[VIP-35] Extend Revenue Utility

VaultCraft Improvement Proposals VaultCraft Improvement Proposals [VIP]
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Summary

This proposal aims to amend [VIP-34] Revenue to be used for VCX buybacks & burns by expanding revenue utility to include liquidity provisioning when needed to prevent significant losses for VCX holders.

Additionally, it proposes that, in the near future, revenue should be used to fund operations. Allocating $75K in WETH per month will be sufficient for operations. With the current runway at two years, using revenue to fund operations could significantly extend VaultCraft’s runway.

Objective: To extend revenue utility beyond buybacks to include liquidity provisioning in times of need, and to fund future operations. A future proposal detailing operational costs and required funding will be submitted.

Scope: VaultCraftDAO can utilize all protocol revenue for VCX token buybacks & burns, liquidity provisioning, and funding future operations.

Limitation: Annual expenditure on buybacks & burns is not to exceed 45,000 ETH.

Value Proposition

Strengthening Token Value: Reducing the number of tokens in circulation to induce scarcity while also increasing liquidity for VCX to prevent significant downside pressure. “It’s important for the community to know that using WETH revenue for single-sided liquidity provisioning doesn’t just reduce slippage — it also raises the price of VCX because of how the pool works. Dual benefits.” - Joey N

Stakeholder Confidence: Demonstrating commitment to the token’s longevity and stability, thereby attracting and retaining investors.

Financial Prudence: Setting a cap of 45,000 ETH per year ensures financial responsibility and sustainable growth.

Implementation Plan

  1. Revenue Allocation: Allow VaultCraft DAO to utilize protocol revenue for VCX token buybacks & burns, as well as liquidity provisioning.
  2. Monitoring Mechanism: Implement a transparent system to monitor and report the amount spent on buybacks and liquidity provisioning. This has already been done on VaultCraft.
  3. Execution Timeline: Establish a monthly schedule for buybacks & burns and liquidity provisioning, subject to change depending on market activity for VCX.
  4. Compliance and Review: Regularly review the policy to ensure it aligns with market conditions and regulatory requirements.

Conclusion

Long-Term Vision: This strategy supports VaultCraft’s long-term vision of creating a robust and valuable token ecosystem.

Sustainable Growth: By capping the buyback & burn expenditure, VaultCraft demonstrates its commitment to sustainable and responsible financial practices.

Enhanced Credibility: This approach will potentially lead to increased stakeholder confidence, fostering a more vibrant community around the VCX token.

This proposal outlines a structured and sustainable approach to enhancing the value of the VCX token, aligning with VaultCraft’s strategic objectives and ensuring long-term stability and growth.

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Current State
Over the past few months, we have executed the plan to use the ETH obtained from options execution to buy back VCX tokens directly. However, we observed that the resulting price spikes from these buybacks were exploited to acquire VCX at an additional discount of over 25%, due to the method used to determine the strike price. Furthermore, any surplus VCX was promptly sold on the open market, causing significant price fluctuations of around 20-30%. Despite these efforts, the value of VCX did not increase and ultimately settled at approximately 0.1 USD per token.

The Problem
After observing this for some time it seems clear that it is most lucrative for a rational actor to farm and dump oVCX (through execution and immediately selling), especially with those extra high discounts created by the buybacks in combination with the delayed strike price adjustment. There is no incentive for a token farmer who is not convinced by the idea of the project to hold on to oVCX or VCX for longer amounts of time.

The Solution(s)

Revenue for Liquidity
Adding a portion of the revenue as liquidity could be a more sustainable solution. This would reduce slippage and increase the price of VCX in a less volatile way than direct buybacks.

Smooth(er) Price Curve
Another option would be to decrease the amount of buyback per execution. Purchasing more frequently but in smaller amounts (1000 USDC equivalent) would smooth the price curve, reducing the extra discount and the incentive to execute and sell immediately.

Vesting oVCX
We could also consider vesting oVCX to reduce the amount available immediately after farming. The amount of oVCX emitted would remain the same, but the ability to execute oVCX right away would be spread over a period of time.

Stacking oVCX
Furthermore, we could make holding oVCX more attractive by, for example, increasing the discount over time, starting with a small discount (5%) and increasing it to 50% over six months. For simplicity, we could emit extra oVCX instead of tracking the discount increase over time. With veVCX, we already have a similar mechanism in place (locking VCX LP tokens for veVCX, which increases the amount of oVCX emissions for vaults one is invested in), but veVCX only locks liquidity, not the oVCX call option itself.

Vesting VCX from oVCX execution
The main problem we have is people/bots selling VCX directly after they execute their oVCX. Maybe we should vest the VCX redeemed through oVCX execution (a month or so)?

Regarding: Extending Team Runway
In relation to utilizing revenue to extend the VaultCraft team runway, I can see the appeal of this approach. Given that the current “bull run” is taking longer than expected to gain momentum, it’s essential to have a functional team in place to maintain the product. Without a team, VCX could lose all its value. However, I would suggest implementing an additional limit of a maximum of 50% of revenue per month or 75k USD equivalent (whichever is smaller) to prevent situations where decreased interest in oVCX execution reduces revenue, and the remaining surplus is used almost exclusively for team maintenance. This limit would help ensure that revenue is allocated responsibly and that the team’s needs are balanced with other priorities.

