Pre-proposal discussion here: [OLD] GEAR Liquidity Raise and Token Transferability
EDIT 11/20 - updated circulating supply information (less circulating supply, more vested supply, accounting for strategic rounds being locked)
The purpose of this proposal is to:
- Officially target a timeline for making the token transferable
- Set parameters for the gnosis auction token sale
- Determine a home for protocol owned liquidity and the parameters for LPing:
Gearbox V1 was the minimum viable product - Gearbox V2 is the product that is ready to onboard users and start earning meaningful revenue. GEAR is the token that governs all of this. Therefore, this is the perfect time to bring back discussion around if, why, when, and how to enable the GEAR token to be transferable.
You can view this document in google docs form, as well as previous versions, here
A vote “FOR” this proposal would signal approval for the following token launch plan:
- Target enabling token transferability between Dec 1st and 10th, 2022.
- Approximately 1 week before transferability is enabled, host a liquidity fundraise token sale. Sell 1.5% of the token supply. Utilize a gnosis batch auction executed thru the gnosis multisig auction application, with the following parameters:
|Auctioning Token||0xBa3335588D9403515223F109EdC4eB7269a9Ab5D||GEAR contract|
|Bidding Token||0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48||USDC Contract|
|Sell Amount||150000000||GEAR tokens|
|Minimum Buy Amount||$0.015 x 150m GEAR||USDC|
|Minimum Funding Threshold||0||USDC|
|Order Cancelation End Time||Start Date/Time plus 12 hours||Month, Day, Year, Time|
|Auction End Time||Start Date/Time plus 72 hours||Month, Day, Year, Time|
|Minimal Bidding-Amount Per Order||10000||GEAR tokens|
|Atomic Closure Allowance||No (Unchecked)||Checkbox|
|Whitelisting Process||No (Unchecked)||Checkbox|
|Miner Role||Gnosis Auction Contract||Role bestowed by multisig|
Pair the proceeds from the sale with an additional 1.5% of circulating supply and provide liquidity on Balancer.
If raised funds are less than $2,000,000, create a separate proposal to determine best path to obtain more liquidity (liquidity mine uni v2 LP positions, or supplement from strategic raise round 2).
The base assumption is that eventually, the GEAR token needs to be transferable. There are multiple factors that play into the timing of the token launch.
There are a few benefits of an unlocked token:
- It is easier for contributors and others that wish to become active to gain a financial interest in the protocol.
- Liquidity mining is more effective as LPers and users do not have to try to price unknown value / timeframes.
- Contributors have the flexibility to adjust their payments each month to skew towards/away from gov tokens depending on financial needs/planning, without needing to ask for adjusted pay each month (ie, contributors can customize the % of their income that’s in GEAR vs stables)
- Token price feeds become feasible, which allows for use cases such as portfolio margin to be integrated, allows liquidations to be more efficient and less costly, and allows for GEAR integrations with other protocols.
Currently, when tokens unlock, holders will have 4 options: Sell, Hold, Buy more, or Provide Liquidity. Ultimately these are all forms of Buy, or Hold. Those that choose to hold the token are likely expecting a future return. The longer it takes to unlock the token, the more time Gearbox has to create this future return. However:
- In their short history, DeFi protocols have usually taken a few years to find product market fit and proven sustainable profitability.
- Even if Gearbox does find product market fit sooner, there is no guarantee that this value is immediately transferred to the token.
- Regulatory uncertainty creates even more of an unpredictable timeline on these items
- Revenue share in the growth phase of a protocol is generally not good for the long term success of the protocol.
The primary point is that there is no hard timeline on when Gearbox will start earning significant revenue, and then there is no hard timeline after that on when that value could transfer to token holders. That could lead to a scenario where two years from now GEAR is still a valueless governance token that does not benefit from the success of the protocol. At that point, if the token were to be unlocked, then 2 years would have been spent without the benefits of an unlocked token just for a big old nothing-burger of an unlock event, where holders still only have the option to sell or continue holding.
There are potential ways around this, such as direct utility of the GEAR token as cross-margin or other benefits for users. However, this still requires GEAR to find PMF (utility without revenue is akin to lipstick on a manatee, with sailors that have been at sea too long and slowly sober up. Or, to put that less ridiculously - it just creates hype / wealth transfer games that benefit those that understand early and eventually get figured out).
Currently 29.2% of the supply is owned by early contributors and ex-core, with a 1 year linear vest beginning Dec 15th, 2022. Launching the token after this vest begins would potentially create bad optics for the DAO (tokens that were meant to be locked are instead effectively unlocked with every other token, though the vest will mean there won’t be immediate large unlocks).
