not vice versa, so dump going to stop at least

Thoughts:

None of those solutions gonna work if applied as is in current market conditions. We need to build (or save in bear market) community, build traction, add fundamental value to ORCA token and link ORCA token to ORCA protocol (not through governance exclusively, as described above). Bear markets are super deadly for even best of protocols.

Protocol is solving several issues with it’s emission: supporting decentralization by increasing number of token holders and incentivize liquidity. But emission only actually leads to reduced decentralization, as people going to dump their tokens to existing AMM pools, so the only whales left - are only those who have all the tokens in AMM pools, and those tokens are worth 0, so in the end there is only 10-20 holders not 100s of them.

Potential Solution

I propose to introduce more complexity into variables, which will be later voted for by token holders on a bi-weekly basis

1. More proactive approach to usage of current treasury funds

• Split treasury funds for protocol owned (i.e. bug-bounty programs) and community owned, I’d propose to split it 50/50

• Reducing emission alone can kill protocol

• Community vote for: buying back up to 75% (number which community is voting) of incentives token with current treasury funds, re-considered on a bi-weekly basis

2. Introduce xToken model and buy-and-burn logic at the same time

• 75% of funds generated as a fees of protocol goes into buying back ORCA token

• Community vote for : buy&burn vs distribute proportions of those tokens (with options for example 25/75, 50/50, 75/25)

3. Bonding of AMM pools (Osmosis model, 14-21-28 days), cannot be applicable to whirlpools though

• This will remove constant daily, hourly selling of incentives, there will be periods when token can actually rise because of buy-backs, which can create hodl culture

4. Active discussion of pros and cons and potential usage of veModel

• Hardest one to implement and not to make a mistake, so I propose to leave that door open

• Can be used currently as continuos accumulation of veTokens in order to vote for bi-weekly changes

• Using veTokens to vote and propose are much better solution than 100k ORCA alone on the wallet

Conclusion

• use part of current treasury funds to incentivize liquidity and reduce emission

• introduce staking (xORCA) and buy-and-burn and let the community to decide for the proportion

• add complexity for top v2 pools (discussable)

• more tokenomics discussion and bigger community involvement

I think that those simple steps can re-create community, save it through the bear market. Can generate traction and new set of memes, which are important for community involvement. And those steps will make ORCA shine when and if bear market is over. Team will benefit as it will definitely attract new series of VC investments, community will benefit, investors will benefit, users will benefit.

If team decides to continue to do nothing - then ORCA token is not connected to protocol. And I would create a proposal, to rename the token, as it has nothing to do with protocol itself.

[dobby]

I’m no tokenomics expert, but I’m sure of one thing - no one is happy with the price movement of the ORCA token. And if I had to guess, core team members who have received compensation in the form of said token are feeling the same way.

Although token holders have not seen value returned to them in the form of price appreciation, I hope we can all agree that the Orca team builds like no other. And I do think that this level of commitment and passion for building will be rewarded over the long run.

In an ideal world, I think we would all like to see the team focus on hiring, building and improving Orca’s product as @yutaro suggested. But the team must also remember that if you lose the community, you lose everything. And if your token is worthless, hiring and retaining talent can become quite challenging. I think that might be the “missing link” between redistribution of treasury funds and long term value for the protocol.

An insurance fund is a great idea but does not give the community any incentive to buy or hold ORCA. From what I can see, I think it would be wise to give more consideration to the xORCA idea because that’s what the community favors.

[Myst]

The token must be connected to the protocol to have value. What’s next here? The topic has been discussed for some time. Does someone need to submit the proposal for a vote?

[Myst]

Can we move to a snapshot proposal?

[kbX9]

Hey @Myst

What do you mean? I guess if team were interested they would propose that to see how community reacts, for now there is no interest as I get it

[Myst]

I believe the interest does exist, just based on this forum. The community is non existent, these few folks on the forum are the community. It seems to be a resounding concern that the token is not deriving any sort of value from Orca’s success. It’s a farming token that will eventually lead to 0, unless initiatives are put in place to prevent that. We need to go ahead and try with proposals before it’s too late.

[kbX9]

The issue was discussed a lot in discord. For now there is no one who is ready to burn $100k to buy no-utility token (to buy 100k tokens) in order to make a proposal unfortunately

[dobby]

@Myst

It seems to be a resounding concern that the token is not deriving any sort of value from Orca’s success. It’s a farming token that will eventually lead to 0, unless initiatives are put in place to prevent that.

I believe that the team is sensitive to this, and as I mentioned above, it’s likely in their best interest to solve this problem too. As I understand it, this governance process is still very early-stage, but would love to see more engagement on this front. All in the spirit of building in public!

I would also be curious to know if @yutaro or anyone else from the core team has considered any alternatives other than reinvestment through hiring and the insurance fund. Has anyone else on the team voiced support for something like an xORCA token? Has there been any internal debate around the topic of value accrual?

[yutaro]

Hey all, I do appreciate everyone giving their thoughts on this. I commented on this in the governance channel on Discord, which I’ll copy below.

…i would add that Whirlpools already has a mechanism to increase the protocol fee rate for every pool. if the community agrees to it, implementing a buyback and burn or fee redistribution mechanism is relatively straightforward (at least in terms of technical implementation). my personal opinion though is that we are still in the early stages of DeFi, especially on Solana. there’s still a lot that can be done to make Orca the dominant liquidity layer on Solana and we should be collectively focusing on that instead.

I want to also add that I am personally bullish on the growth of DeFi on Solana. I eventually expect over $2 billion in daily trading volume on Solana. I also believe that there will only be a handful of big winners and that Solana DeFi is currently at a very early stage of development. My vision has always been for Orca to be one of these DEXes driving over a billion dollars in daily trading volume. I would love to see alignment within the Orca community around this goal.

Therefore, my view is that now is not the right time to implement xORCA. Whirlpools is still in the process of gaining market share, and protocol fees will come at the expense of LP yield. There are also urgent features for Whirlpools that the team is working on in our move toward full decentralization such as support for multiple fee tiers, routing, and the eventual goal of permission-less listings. My view is that these features and other initiatives to directly attract trading flow to Orca should be prioritized.

Finally, I want to emphasize that the protocol fee rate is a lever that can be adjusted. If the community thinks that this lever should eventually be adjusted and that the protocol fees should be tied into a buyback-and-burn or fee redistribution mechanism, it is reasonable for Orca’s governance process to support such a mechanism. However, I don’t think that now is the time to do it.

As always, thanks for voicing your opinion here. Let’s continue the discussion in this thread and in the governance channel!

[danccyf]

I’d like to second your opinion. Security (I.e., knowing my funds are SAFU) is THE most important thing to me, personally. Without a secure environment, there is no value for the Orca holders. On the other hand, if Orca is the most secured AMM on solana with a robust insurance funding to back it up, demand for Orca and the token will increase organically. We’ve all seen those sad stories too many times, so let’s please protect the long term growth and reputation of Orca instead of focusing on short term token price. Therefore, for the benefit of the protocol (and orca tokenholders), insurance fund is essential (in addition to bug bounty). If insurance fund has too much resistance from the broad community, I’d suggest partnering with third party insurance first as an interim solution (e.g., InsurAce) asap.