One of the most enduring and popular, yet controversial topics of FEI has been executing buybacks of TRIBE tokens with PCV proceeds. There has been both adversarial and constructive calls for buybacks ever since genesis, and thus far, none has been officially proposed.
Given that the protocol is at a more stable and secure state now than ever before, such conversations have resurfaced in a more constructive manner, and more in tune with the current realities of the protocol. In pursuant to dozens of conversations with members of the wider community, I have decided to summarize some of the popular arguments and valuable considerations at this forum, and hopefully kick off an intelligent debate regarding buybacks.
The most salient arguments for buybacks thus far can be summarized as the following:
“TRIBE is undervalued relative to the value of PCV. Even if we were to wait until all TRIBE is issued, redeem all FEI, and then dissolve the PCV, each TRIBE would be worth more than 70 cents. It should clearly be worth more than that now given the reward program and the potential for protocol growth. So buying TRIBE is a great investment for the protocol - it’s basically guaranteed arbitrage. At the same time, it can aid price discovery of TRIBE.” - Face Shaver
in the crypto field price action itself is arguably the most important piece of marketing, strong price action itself generates immeasurable press and has proven to attract large amount of users as even complete meme coins like SHIB managed to build some kind of an ecosystem with such an influx. TRIBE-FEI, on the other hand, has been plagued by its price action and user circulated FEI most likely took massive hits due to the price action of TRIBE.
Circulating TRIBE is experiencing high inflation through uni v2 staking rewards, and many have felt that there is an inflation arms race; where one must stake their TRIBEs in Uni v2 or be passively diluted. Therefore there is a strong market consensus of downward price movement, which is toxic for user retention and engagement. Many people have sold their Tribes due to an expectation for lower future prices, and shortly after lost interest in the community and project altogether. Buying back would in part alleviate this sentiment and contribute to user/community retention.
The controversial aspects of buyback:
- It does not generate organic value to the protocol, this has been voiced repeatedly since the very beginning. From a strict shareholder return point of view, buybacks inorganically increase earnings per share rapidly, and are tax preferred when compared to declaring dividends. Of course this is not germane to TRIBE right now. Though with the extremely low valuation of TRIBE currently this aspect is potentially up for debate.
To further explore this delicate topic, I would like to introduce a few nuances that have been explored with public companies buying back their own common stock.
The exact manner with which to execute the buyback needs to be very judicious. It has been academically demonstrated that it is not productive in the long run to execute buybacks at high valuation multiples, and potentially toxic to do so with financed funds. Therefore the best practice for buybacks would be to only do so while the underlying equity is trading at very low valuations, and refrain from doing so while valuations are high. Though the caveat is in historic corporate practice, long term buybacks causes shareholders to form an expectation for ever increasing EPS (which is most easily achieve through buyback) and pressure the management to execute them even during unfavorable conditions.
Therefore, it is very important to extensively scrutinize the timing and funding source of buybacks. Using organic revenue of the protocol to reward shareholders is the preferred practice, whereas dipping into the balance sheet to fund buybacks are less desirable. Combined with the experience of other protocols (BNB, UNI etc), it is best to restrict such buybacks to a percent of total organic revenues and pool up these funds only to execute them when the valuation metrics are depressed. Though given the scale of existing organic revenue (which is mostly coming from Lido), buybacks are probably limited to the order of tens of thousands of dollars, which might not be even worth voting on at this moment. Though this will surely change in the future as FEI builds up more organic earnings and TRIBE price may remain depressed due to inflation.
Another universal practice in US equity markets would be to retire the shares that have been bought back, effectively reducing the circulating supply. Though this needn’t be the case with cryptos, as Uniswap has pioneered buyback programs to extend funding to their grants program. Similarly, it is not conducive to the health of the TRIBE community to reduce the number of individual TRIBE holders and have large amount of tribes sitting dormant in the hands of the PCV. TRIBE should be used and held by users; more diversified the holders, the better.
If TRIBE is to execute buybacks, how to dispose of the said tokens would be of paramount importance. A very valid outlet would be to fund various interest rate/liquidity bootstrapping opportunities (which will cause the buyback TRIBE to be locked for months/years)
The other preferred avenue would be to divert these funds to the grants program; which is already endowed in the white paper, but buyback proceeds may extend the grant program indefinitely and facilitate use-case or awareness expansions well beyond what was otherwise possible.
Regardless, it is extremely undesirable to just merely lock these tokens back into the PCV or DAO treasury or burn them altogether; Since it would just represent a low quality, low liquidity dead money investment for PCV proceeds.
Seeing that this is emerging to be the most popular topic as of late, I hope this thread would spur constructive discussion on buybacks and associated best practices!