Launching into the hype of Gearbox V2 gives the DAO a better chance at having an efficient token sale and liquidity launch. There is risk of creating FOMO (and thus unhappy community member bag holders), however current market conditions will likely dampen this significantly. The token launch is also set a few weeks after V2 launches in order to give the crypto community time to fairly evaluate Gearbox V2.
As mentioned above, liquidity mining is more efficient with a liquid token. Some depositors have expressed that earning yield on lending is less desirable with an uncertain unlock timeline. The liquidity mining event would likely not launch with V2, to let V2 scale up a bit prior to bringing significant TVL. This means its acceptable for the token launch to also not occur with the launch of V2. Additionally, devs would probably kill the community if it voted to launch liquidity mining and the token event at the same time as V2.
The current state of GEAR tokens is as follows:
- 20% for early contributors/initial core, 1 year linear vest beginning Dec 15th 2022
- 9.2% for current contributors, 1 year lock beginning approx end of Nov 2022.
- 1.933% to Discordoor and Testoors and retroactive payment round (1% discord, 0.5% testoor, 0.5% retroactive)
- 5% to Credit Account mining
- 1.4m gear tech multisig [negligible]
- 3.766% to Strategic Funding Round (1 year cliff, 1 year vest)
- 0.79% Strategic Funding Round 2 (1 year cliff, 1 year vest)
- 1% Liquidity Mining (%is after 3 months of liquidity mining)
- [Proposed] 0.04% per month in contributor payments + tech multisig
When adding in the proposed 3% for liquidity and consolidating categories, that leads to:
- ~9.75% “circulating” (ie, no vesting) supply (once 3 month LM concludes)
- 33.8% vested (20% starts vesting Dec 15th)
- 54.95% DAO
- 1.5% in liquidity pool
Note: total supply of GEAR is 10 billion
The current FDV per the vested fundraising rounds are $150m. We will keep this same valuation to make a funded auction a more likely outcome, but the market is free to price GEAR higher to than 150m FDV to account for the fact these tokens will be unvested. With 10% of supply circulating, that leads to a circulating market cap of $15m. 1.5% of supply would be $2.25m of liquidity, paired with ETH, for $4.5m total. This means 13% of circulating supply would be able to be sold into protocol-owned liquidity, in absence of other liquidity providers and buyers. This means that dumpoors will need to find willing buyers or sell GEAR back to the DAO at a cheaper cost than was likely paid for it (thus saving the DAO money on credit account creation). Separately, this also means only 1.5% of the total supply, or 13% of circulating supply, is available for purchase on the open market from the DAO.
This is also a decent liquidity base to build from for eventual listings on centralized exchanges, if desired (comparable to other current cycle DeFi protocols, good example being GMX which has ~4x the FDV and ~4x the liquidity). The liquidity would also be slightly more effective if it was utilized in a wide Uni V3 range. Lastly, funds raised from the proposed strategic funding round 2 could also be utilized for protocol owned liquidity if deemed inefficient. Inefficiency could be measured as GEAR beta (ie, volatility) relative to ETH, as too thin of liquidity creates high volatility that is undesirable for investors, holders, and contributors.
Note that token price scales with initial liquidity, ie if the initial token price is 0.045c (3x), then the initial liquidity will also be 3x ($13m).
Docs are here: https://gnosis-auction.eth.limo/#/docs#topAnchor
A batch auction runs through a bidding system. Users deposit capital and bid a maximum GEAR price they would pay. At the end of the auction, the order book is analyzed to determine where the supply and demand curve intersect - this will be the GEAR clearing price. Bidders who specified a maximum price higher than the clearing price will receive GEAR tokens at the clearing price. There will be no whitelist.
Here are the proposed specs for a Gnosis Batch Auction from above, with context:
|Auctioning Token||0xBa3335588D94035152 23F109EdC4eB7269a9Ab5D||GEAR contract address|
|Bidding Token||0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48||USDC Contract Address. Will be converted to wETH for liquidity.|
|Sell Amount||150,000,000 GEAR Tokens||150 million GEAR tokens, see justification in section 4.|
|Minimum Buy Amount||$0.015 x 150m GEAR||Minimum buy amount is used to set the effective minimum sale price of $0.015. $0.015 is set to exceed the recent strategic round to account for the gnosis auction tokens being unlocked immediately after the sale.|
|Minimum Funding Threshold||0||There is no minimum, as any amount of POL will be beneficial. If the raise is low, POL can be supplemented with liquidity mining.|
|Order Cancelation End Time||Start Date/Time plus 12 hours||Give a short period of time for people to re-think their bids if they FOMO in at launch.|
|Auction End Time||Start Date/Time plus 72 hours||Auction will last 3 days, which means at least one weekday will be included.|
|Minimal Bidding-Amount Per Order||10000||Denominated in GEAR tokens, corresponding to a minimum of $150, higher if price is higher. Minimum amount is used to offset gas costs of clearing the option ($5-10 for token transfer for each bid)|
|Atomic Closure Allowance||No (Unchecked)||unecessary for an illiquid token|
|Whitelisting Process||No (Unchecked)||There is no advantage to having multiple addresses participate, so there is no need for a whitelist.|
|Miner Role||Gnosis Auction Contract||Auction needs the miner role to be able to send GEAR tokens to buyers before transferability is enabled.|
|Whitelist||none||There will be no whitelist|
Graphic is assuming 100m tokens sold at $0.0125 min price (ie, not updated for current proposal of 150m tokens at $0.015 min price).
