ShapeShift

This proposal authorizes the ShapeShift DAO to spend up $500,000 worth of stablecoins from its treasury in order to purchase a corresponding amount of FOX on the open market, create a corresponding amount of LP tokens for the FOX Uniswap V2 pool, or some combination thereof. This is a one-time authorization that gives the TMDC the responsibility to determine whether or not to make these purchases, based on specific triggers discussed below.

Abstract

In late-November 2021, ShapeShift DAO entered into an agreement with Fei Protocol whereby it supplied FOX in return for improved liquidity on decentralized exchanges. This program, which also provided the DAO with TRIBE rewards, was part of Tribe’s “Liquidity-as-a-service” program.

Following a hack of Rari Fuse and the onset of perceived regulatory pressures, FEI Labs has proposed winding down the entire FEI protocol. As part of these plans, the TRIBE community is deciding what to do with the various tokens in its treasury–of which the aforementioned 15.3M FOX is included.

The TRIBE community is currently deliberating on options for what to do with this FOX. It’s possible that the tokens may be distributed on a pro-rata basis to TRIBE holders. Alternatively, the protocol may simply decide to dump all its FOX, or sell them to an OTC buyer at a discount (who in turn may decide to dump them in order to turn a rapid profit). All three scenarios (particularly the two where FOX is quickly dumped on the market) could lead to a rapid diminishment of FOX liquidity on Uniswap.

Motivation & Benefits

The primary reason for this proposal is to defend the liquidity of FOX on Uniswap V2. Currently there is slightly over 2000 ETH in the FOX/ETH pool. A substantial decline in the available ETH, triggered by a sizable and rapid sale of the FOX currently held by TRIBE, could create a thin market and negatively impact the DAO’s positioning in the broader DeFi space. For instance, high amounts of slippage would make it difficult and capital-inefficient to engage in any exchagne of FOX. This, in turn, could negatively impact both the DAO’s operations and the ability of contributors to convert their FOX into other assets. Thus, given ShapeShift’s various positioning in the DeFi ecosystem, it’s arguably important to ensure that sustainable liquidity is maintained on Uniswap.

Specification

If this proposal passes, the following steps will be taken:

The TMDC would be authorized to either a.) purchase, on behalf of the DAO, up to $500,000 worth of FOX on Uniswap V2, b.) deposit up to $500,000 worth of crypto with the corresponding amount of FOX to a liquidity pool on Uniswap (TMDC would have optionality to decide whether to pair with ETH or USDC as well as whether to add liquidity to Uniswap V2 or V3), or c.) some combination of the above, amounting to up to $500,000.

This action would also be subject to a conditional trigger:

The amount of ETH in the FOX/ETH Uniswap V2 pool has declined by at least 20% over a rolling 48-hour period, following a sale or distribution of the FOX tokens held in the TRIBE LaaS vault.

This trigger will help avoid a scenario where the DAO is purchasing FOX tokens due to a broader pullback in crypto prices. The objective of this potential is not to prevent FOX from dropping in price, but rather to bolster its Uniswap liquidity in the event the TRIBE-owned FOX is quickly dumped on the market.

Note that this is a one-time authorization specifically crafted to address the uncertainty around the TRIBE-held FOX. It will be rendered moot if/when the situation with the TRIBE-held FOX is resolved. Also note that this purchase (should it be made) would not count towards the TMDC’s allocation of usable funds. Although the TMDC would determine if and when to make this purchase (should the proposal pass and the conditional trigger be met), it would be doing so on behalf of the DAO and not as part of its regular and ongoing efforts toward managing and diversifying the DAO’s treasury.

The purchased FOX would be deposited and held in the DAO’s Gnosis Safe treasury.

Drawbacks

The decision to spend $500,000 from our stablecoin reserves cannot be taken lightly. Given current projections, this would take a month off of our runway, meaning that we’d run out of stables in May 2023, rather than June 2023.

Additionally, it could be argued that even though it may seem like a good deal now, purchasing FOX in this current market environment is not a smart idea–even considering the liquidity concerns. Should the bear market persist, FOX could drop far below current levels. The DAO already has ample FOX in its treasury, and exchanging stablecoins for a depreciating asset (assuming more market bearishness) is arguably not a smart decision given the DAO’s limited runway.

It could also be argued that short-term disruptions in liquidity may even out over time due to natural market forces, making this proposed purchase of FOX redundant and/or unnecessary.

Lastly, the DAO would arguably be working against its existing program of accumulating stablecoins via Olympus bonds. Buying FOX at a certain price could lead to a “losing trade” scenario in the event it then resumes selling it at a lower price. To quote from a response to this proposal’s ideation post:

“In a way we are now actually paying that “fee” twice. We already paid it once to acquire these stables from previous bond sales, and now we are going to use these stables to buy fox, only to then sell bond at a discount again. This is very capital inefficient and I don’t think it makes sense for the DAO at this point.”

One way to deal with this perceived capital inefficiency would be to limit new bond sales in order to offset the amount purchased. This is a potential strategy the TMDC could consider. However, this proposal does not contain the requirement that the DAO limit itself to that specific strategy.

Vote

For: Authorize the TMDC to a.) purchase, on behalf of the DAO, up to $500,000 worth of FOX on Uniswap V2, b.) deposit up to $500,000 worth of crypto with the corresponding amount of FOX to a liquidity pool on Uniswap (TMDC would have optionality to decide whether to pair with ETH or USDC as well as whether to add liquidity to Uniswap V2 or V3), or c.) some combination of the above, amounting to up to $500,000. This authorization will only apply if the conditional trigger described above has been met.

Against: No FOX purchase or LP deposits are authorized.