This is to finalize the details of Optimizing FIP-77’s TWAMM Parameters for it to be push through for a vote.
Proposal Summary
This FIP proposes for the protocol to initiate
- a $1mn TWAMM over 30 days when price is below $5 and stopped (even when the TWAMM is midway) when price is above $5 and
- a $1mn TWAMM over 30 days when price is below $4 and stopped (even when the TWAMM is midway) when price is above $4.
If and when the $2mn budgeted for this proposal is exhausted, we will re-evaluate its effectiveness to make a decision on whether to recalibrate (increase and decrease) a new TWAMM.
The objective of this proposal is to optimize FIP-77 for better efficiency in achieving POL value accretion. Details below.
Introduction
This is Ouroboros Capital. We are a liquid crypto fund that prides ourselves as vocal hands-on investors of our bags (FXS included).
The protocol has recently resumed its TWAMM FXS Buyback program again, kicking it off with a $2mn buyback over 6 months. I’m writing this proposal for us to consider parameters to which we can optimize for to design a much better buyback program.
Objective of Buyback
To start, we have to first understand what the buybacks are attempting to achieve. To put it simply, the buyback program’s objective is for the protocol to accumulate $FXS at prices which it deems $FXS to be undervalued. This delivers a spectrum of benefits including but not limited to 1) POL value accretion, 2) signaling a valuation floor to the market which consequently helps the protocol with more economic use of $FXS as incentives, 3) warehousing $FXS at cheap prices to be used in the future as it grows it value, etc.
Optimize for Acquiring $FXS at Low Prices
Now that we’ve established that the objective of the buybacks are to buy $FXS cheap and signal a psychological price floor to market, I would like to propose parameters which would help optimize for that. I am proposing for a more aggressive TWAMM that increases in magnitude at lower levels but also stop buying $FXS at a higher levels.
What is The Right Size and Price?
Historically the TWAMM buyback have been the most effective at establishing a price floor between the $4-5 level. A level that we should also agree is only more of a value floor as time passes given the growth of the protocol Frax v1 to Frax v2 AMO, Fraxlend, FraxFerry, FrxETH, etc. As such I recommend the program to target these price levels given the historical context.
However, it is evident that these price levels are not visited for long. Since the introduction of the TWAMM buyback program last year, the price range of $4-5 has only been visited for 74 days. A mere ~20% of the days in the year. We will not be able to efficiently capture the value that presents itself if the TWAMM is spread across a period such as 6 months. Instead, I propose a $1mn TWAMM that spans over 1-month (30 days), buying only when price is below $5 and an additional $1mn 1-month TWAMM on top of it that starts buying only when price is below $4. We are proposing a 30-day period given it covers the lengths of time that has previously dipped the $5 level. See image and appendix below. The upper price limits circumvents the protocol chasing FXS higher and stops once the original objective of establishing a price floor has been achieved.
This more aggressive buyback would 1) create a stronger signaling to the market and 2) allow the protocol to more promptly capture these rare value windows.
Digesting Existing Sell Flow
It is worth highlighting too that the Uniswap and FraxSwap pools have seen an increase in ~74K $FXS since 5 days ago when price dipped below $5. Assuming $5 FXS, this is ~$370K of FXS sold in 5 days (~$2.2mn in 30 days) which the above proposed $2mn TWAMM should be able digest.
I welcome any suggestions and hope as a community we can work towards designing a better buyback program.
Appendix
Prior Dates since FIP-77 when $FXS is below $5:
- 7-9 Jun '22 (2 days)
- 13-20 Jun '22 (7 days)
- 28 Jun - 5 Jul '22 (7 days)
- 12-14 Jul '22 (2 days)
- 20 Sep - 8 Oct '22 (18 days)
- 12 Nov - 5 Dec '22 (23 days)
- 22 Dec '22 - 6 Jan '23 (15 days)