Some commentary on Lido's enshrined buyback proposal, and how it relates to Uniswap's much bigger governance restructuring proposal. (Note: Uniswap's proposal is both excellent and much-needed, and I will comment on it in more detail elsewhere). "For being posted a day after Uniswap’s, it’s nothing alike… No retroactive burn, no corporate restructuring, no real alignment" Firstt off, in Lido, there is no need for a governance restructuring, because it had been doing these things right from the start. 1. Lido incentives have always been aligned: There is no token + equity structure, only the token, and all revenues have been under full DAO control from the start. 2. LDO supply was already predictable: LDO token is 90% distributed and there is no large supply overhang from investors and/or unissued supply sitting in the DAO treasury. The only dilution is for contributor grants; this is currently 22M LDO (2.2% of supply) over 4 years. The buyback proposal is more interesting, so let's talk about that. "A buyback for ants? Lido proposes a ~$4m / year LDO buyback (capped at $10m / year if all conditions are met)" 3. I can see that some people are reading this proposal wrong, and the correct way is that buybacks are becoming enshrined/automated - not that there are large buybacks coming up. There are multiple goals that any smart buyback mechanism should try to solve: a. VALUE CREATION: do not destroy (!) value for owners (LDO holders). This is achieved by acyclical trading of the token. b. INCENTIVE ALIGNMENT: raise the barriers for growing budgets on the contributor team but without stifling allocation for growth c. SIMPLICITY: package all of this into a mechanism that is simple enough to automate and doesn't require constant adjustment Especially the first two goals are highly related - as not all buybacks create value. The intuition is this: value from buybacks is created only if the present value to tokenholders exceed the discounted value of future cashflows from reinvesting the same value inside the protocol (e.g. on growth, optionality, ...) In other words, LDO holders should consider themselves owners of the DAO and its treasury. If this was _your_ business, under what conditions would you move money out of it to fund your personal life/investments? A reductio ad absurdum can show how buybacks can thus obviously destroy value: if owners "withdrew" 100% of revenue + treasury, they would have to stop all work on the protocol (contributors, liquidity, etc.) The protocol would keep running for a while, but eventually breaks in a future Ethereum upgrade, and/or is surpassed by competitors. Thus, users abandon it and the value of YOUR own business collapses to zero. Congrats, that was a stupid mistake. Let's unwind that. Rather, the goal must be to establish a good balance between allocating revenue for the various goals: maintaining the protocol, growing customers, being resilient in bear markets while at the same time establishing a baseline for qualifies as "excess" beyond these basic needs. A smaller, but still destructive issue is to avoid becoming a cyclical trader of your own token. As in, if Lido was to always buy LDO at the top and sell it at the bottom, its quite clear how you rack up a negative PNL compared to keeping the money in the treasury. So the specific buyback strategy is also important. Lido's current proposal is to thread the needle between these three different goals: - if revenue is >$40m annualized, 50% of it goes to buybacks. If revenue is <$40m, buybacks stop because otherwise the treasury would be depleted. - ETH must be <3000, because Lido's treasury is ETH-denominated and you don't want to sell that in a bear market. So where does that leave us? Expectations in large buybacks right away are clearly misplaced. Lido makes a small profit today, and that will be used for buybacks - using more would be irresponsible and value destructive for owners. But the (very real) improvement is that if Lido increases its revenue, half of that value will now be automatically used for buybacks. As one of the oldest and strongest brands in Defi, with >350k unique stakers, Lido has a lot of room to grow revenues - from increasing its staking market share, increasing its margin from staking, a rising ETH price, from making complementary products to staking (e.g. https://stake.lido.fi/earn), and to expand horizontally into other services around other assets (e.g. stablecoins). I have a lot of thoughts on how to improve this mechanism further, for example - somewhat raise the revenue hurdle, but increase the % used for buybacks above the hurdle much closer to 100% - keep the ETHUSD hurdle, but replace it with a moving average - make trading even more cyclical by considering LDO/ETH and P/E ratio - remove the $10m/year cap completely Anyway, these are just my thoughts, and the proposal is now open for discussion. What do you think?(Hasu⚡️🤖)