In the example above, we are selling 100m gear tokens at a minimum buy amount of 1.25m, which corresponds to a minimum buy price of $0.0125. The red curve is the supply curve, which is just the total supply (100m) multiplied by the price on the x axis. The blue curve is the demand curve, which represents the amount of capital willing to buy at each price (ie, 100% of committed capital is willing to buy at 0.0125c GEAR prices, because they have all bid at least that high).
The token sale price is determined by the intersection of the supply and demand curve. In the example below, this results in $5m of total capital being willing to purchase GEAR at a price at or above $0.05, meaning they will all get GEAR at $0.05. The remaining committed capital will get nothing.
The min buy amount determines the minimum (reserve) price. So long as demand is less than supply, tokens will be sold at the minimum price. Once there are enough orders to buy the full supply, the sale price will begin to increase. More examples can be seen on individual pages for past auctions.
While there is no price cap, anyone buying in the batch auction will know that there is a much larger quantity of circulating supply out there. If the market is somewhat rational, this should limit the FOMO. Additionally, the fact that not every order gets filled means there will still be some remaining demand, as many users may be willing to reconsider their minimum purchase price when the token hits the open market.
Users can bid on prices, meaning they can set their own price cap personally. This creates an upper limit on price for individuals. The final token price is determined by the bidding, and everyone pays the same price (meaning you will pay your bid price or less, should the token price be under your bid price). This creates an equal token price for all (similar to Degenesis) but lets the market set that price.
Additionally, the fact the system already exists saves on dev resources.
There is no cap per wallet, meaning a few whales could in theory purchase the entire 1.5% sale of circulating supply - but they would also have to outbid everyone else in order to do so (thus are less likely to have exit liquidity as they fomo’d highest)
While dev resources are saved, the system itself is more complex and therefore may result in less participation or users not understanding what they are participating in.
In absence of anyone willing to take a grant to built the Degenesis style token sale (and get it approved by governance), Gnosis Auction is the path of least resistance with limited tradeoffs between the two. Degenesis could still be pursued if someone steps up to take charge of building it, but for now the Gnosis Auction only requires work from marketing and multisig, whereas Degenesis would also require front and back end dev work.
The proposed liquidity home is Balancer, due to potential partnerships that would let us accumulate an initial stake in Aura and then vote for and farm our own pools (which would also create additional liquidity). Additionally, bribing is more efficient than standard liquidity mining and is an option on Balancer/Aura (not an option for Uniswap), if more liquidity is needed for a period of time.
The full amount of funds raised from the gnosis auction will be paired with an equivalent value of GEAR from the DAO and used to seed the liquidity pool. The DAO also may propose to use an additional $500k worth of ETH from the community raise 2 for liquidity, after the Gnosis Auction has concluded.
Note that the liquidity pair is denominated in ETH as altcoins are still very correlated to ETH/BTC, moreso than USD. Denominating in USDC tends to lead to more potential IL in both directions as well as more missed upside if ETH is to continue its lifetime longterm upward trend.
There is an option to denominate liquidity in stETH or aWETH, which would result in 75% of Balancer revenue being recycled as bribes. However, this means GEAR liquidity is dependendent on another protocol (LIDO or AAVE). As liquidity for stETH or aWETH growth on Balancer, the DAO could consider switching to either of those for a liquidity base. For now, we will keep things simple and pair with wETH.
Prior to enabling transferability, the multisig may use a nominal amount of GEAR and WETH (<0.01) to seed a new 50/50 pool on balancer as a test deposit. Should that succeed, the multisig should queue and execute two transactions:
- Enable GEAR token transferability
- Seed a NEW 50/50 GEAR/WETH pool on Balancer, at the price matching the USD price at the end of the Gnosis Auction.
Note that the old pool shouldn’t be used as someone could in theory purchase the GEAR in this pool by routing through the internal balance, thus changing the price before liquidity is seeded.
Lastly, the Gearbox DAO will apply for a BAL gauge on Balancer.