Discussion: Dynamic Community Pool Tax & Reserve Management
This work was funded by the AADAO. Author: Noam Cohen / Binary Builders Dynamic Community Pool Tax & Reserve Management Blockchain protocols are micronations, each with their own citizens, culture and goals. With the Cosmos Hub we are currently participating in one of the most interesting decentralized governance experiments in Web3. Every ATOM holder is part of this journey where we’re figuring out how to steer the ship together. Nations and corporations alike practice rational financial management; when times are good we (hopefully) put money aside, and when times are bad, we ideally make sure we use those reserves to cover our costs. With this post, I’d like to start a discussion on how, by partially transitioning to a USD-based expense model, the Cosmos Hub can practice automated rational financial management to increase the available resources to cover its operational expenses in the long term . The Problem While kickstarted at Tendermint and maintained by the ICF, the Hub is transitioning to an independent, ATOM-led community that’s now able to fund it’s own future path. With the AADAO in full motion, research & development being funded directly through the…
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Good work. If the selling is continuous, it can’t be front run.
This is great work, and I’m excited to see what the community thinks about the idea.
Sounds reasonable !
Appreciated the well-written post + charts and tools to experiment various scenarios
My only request atm would be to make sure the selling volume goes through the AEZ (a DEX on Neutron most likely) keep the volume and fees in house.
In general think this is the wrong approach and will hurt atom
Just a couple questions for now:
How much do you think needs to be liquidated in the treasury?
What are the real world tax implications of such proposal?
I don’t think any AEZ dex could withstand the kind of selling the hub does to fund herself.
This is a great idea, and a really well-written analysis!
Noam:Where and how to convert
This is the tricky part. There are several approaches possible and they all have their pro’s and cons:
If committing to a “sell off ATOM as its price rises, buy ATOM off the market when it falls” strategy is acceptable, in the short-term can you just deploy a ATOM-USDC PCL pool on Astroport, start LPing, then hold ownership of the LP shares in the Community Pool? The LP shares would continuously stay at 50% ATOM and 50% stablecoin in value. There wouldn’t be any brakes on how fast this strategy buys and sells, but as a stopgap it could technically be done right now, without writing any new code.
Are other, non-standard tokens with stable value worth considering, like buying and holding SILK instead of a token strictly pegged to USD? Or to the degree that bridge risks are acceptable, there are tokens bridged from Ethereum like sDAI and wUSDM.
It’s an interesting topic that we already started discussing in Juno a few months ago (you can search on Discord in our Cross-Department channels). I think you first need to show the community all the invoices and expenses in fiat/stablecoins to justify the amount you are selling. You don’t want to become a managed fund, but only cover planned/budgeted/recurring expenses quoted in stablecoins, when it doesn’t make sense to pay them in ATOM (and you should keep that at a minimum, while sponsoring adoption of ATOM to merchants so that suppliers can slowly accept & spend more of them directly). It’s much easier & efficient to leave fiat taxation and regulatory compliance to the single recipients (based on their residence country) than to the blockchain as a whole (who would be responsible otherwise?!). I like the concept of price stability, but that’s a different topic that should consider prices against everything else, not just 1 other denomination. If instead you target the specific denominations that you accept in invoices (ie. on-chain contracts, that the community can verify), you really cover the need you alluded to and it starts to make sense to me. This way you are…
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I agree. Being a liquidity provider in a ATOM-USDC pool accomplishes this task automatically. Whoever buys ATOM with USDC would be stuffing the Treasury with USDC. So maybe pursue an LP strategy instead?
On the other hand, if we pursue a selling on DEX strategy, the question then becomes why don’t we also augment the selling with selling on Binance which is by far the most liquid ATOM pool. While we need to promote selling on DEX, the haircuts (ie losses for Treasury) are pretty large there so we need to cut the haircuts by doing some selling on Binance (by far the most liquid CEX). I understand this is creating an API hooking into Binance which is not generic, but generally speaking we can’t be blind to liquidity realities out there. If the large pools of liquidity are on Binance, we have to incorporate that into our trading strategy.
