EIP-21: Compounding Coupon Interest During Contraction (Reverse DAO)

I think the community might be approaching the coupon incentive problem in the wrong way.

Preserving coupon value past 30 days, allowing bidding for coupons, varying premiums based on price and length of debt cycle don’t solve the problem in a truly scalable and sustainable way. Whatever coupon pricing or premium mechanics we implement will likely be wrong - either too high, or too low. More importantly, the “right” premium probably varies quit a bit over time, so a one-size fits all solution won’t work.

Creating complexity is also confusing to community participants. We want broad participation in the ecosystem, which means simplicity.

Furthermore, the coupon gains are one-time vs. compounding, meaning that returns are highly variable and don’t take into account lost opportunity cost and loss of patience which is prevalent.

My suggestion is super simple to understand and creates massive incentive for burning of ESD during the first epochs of a contraction cycle: A Reverse DAO for Coupons that compounds each epoch when the TWAP is below 1.00 .

How it works:
You burn your ESD -> Get ESDC -> Bond your ESDC to the Contraction DAO -> Earn 1-3% every 8 hours in additional ESDC which can be redeemed during the next expansion phase.

This rewards early burning, and compensates community participants during long contraction cycles. Right now coupon premiums are 56% at max debt, whether the contraction is 7 days, 14 days or a month or longer. With compounding on ESDc coupons, there’s a constant stream of rewards/interest accruing, thus keeping people invested in the long-term success of the Empty Set Dollar Ecosystem.

The current mechanics don’t work for impatient participants, since we can go for weeks without anything happening. Seeing a coupon number tick up with each epoch will keep people engaged and create a natural push-pull dynamic between the expansion and contraction DAOs.

What has to be determined:

  • The interest calculation on ESDc
  • The DAO lock-ups for coupons (same as for the ESD DAO or longer/shorter?)
  • Should coupon interest be capped at max debt, I assume so but open for further discussion.
  • Coupon expiry

Simplifying usage
This proposal makes participating in ESD super simple. Bond to one DAO or the other depending on contraction/expansion. Earn ESD or ESDc depending on the DAO, but you can only sell/redeem your coupons during expansion.

It stops being a whale game, where we count on LPs removing liquidity and people coming in to pump up the price on low volume in order for participants to redeem their coupons, since there will be a lot more and a lot faster contraction due to the compounding incentives.

I can also forsee bots that automatically move funds between the two DAOs, that would make this work auto-magically for people who don’t want to actively monitor whether we are in expansion or contraction.

Next steps / Discussion
I welcome feedback/comments on this proposal. What are the unintended consequences? What am I missing? Are there other key decisions that have to be made to implement this?

4 Likes

This definitely compromises the “single-token” selling point, though since we already have ESDS and an unbounded number of distinct coupon flavors, maybe “single-token” was a handwave to begin with.

People seem to really like fantabulous APYs in tokens of dubious underlying value, so my intuition is that people will definitely want to farm ESDc, and the “pull” from that would help us mop up the excess ESD.

Are the ESDc supposed to be redeemable for 1 ESD at some point? If/when this does push ESD into expansion, do ESDc redeemers get the new ESD before ESD DAO bonders?

On cycle 2 or 3, if not all the ESDc was successfully redeemed for ESD last time around, people might want to value 1 ESDc below 1 ESD, given the uncertainty and the wait involved in converting back. When people burn ESD for ESDc, are they going to get the real market price? Or will the system always give you 1 ESDc for 1 ESD? If people can just buy ESDc rather than minting it, they would do that and not sink any ESD.

Is the “Contraction DAO” going to vote on anything?

1 Like

Are the ESDc supposed to be redeemable for 1 ESD at some point?
ESDc would be redeemable for ESD when TWAP is above 1.00, subject to whatever DAO lock-ups might be applicable.

If/when this does push ESD into expansion, do ESDc redeemers get the new ESD before ESD DAO bonders?
Good question… I suggest ESDC redeemers get the new ESD first

When people burn ESD for ESDc, are they going to get the real market price? Or will the system always give you 1 ESDc for 1 ESD?
It would have to be market price.

Is the “Contraction DAO” going to vote on anything?
Yes, both DAOs should have equal voting rights.

I am skeptical of the complexity involved here. Furthermore, having both expansion and contraction create compounding ESD rewards has me believing that we may be creating a bigger long term problem for ourselves. This may permanently affect our ability to maintain a peg.

1 Like

nice view, maybe.

But I think it’s a good idea to promote people to buy more ESDc.