FIP - 10 Purchase FXS with Unspent Profits

Author: Hameed

Edited - Final proposal below:


Authorize the Frax team to use Pre-1559 protocol profits to purchase FXS on the open market. The ultimate usage of the purchased FXS can be determined later.

Background & Motivation:

Frax currently has substantial unspent profits that were accumulated before FXS-1559 was implemented; estimated to be in excess of $1.17m. This proposal would authorize the team to begin purchasing FXS, at their discretion, with a goal of maximizing the amount of FXS purchased. Without this proposal, the funds will continue to sit in the protocol. The intent has always been for protocol profits to be used to purchase FXS (whether for buyback and burn or distribution). This proposal authorizes the team to begin purchases. The ultimate use of the FXS - whether it goes into the DAO treasury, is burned or shared with veFXS - can be determined by a subsequent proposal. The intent is to begin buybacks to take advantage of the current market price. The ultimate size of the buyback could be 3-5% of the current circulating supply, which would expand the treasury by over 12%.

Here is a link to the original forum thread: FIP - 10 Purchase FXS with Unspent Profits

For: Authorize the Frax Team to use unspent profits to purchase FXS on the open market

Against: Do nothing

#### Summary:
Use unspent Frax protocol profits to purchase FXS on the open market. Burn 1/3rd of the purchased FXS and use 2/3rds as a 45-60 day incentive for veFXS to increase participation. This is a one time purchase for pre-1559 protocol profits.

#### Background & Motivation::

Frax current has substantial unspent profits that were accumulated before FXS-1559 was implemented. I’m not certain of the final number but the front end shows $1.17m of unspent profit currently idle. Given that FXS is near a recent low price, this appears to be an optimal time to use the unspent profit to purchase FXS on the open market. At $2.25 per FXS, 520,000 FXS could be purchased on the market, which is almost 3.5% of the circulating supply of FXS (there will obviously be slippage so this is just for illustrative purposes).

We could then burn 1/3rd of the FXS proceeds (approximately 170k FXS in the example above) and use the other 2/3rds (approximately 343k FXS) as a near term incentive for veFXS participation.

The burn would return the FXS total supply close to 100,000,000. Long term, I believe that a deflationary FXS is important for the FXS value proposition and the overall health of the protocol.

veFXS participation is currently at approximately 15% of the circulating supply. Here is a rough analysis of the current circulating supply from earlier today:

Total FXS circulating: 14.75M
FXS-FRAX pool: -4.5M
Binance: -3M
veFXS: -2.3M
L2 Bridges: -1.6M

All remaining FXS: 3.35M - this probably includes other pools and locked FXS

So approximately 6.35M FXS (Binance + all remaining) could potentially be attracted to veFXS. Throughout the industry, staking participation rates of approximately 50% are achieved. I think this is a bit high for veFXS given the FXS-FRAX pool participation but we can still do better than 15%. By using 2/3rds of the FXS proceeds from this proposal, we can further incentivize veFXS for approximately 60 days to entice new participants. I expect that once people stake in veFXS, they are likely to stay in the pool given the relative high rate of return (currently near 38% APR for unlocked FXS).

A default approach for this proposal would have been to mimic the 50/50 veFXS fee split that currently exists. I opted to propose a slightly higher veFXS reward to further incentivize veFXS participation.

Having idle profits sit in the protocol does very little for the protocol and FXS holders. If the funds are going to be used to buy FXS, now appears to be an advantageous time to do so.

#### Abstract:

I propose that we use the unspent protocol profits that predate FXS-1559 to purchase FXS on the open market. 1/3rd of the purchase is then burned and 2/3rds is distributed to vefxs over a 45-60 day period depending on the total amount of the proceeds.

For: Use unspent profits to purchase FXS on the open market and distribute according to this proposal.

Against: Do nothing.

I’d love to hear feedback and input from others, please let me know what you think.


I’ve had some more time to reflect on this and discuss with a few more people. I think it’s in our collective best interest at a minimum to execute a buyback. We have the opportunity to buy around 3.5% of the circulating supply of FXS at the moment. This would expand the treasury by over 10%.

If you feel strongly about this one way or the other, now is the time to weigh in.

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i dont really agree.

we voted to split the profits 50% / 50% so i dont see why we would now split it 66% / 33%.

i am expecting a vote for the new ETH pool to be put back up again once the voting bug is fixed and that was being funded by some of the unspent profits. so that vote should take place first.

the unspent profits are not idle, they are still earning interest and its compounding which results in bigger profits if its left there for a longer time frame.

i support the idea of using 50% of the profits to reward veFXS holders and that has been happening.

i also support the idea of letting the profits build up before taking them and this results in everyone making more money from the funds held in the protocol.

i would support a “buy back and hold” with a 3 year lock up and no rewards , so the protocol has some FXS to pay out as rewards in 3 years time as the main funds start to run out.

i would also support the idea of building up the profits and the team being able to use it in the event that the peg is lost.

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Thanks @sparkes25 , I appreciate the response.

I have a different perspective on some aspects but I do think we have some common ground. I’d like to simplify this proposal to authorize the team to use the pre-FXS-1559 profit to buyback FXS at an opportune time (at their discretion). Executing this purchase should increase the treasury substantially and provide good value to the protocol. We can determine later what we want to do with the proceeds.

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In my eyes, the pile of unspent profits that have been built up should be spent as originally advertised: on burning FXS.

The alloocation of the running AMO profits, which are currently being used 50/50, can be discussed in another FIP.

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