Discussion and analysis of buying back TRIBE tokens with PCV funds

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!

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buyback is the core mechanism of FEI DAO to establish the FEI holder and FEI governor (tribe) economic model based on PCV, and is an innovation of stable currency.

This is a sound analysis. I would only add that:

  1. If the protocol were to implement ‘buybacks’, it should do so at a regular basis/DCA instead because there is currently no method to determine the P/E or valuation of Fei Protocol. This would probably be most capital efficient.
  2. Agreed on only using a low percentage (say 1-3% of revenue) to initiate such buybacks;
  3. I strongly suggest ‘Buyback and Make’ - as I mentioned before, buy back any TRIBE to be held in the Treasury, and recycling it for future liquidity mining initiatives, grants/community initiatives and other protocol-building activities instead of burning it permanently.

From previous discussion, there is currently a reluctance of implementing such a program at this point in time, but I think will probably be more realistic as a point on the roadmap much later down the road, and also when we have more understanding of what Fei Protocol’s value and revenue sources/quantum there is.

EDIT:

I have further thoughts about this and would like to suggest the following, as this transcends the issue of buybacks at face value but rather improving the economic linkage between FEI and TRIBE:

  1. wrapping TRIBE into an xTRIBE-type token in the same style as veCRV where it will be locked away for a long period to provide voting power, and at the same time capture rewards from PCV investment proceeds and other fees (eg Rari)
  2. to arrive at the point above we need a more aggressive investment approach with the PCV;
  3. we can also try to implement some market transactions to also require TRIBE in scenarios where it is favorable to the protocol, eg when the bonding curve to purchase/mint FEI goes above a certain predefined amount.

I am against a token buy back program. I would rather propose a dividend or revenue share to token holders. Share buy backs work with public companies because reducing the number of outstanding shares and centralizing control in less people is not an issue. However, in a DAO that is an outcome that is not ideal.

I think buyback is a great idea given the severe undervaluation of TRIBE. I am actually working on a proposal that I hope to share soon. My thoughts regarding some of the points raised above:

  1. In general, spending too much on buybacks would not be desirable. However, TRIBE is so obviously undervalued at the moment that I think we should implement an aggressive buyback program before the market corrects itself. FEI Protocol is like a company whose market cap is smaller than the market value of the building it owns. Buying TRIBE is guaranteed to be a profitable investment for the PCV and for all TRIBE holders.

  2. If we set up a bonding curve that allows people to buy FEI with TRIBE at a conservative discount rate (say 30-50bps), most of the buyback will happen through arbitrage that goes through the FEI-TRIBE pool. That means we can minimize the negative impact on decentralization, since only 1/3 of the pool is held by retail holders (and this percentage will most likely decrease once TribalChief is live). Also, as long as buybacks happen through FEI-TRIBE, all LP holders will be equally selling their TRIBE so that the number of TRIBE holders will not decrease.
    Also, we can always use the bought-back TRIBE to supplement incentive programs and further decentralize ownership (more on this below).

  3. I second that we should make the best use of TRIBE that we buy back. However, TRIBE is automatically burnt as soon as it is bought back because TRIBE held by the protocol never means anything. The amount of TRIBE held in the DAO Treasury has no meaning, just as FEI held by the PCV means nothing. So I think it is okay to deposit the bought back TRIBE into the Treasury, and make the best use of Treasury as we are already trying to do. Increasing incentives for FEI usage or funding community grants both seem to be good ideas.

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Would love to fold this discussion into Fei V2 Design Discussion. Phase 1 took a lot of inspiration from the ideas we have discussed here and in discord

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Philosophically I agree completely, however there is a clear difference between TRIBE in the treasury and TRIBE minting in terms of the implicit contract on token supply over time

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100% agree that it functions as an implicit contract.

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Great sober review of the buyback discussion cozeno. I am for a “buyback and make” option with the TRIBE in the treasury put to good productive use - like financial dashboards, quarterly reports, integration tools, whatever the community comes up with and yes, even marketing - but the good kind - tried, tested, and embraced by the defi community (used by Yearn, Uniswap, Compound, AAVE, AP-Finance, Zapper, Zerion, 1Inch, etc) We cannot remain purist about this. The arguments for a sensible and informed buyback is strong. As Face Shaver notes, the TRIBE price is at a discount to its intrinsic value right now - even more so with every ETH or DPI pump. Investor sentiment and community participation is at a low. A TRIBE buyback program with protocol revenue will not make things worse. @joey let’s not punt this decision as we have in the past.

I think it is most appropriate to use 20% - 30% to maintain the price of tribe.

Because tribe does not have a dealer, retail investors alone cannot maintain its price, and if the price of tribe does not rise, how can tribe investors have confidence. The second is to use such a large share to make money on the price difference. The team will make a lot of money because of this, and it will drive the price of tribe up, while the number of users who buy tribe will increase. The benefits are predictable.

we need not only buyback, but dividends from all fei fees and transacitions to tribe holders.