[DAO Discussion] CMP - Fees & Migration-Related Token Supply Reduction

[jclemons]

[DAO Discussion] CMP - Fees & Migration-Related Token Supply Reduction

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Objective:

This proposal aims to clarify performance fees and compensation guidelines previously set forth, in light of the extraordinary token migration that happened in Q4 2023.

Community Interest:

• I would like to see a formal proposal
• I am not interested in seeing more

High Level Details:

Wonderland recently migrated to a new token called Volta. Per CMP#1, the last of these migrations (which are now manual migrations) will conclude January 1, 2024. Because a significant portion of wMEMO tokenholders will not have migrated their holdings, this will decrease the circulating VOLTA supply used to calculate backing per token and mechanically increase backing per token.

I propose that the performance fee calculation exclude changes to backing that resulted (mechanically) from this migration, which had nothing to do with any investment activity or acumen.

Provide Low Level Details:

Performance fees:

Performance fees are currently paid on account of performance. As it stands (reference Q3 Treasury spreadsheet), performance fees are

10% * (BackingPerTokenEnd - BackingPerTokenStart - TOProfitPerToken) * EndingCircSupply.

In general, this is wonderful: performance fees align incentives and motivate good performance. I even support paying performance fees for the value accretion that arises from buybacks.

Exceptional situation:

As noted above, Wonderland recently migrated to VOLTA. The conclusion of these migrations on January 1, 2024, per CMP #1, will result in a significant reduction in circulating VOLTA supply because a large proportion of wMEMO holders have failed to migrate their token-holdings. This will lead mechanically to a sharp increase in liquid backing per circulating token.

This is an exceptional situation unanticipated in the vague language in which performance fees were first established. The purpose of this brief CMP is to clarify what to do here.

Core proposal

I propose that the performance fee calculation exclude the increase in backing that resulted from the migration. Specifically, instead of computing

10% * (BackingPerTokenEnd - BackingPerTokenStart - TOProfitPerToken) * EndingCircSupply,

we compute

10% * ( [ (AugBackingPerTokenEnd - TOProfitPerToken) / BackingPerTokenStart] ) * StartingLiquidValue

where

AugBackingPerTokenEnd = (EndingLiquidValue - StartingLiquidValue)/(StartingCircSupply - #BoughtBackTokensinPd)

This computes a rate of return on backing per token that excludes (only) return from the migration-related token supply reduction. It then computes 10% of the dollarized value of that return to give as a performance fee.

Reasoning

Performance fees are meant to incentivize good management of the treasury. Even buybacks require intelligent timing and execution. I have nothing against paying for that. But, the migration and associated backing increase had nothing to do with good treasury management.

Hopefully this is not controversial. I am not trying to change rules; I am trying to elucidate them in a special circumstance.

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[1poundfish]

This sounds fair to me.

Very back of the envelope math - assuming ~$100 increase in backing per token (yes, this is necessarily a guess, but one can make a good estimate given stabilization of migration #s…) this is ~350k tokens*$100 delta*10% = $3m that is getting paid in perf fees…yes, a second order term has to be carved out for the effect of buybacks, so that means $2.7m getting paid out in perf fees…for something that wasn’t really performance-related.

Not meant to be punitive - I also imagine and hope (for the sake of alignment!) that people involved with the treasury also have a healthy VOLTA holding anyway and will benefit from the token re-rating.

[Qasem215]

My two cents:

Instead of having a formula that depends on token backing*, I’d rather it depending on treasury value.

Edited token price and changed it to token backing

[Qasem215]

What I meant is to use only the treasury value, then it doesn’t really matter how many tokens migrated/bought back

[1poundfish]

That’s a reasonable point of view and possibly the easiest thing to operationalize (don’t need to compute a rate of return and scale it) BUT it would be a large departure from the tradition so far of paying for the actual accretion due to buybacks and represents less of a compromise.

[hypermassiv]

I understand the concern and agree to some extent that performance fees should ideally come from actual performance accredited to the department at hand and not as a result of extraordinary circumstances.

However, I hope that despite the outcome of this discussion, the author would continue to work and expand upon this amendment such that it would address future extraordinary events as well, since I believe things like this will likely not be a one-off occurrence.

The framework that we have now needs to be constantly evolving so that it gets better. While I like the fact that this was posted, I’m also a little disappointed that this came so late into migrations. Personally, I would’ve liked to read others’ comments about it as well but we might not get much traction in this short period of time.

[1poundfish]

thanks @hypermassiv

in general, perf can be computed either based on return on backing per token subsequently scaled up to a dollar amount (“backing return based approach”) or dollarized profits to the treasury (“treasury value based approach”). BRA over and above TVA (which @Qasem215 suggests), includes some notion of token supply.

Here’s the tradeoff:

• if you want to offer credit for buybacks (which concern token supply) by managers, then you must choose BRA

• if not then you choose TVA

• BRA has 2 moving pieces and so more likely to run into ‘extraordinary circumstance.’ TVA has 1 so less likely.

Hard to anticipate unforesseable contingencies and I am sure this is more controversial so maybe an issue to tackle later. Questions that might be relevant:

• should managers be comped for effectively inheriting a protocol beneath backing value?
• how much skill and effort to conduct buybacks?
• any other incentives to consider?
• any more, non-buyback, anticipable changes to token supply

[hypermassiv]

I know it’s hard to anticipate all future contingencies. What I’m referring to is a framework on tackling such events rather than a specific solution.

To be very honest, personally, others’ remuneration doesn’t bother me that much. I’m happy to see people willing to work on it with detailed solutions but I’m not at all interested to look deeper into it unfortunately.

That doesn’t mean that I don’t think this is an important and relevant discussion. Just that I’m ambivalent about it and don’t really have strong opinions for or against.

Good job on the proposal though, and good luck.

[DEFImaster]

We need this to be implemented asap.

[Hyp3rbole]

Solid proposal. The fee structure definitely needs a rework, to account for events like this. I’m also curious about whether the migrations ending would even fall in the “current” quarter? The team has stated that any open tickets will be honoured, and we are stopping taking new tickets on the first of January.