I don’t think we should interface directly with DEXes and sell on the open market like that, it would affect the price too much. It’s also really tricky to plug into dexes directly because they can have API-breaking changes, liquidity can move around, it can be front run, and generally they require a bit too much coordination on the protocol level to get right.
What I’d rather see happening is some kind of auction based system. But I also really like the idea @dynstatic proposes where we just LP the tokens. The main issue with that is that you still need to figure out how to get the other half of the LP on the USDC side.
Perhaps there’s some mixture of auction (to get 50% of the stablecoin) and LP-ing that would be the most effective. The great thing about LP-ing the tokens is that you could increase ATOM’s liquidity quite a bit, which should further reduce price swings.
Great to hear about the Juno perspective, thanks for sharing!
I’m curious about the tax situation. Because we’re already deploying PoL, earning rewards, we swapped ATOM to stATOM. All of these are taxable events. How is stablecoin conversion any different?
Once again, you’ve delivered high-quality content and provided a thorough analysis of the situation. Here at Govmos, we’re fortunate to have a team member with over 13 years of experience in finance, trading, and market making. Consequently, this topic falls squarely within our area of expertise. To be more precise, this particular action falls under the category of volatility arbitrage, a topic far more complex than simply buying below average and selling above. Despite the intricacies of financial arbitrage, you’ve managed to pave the way for a fruitful community debate on the matter. As you correctly identified, within the realm of professional arbitrage, discretionary arbitrage and public strategies represent two distinct methodologies which need to be addressed separately. Discretionary Arbitrage : • Description : Discretionary arbitrage involves making trading decisions based on the discretion and judgment of the trader or team. This method relies heavily on qualitative analysis, intuition, and market expertise. • Approach : Traders employing discretionary arbitrage typically delve into fundamental and technical analysis, alongside considerations of macroeconomic…
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Noam:The main issue with that is that you still need to figure out how to get the other half of the LP on the USDC side.
Yeah, to avoid slippage, since we can’t currently use the auction smart contract that doesn’t (yet) exist today, I guess you can indirectly rely on arbitrageurs by placing a few big limit orders on an on-chain orderbook like Kujira’s FIN, or else just directly arrange some OTC deal off-chain as a one-time thing.
Will the future Neutron smart contract for the auction system hook into a price oracle like Pyth to make decisions about what price range to offer? It’s already deployed on Neutron mainnet since July, Mars Protocol uses it.
agree. let’s make the cosmos reserve sustainable.
Thanks for all the feedback everyone. Going to comment in bulk here: whitemarlin: How much do you think needs to be liquidated in the treasury? This is a good question. There are 4 main items to cover: • Grants programs like the AADAO • Core teams like Informal, Hypha & others that might show up • POL deployments, potentially through the ATOM Wars (or AAT). I believe this to likely be the bulk usage. • Other unexpected fund deployments (e.g. maybe the Hub wants to invest in a consumer chain or something) How much do we need? That really depends. Like you, I am keen on keeping development costs low. I have no interest in a war chest of hundreds of millions meant for developers (that seems like a waste of money). However, I do think we need enough to cover several years of development, grants & marketing and business development costs. I think it would be wise if we could come to some consensus on what the yearly burn rate for the ATOM project should be (under $10m?), and aim to have reserves dedicated to that for the next 5 to 10 years. POL deployment and strategic investments that boost the AEZ seem like the primary use of this fund. That could…
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Noam:There’s a lot to unpack in your post. I’d love to hop on a call with the author if possible. I think there’s a lot of merit to what you’re saying and I would love to take a closer look at that feedback. Please send me a DM on Twitter if you’re up for it
Feel free to reach out via email at [email protected]. We’ll find a way to set up a meeting and discuss the details.
I have been an advocate of the community pool reserve management since 2019. Would be nice to look at examples of treasury management on ETH and start asap on ATOM.
Of course, any solutions, must, imo, give the final decision powers to the chain