In general: Do we have experts in game theory available? I would suggest we red-team every idea we are discussing to avoid further loopholes and getting “gamed” by outside actors.

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General comments on your solutions. Adding additional smart contracts always adds complexity. Complexity always leads to more problems. Please see more comments below.

Revenue for Liquidity
Adding a portion of the revenue as liquidity could be a more sustainable solution. This would reduce slippage and increase the price of VCX in a less volatile way than direct buybacks. :white_check_mark:

Smooth(er) Price Curve
Another option would be to decrease the amount of buyback per execution. Purchasing more frequently but in smaller amounts (1000 USDC equivalent) would smooth the price curve, reducing the extra discount and the incentive to execute and sell immediately. We can test this, yes

Vesting oVCX
We could also consider vesting oVCX to reduce the amount available immediately after farming. The amount of oVCX emitted would remain the same, but the ability to execute oVCX right away would be spread over a period of time. - We can’t change the contract here so this is a no.

Stacking oVCX
Furthermore, we could make holding oVCX more attractive by, for example, increasing the discount over time, starting with a small discount (5%) and increasing it to 50% over six months. For simplicity, we could emit extra oVCX instead of tracking the discount increase over time. With veVCX, we already have a similar mechanism in place (locking VCX LP tokens for veVCX, which increases the amount of oVCX emissions for vaults one is invested in), but veVCX only locks liquidity, not the oVCX call option itself. Increasing the discount is what Timless did and I believe is the main reason their token LIT died. Increasing oVCX per epoch is an option with each Smart Vault having its own rewards management page.

Vesting VCX from oVCX execution
The main problem we have is people/bots selling VCX directly after they execute their oVCX. Maybe we should vest the VCX redeemed through oVCX execution (a month or so)? ***I like this solution. Im concerned about adding complexity here. But I also dont see this necessarily as a problem. Certain measures by the market, including VaultCraftDAO, can counter this when necessary. Its great theres sophisticated players out there doing these things. Inevitably there will be sell walls and the only way through is to slowly chip away, or blast through. ***

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Stacking oVCX (…) Increasing the discount is what Timless did and I believe is the main reason their token LIT died. Increasing oVCX per epoch is an option with each Smart Vault having its own rewards management page.

Imho it doesn’t need to be more than those already implemented 25%. The idea is to decrease the incentive to sell right away but keep (however delayed) the promise of an eventual X % discount.

I don’t yet understand the “increase per epoche” idea - can one increase the emitted oVCX per epoche per investor? Or can one only increase the emitted oVCX for everyone?

Vesting VCX from oVCX execution (…) I like this solution. Im concerned about adding complexity here. But I also dont see this necessarily as a problem. Certain measures by the market, including VaultCraftDAO, can counter this when necessary. Its great theres sophisticated players out there doing these things. Inevitably there will be sell walls and the only way through is to slowly chip away, or blast through.

But the problem is the farming, or isn’t it? Was the sell pressure generated from farmers (oVCX execution and immediately selling VCX) or from long time (several months ;)) VCX holders who simply wanted to cash out?

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Good discussion. Striking the balance between defending the price, enticing users and managing complexity is the crux here. Less complexity and easily accessible rewards makes it easier to retain existing users and attract new ones. But accessible rewards obviously also leads to more sell pressure.

Complexity is already quite high. I’d speculate that the steep learning curve is one of VaultCraft’s main barriers to growth (VCX-LP, veVCX, xVCX, oVCX, oh my). In our efforts to support price, we should do as much as we can to keep the cognitive load off of users. And if complexity is added, it should me mitigated as much as possible with UX/UI design. We’ve seen too many projects commit slow suicide by adding layers of complexity in the name of incremental improvement.

With that as my framing, some thoughts:

Smoother price curve
Smaller, more frequent buybacks (or WETH liquidity provisioning) is a no-brainer to test since there’s no added complexity for users. The approach of blasting the price upwards with big buys worked in the past but we’ve clearly seen a shift in the last month.

Vesting VCX from oVCX execution
Pros and cons here. My biggest concern with vesting is how much WETH you’d be asking users to “lock up” as VCX just to get the value of their earned oVCX. I think a month could turn a lot of people off from using VaultCraft altogether. If anything, a very short vesting period could be worth testing. Since the strike price is based on the 12 hour TWAP of VCX, maybe just 12 hour vesting. This might encourage users to execute oVCX more regularly rather than waiting for a large buy to sell into.

The goal here is not to make selling overly difficult. That’s a sure way to kill a project. The goal is to increase protocol revenue (get a fair WETH price for executed oVCX) and reset expectations of farmers (expect close to a 25% discount, regardless of when you execute, rather than wait for a price spike and an outsized return on WETH).

Again, I’m hesitant to add any complexity, so this test should have clear metrics for success and be paired with UX that makes everything clear, like an explainer on the exercise modal and a countdown timer for vesting.

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Implementing vesting VCX from exercised oVCX is just another high friction point. Wouldnt do that.

If anything, just spread out the buybacks and add liquidity when necessary to counter the sells. In the beginning it seems the monthly buybacks definitely had a serious impact.